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The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Neno
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 The Exchange Rate of Foreign Currency in Economic Feasibility Studies  - Page 3 Empty The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Neno on Wed 27 Mar 2013, 2:26 pm

First topic message reminder :

Shared with me today from another member and we would like to read all comments and thoughts. TY ~Neno

The Exchange Rate of Foreign Currency in Economic Feasibility Studies


Below
are the central controls related to the exchange rate of the foreign
currency to convert the project inputs and outputs from foreign currency
to its equivalent in the local currency, and that is by calculating the
net discounted present value standard and the internal return on
investments in economic analysis that governs investment projects that
costs excess one million dinars.




Estimate the shadow price of foreign currency:



1. It
is necessary to put central controls to amend the official exchange
rate * to reflect the shadow price of the foreign currency
, and that is considered one of the necessary requirements to implement the
net discounted present value standard and the internal return rate on
investment in the economic calculation stated in the instructions,
paragraph nine.



The
central controls for adjusting market prices distinguished a group of
outputs and inputs traded internationally, where the projects production
or usage of them is reflected on the abundance of foreign currency in
the economy and thus project outputs or inputs used of such are
considered purely foreign currency outputs or inputs.








* What is meant by exchange rate: the number of units of foreign currency, expressed in dollar per one dinar.

In particular the following outputs and inputs of foreign currency were distinguished:




· Export-outputs.

· Outputs marketed locally that substitute imports.

· Imported inputs.

· Inputs produced locally that usually go to exports.

· Foreign labor.


According
to the pricing rules the value of the output and input (traded) is
calculated using export prices (FOB) and import prices (CIF), according
to what is listed in the pricing rules.



In
other words the pricing rules calculate what the project produces from
foreign currency (quantity of exports multiplied by the export price
(FOB) in foreign currency or the quantity of
substitute
imports multiplied by the import price (CIF) in foreign currency, as
well as what the project uses from foreign currency and imported inputs
multiplied by the import price (CIF) in foreign currency .... etc.).


In
a later step, project outputs and inputs must be converted from the
foreign currency to its equivalent in local currency (dinars) by using a
specific exchange rate for the foreign currency.





2. Justifications for exchange-rate adjustment:
there are a number of important and powerful arguments which support
the view that the official exchange rate reduces the real value of
foreign currency for purposes of calculating the economic
national profitability for investment projects and hence for the
purposes of investment planning. It is demonstrated in this context to
call for assessing the dinar for less than (3.208) dollar (official
exchange rate) when assessing project outputs and inputs of traded goods
of exports,
substitute imports and imports... etc.



The justifications to call for the use of an exchange rate that is lower than the official exchange rate are:



· The
use of an exchange rate that is lower than the official rate is the
appropriate action at the investment planning level to translate the
country’s economic strategy aiming at stimulating central investments in
the sectors that encourage the development of non-oil exports, as well
as sectors that encourage the expansion of domestic production base in
order to reduce imports and compensate it with local
commodities.
This helps to reduce reliance on foreign exchange earnings from crude
oil exports and increases the share of non-oil sectors in the local
production.




· The
application of the amended exchange rate on project imported inputs
will assist in directing investments away from aggregated sectors
dependent on imported inputs and the preference of those sectors that
rely on locally produced inputs.




· The
use of the amended exchange rate helps to correct the balance in favor
of the traded goods sectors compared to non-traded goods.




· The
real exchange rate has declined rapidly since the early seventies,
through rapid rise of the level of prices and local costs which led by
the steadiness of the official exchange rate to change in prices and
actual local rate costs that gave an advantage for imported goods at the
expense of locally produced goods, meaning that it led to deterioration
of the competitiveness of alternative replacement goods and export
commodities.




· This
action shows that the official exchange rate overestimates the value of
the dinar, compared to the foreign currency and from the promoting
goods substituting imports and export commodities point of view of.




And in support to this view is the state’s utilization and in a broad approach to the customs
and quantitative protection policies especially for consumer goods, as
well as export subsidies that exports have through an amended export
exchange rate.






3. Estimate
the amended exchange rate of the Iraqi dinar to be used in technical
and economical feasibility studies and for (1.134) dollar per dinar
. This price should be approved for 3 years until re-appreciation by the competent authorities.

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Jetsa
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Post by Jetsa on Wed 27 Mar 2013, 9:24 pm

[You must be registered and logged in to see this link.] wrote:and if I remember correctly there was something also posted on MOF website regarding contract rate!????? to be used on contracts!
I remember that too but if memory serves, the same rate of 1.134 was used for that also?
Screwball
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Post by Screwball on Wed 27 Mar 2013, 9:49 pm

[You must be registered and logged in to see this link.] wrote:
I remember that too but if memory serves, the same rate of 1.134 was used for that also?

correct!
ron-man
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Post by ron-man on Thu 28 Mar 2013, 9:28 am

I am still mixed up,but I'll take either one to start with then let it move up from there.
weslin3
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Post by weslin3 on Thu 28 Mar 2013, 12:38 pm

[You must be registered and logged in to see this link.] wrote:I am still mixed up,but I'll take either one to start with then let it move up from there.

Agree! :D

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