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“Reconstruction bonds” are an economic policy to reduce inflation and finance the deficit
Economical 10/12/2023
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Baghdad: Haider Falih Al-Rubaie and Shukran Al-Fatlawi
A number of economic and financial experts welcomed the Ministry of Finance’s decision to issue “construction bonds” and put them up for sale, stressing that the step carries a number of benefits, including absorbing the enormous cash mass accumulated by citizens, which, according to economic specialists, amounted to more than 90 trillion dinars, or approximately 91 percent. Of the total monetary issuance in Iraq, indicating that other positives of the decision are reducing inflation and closing the budget deficit.
The Ministry of Finance announced the issuance of bonds under the name (reconstruction bonds) and made them available for sale to citizens, indicating that the step, which comes in cooperation with the Central Bank, aims to provide and support investment opportunities for citizens, as the first issuance of bonds will be worth one and a half trillion Iraqi dinars, tradable in the Iraqi stock market. Finance, and will be available in the form of two categories, the first will be priced at 500 thousand dinars with an annual interest of 6% for a period of two years, while the second will be priced at 1,000,000 with an annual interest of 8% for a period of 4 years.
Immediately after the announcement of the “bond offering,” the Iraq Stock Exchange expressed its welcome for the step, which it described as “important” in stimulating trading operations by citizens, while those concerned confirmed that the process comes in implementation of the Federal General Budget Law for the year 2023, which included the Ministry of Finance issuing government bonds. To finance the budget deficit.
Economist Nabil Al-Marsoumi stated in an interview with “Al-Sabah” that “the purpose of issuing two-term reconstruction bonds comes for the purpose of first withdrawing part of the cash mass from circulation, which exceeded the limits of 90 trillion dinars, which constitutes more than 91 percent of the total cash issuance.” in Iraq".
Al-Marsoumi pointed out that “the other side of the Ministry of Finance’s step is for the purpose of reducing the budget deficit, as part of the deficit, according to what is proven in the budget law, is covered through internal debt, including the issuance of bonds.”
Despite the positive aspects of “construction bonds” in reducing inflation, absorbing liquidity, and financing the deficit, the Al-Marsoumi expert believes that “the timing of the issuance is not appropriate,” indicating that this comes due to the presence of a wide gap between the official and parallel prices of the dollar, and that this situation affects the price level. Commodities, even if the Ministry of Planning publishes in its reports that the average inflation does not exceed 4 percent, as this is calculated on the basis of a sample of commodities amounting to 333 commodities, and there are many commodities that are not included in the calculation of this indicator, and therefore when the level of inflation is high and the gap Between the official and parallel prices, the incentive to buy bonds is very weak for the citizen, because the real interest does not become positive, but may turn negative or zero, indicating that the real interest is the nominal interest, minus the level of inflation.
In support of the previous opinion, the economic expert, Dr. Mahmoud Dagher, said during a brief statement to “Al-Sabah” that “encouraging work with these financial tools requires that the interest rate be much higher than what was announced on the issue of financial bonds, because if we subtract the inflation rate from the nominal interest rate, the result will be a rate of “Low interest does not encourage or motivate people to engage in bond purchases, and therefore banks that have surplus funds in dinars will resort to buying these bonds.”
The Executive Director of the Iraq Stock Exchange, Taha Ahmed Abdel Salam, told Al-Sabah that “after the subscription and completion of the conditions for the issuance of the announced bonds, they will be tradable in the Iraq Stock Exchange at the prices on the maturity date, and according to the categories in which they were issued.”
Abdul Salam explained that “the new issuance will achieve its desired results through marketing through the banking system to citizens, institutions and companies, and will add to the Iraqi market a new security that is traded under the bond platform using electronic systems.”
In turn, the head of the Iraqi Stock Exchange Investors Association, Dr. Alaa Al-Moussawi, confirmed during his speech to “Al-Sabah” that “the issuance of reconstruction bonds comes in implementation of the Federal General Budget Law, which included the Ministry of Finance issuing government bonds to finance the federal general budget deficit, as this step will achieve A package of positive steps in addition to financing the deficit, the most prominent of which is withdrawing part of the cash mass hoarded by citizens outside the banking system and using it to finance service and investment projects, providing job opportunities for citizens, increasing the domestic product, strengthening the national economy, and contributing to reducing the inflation rate by reducing the cash liquidity hoarded by citizens. “And contributing to preventing the prices of goods and services from rising by reducing the demand for their purchase due to the decrease in cash liquidity among citizens, as well as contributing to improving the exchange rate of the Iraqi dinar.”
Al-Mousawi also stated that “issuing new bonds would contribute to encouraging citizens to save and invest their money and obtain good financial returns, and that trading reconstruction bonds in the Iraq Stock Exchange would stimulate investment in them, and would contribute to increasing trading among citizens and encouraging them to invest their money.” In areas that serve the national economy.”
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