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Why Two Exchange Rates?

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csd9013
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Why Two Exchange Rates?

Post by csd9013 on Thu 29 May 2014, 7:19 pm

Posted on 02 April 2014. Tags: [You must be registered and logged in to see this link.][You must be registered and logged in to see this link.][You must be registered and logged in to see this link.][You must be registered and logged in to see this link.][You must be registered and logged in to see this link.]

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By Mark DeWeaver.

Since the Central Bank of Iraq (CBI) began changing the rules for its USD auctions in 2012, Iraq has been operating a de facto dual exchange rate system. (There’s a summary of some of the CBI’s recent rule changes on pages 12-14 of [You must be registered and logged in to see this link.].) For those with access to the CBI auction—mainly banks and (as of March, 2013) importers using letters of credit—the rate has been fixed at IQD 1,166: USD 1.00. For the rest of us, the dinar has ranged from 1,194 to 1,292, with two major episodes of depreciation in mid-2012 and mid-2013 (see chart).
The ostensible purpose for this arrangement is to limit illicit outflows of foreign exchange to Iran and Syria. In practice, it serves mainly as a subsidy to banks, large importers, and anyone in a position to generate phony trade documents. The losers include everyone from foreign investors in Iraqi stocks to the government itself, which gets the CBI rate on its oil-export revenues.
Iraq is unusual in this regard. Dual (or even multiple) exchange rates are usually only found in countries suffering from chronic trade deficits and foreign exchange shortages. Typically the objective is to make foreign exchange available for “essential” imports or to control inflation by lowering import prices. Examples include Hitler’s Germany, China in the 1980’s and early ‘90’s, Burma prior to 2012, and Venezuela today. (See [You must be registered and logged in to see this link.] from the Asian Development Bank for an excellent introduction to this topic.)
It’s hard to see why Iraq belongs on this list. The country has a trade surplus, inflation is low, and the central bank has ample foreign exchange reserves. Even USD outflows to Iran are presumably no longer a major issue.
One exchange rate should be enough.
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californiadreaming
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Re: Why Two Exchange Rates?

Post by californiadreaming on Fri 30 May 2014, 9:39 am

Interesting. Now I see that chart shows the market rate and the auction rate. I was under the impression or would guess that the auction rate is the market rate since that is the only way to determine what hte market will pay. Unlike other currencies as we all know the Dinar is not on forex or like officially paired to another currency so I would assume the auctions dictate market rate. I don't really know thhough.

The only other thing I can think of is that your referring to why when we buy we don't get the 1166 but if you've ever traveled out ofthe country I'm sure you are familiar withh spreads being charged so nobody really gets the posted rates on any currency
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Neno
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Re: Why Two Exchange Rates?

Post by Neno on Fri 30 May 2014, 12:54 pm

No, this i CBI rate and Street Rate as in Market (black) on the streets. This here the exchangers on the streets rather merchants or not make out on the citizens (poor). Most don't even use a bank. Btw, a bank is a merchant too. Me opinion anyways.

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