Independence of the central bank and international reserves and the general budget in Iraq

Independence of the central bank and international reserves and the general budget in Iraq
On: Sun 05/06/2012 19:54





Dr. Ali Mirza

We have raised many issues, in recent times, about the independence of the central bank / monetary policy and the role and function of international reserves, on the one hand, financing the budget deficit and the balance of the general scheme surplus accumulated, on the other.

Due to the existence of some differences in the principles and concepts of debate among economists and others in Iraq, I will address in this article, some of these issues, institutional and conceptual issues related to monetary and fiscal Balseesten.

First, two policies monetary financial

A. Beginning, it is worth mentioning that in the oil country, determine the general budget, significantly, the pace of monetary expansion. Gigantic public and consequent pumping cash and accounts of public bodies in the banks control significantly in the money supply. No, but that the executive can, by management of the disposal of oil returns, the impact of withholding part of the returns on the money supply directly. For example, you can allocate a proportion of oil revenues went to the reserve account / financial (as do several oil-exporting countries) and thus excludes the impact on money supply. In spite of the presence of local currency against the governor of this part of oil revenues but this contrast is in an account with the Central Bank and not the banks, so it is not part of the money supply. The process of blocking these are called suppression or sterilization: sterilization.

B. The banking system, under the supervision of the Central Bank is obliged to provide foreign currency towards the expenses of the general budget (JD), which involve external payments, the exchange rate prevailing. This is in addition to satisfy private sector demand. In connection with this commitment, in spite of the great importance and critical to manage the Central Bank international reserves, I will explain in the following, among other things, that the size of the balance of international reserves, above the critical point) may stop with the freedom of foreign exchange (, determined by supply and demand for foreign currency, especially by public bodies, particularly the general budget of the state.

Second, the independence and transparency and the credibility of the Central Bank

A. After years of high inflation in the world in the seventies and eighties of the last century emerged the concepts and ideas related to economic monetary authority effectively in the fight against inflation, such as the independence of the Central Bank and the credibility and transparency.

We have incorporated these concepts in theorizing that the interaction of factors of independence, transparency and credibility positive will lead to increased confidence in economic policy so that there is a climate of uncertainty helps low rate of inflation, and then leads to productive investment more away from the considerations yield rapid, including speculation and consequently increase permanently in use and the reduction of unemployment.

The opposite will happen if these factors interact to lead to the negative state of uncertainty and thus lower the rate of investment and high rate of inflation.

The independence of the central bank, which means in practice independence from the executive branch, it may be legal (the law of the Central Bank or the Constitution), or operational, in the selection of goals and means of monetary policy, or administrative, in how to manage monetary policy and who is appointed by the Governor of the Central Bank and its board of directors and decide the period of their service.

The credibility Vtansrv to the compatibility between the stated policy and the reality of implementation. In other words, avoid advertising policies and the implementation of certain reversible.

It was noted that the discrepancies between what is declared and implemented policies of happen in the practice of executive power in the more advanced countries. How, then, would be the case in countries with weak structures and institutions of economic management. The impact of this inconsistency ruined the confidence of economic policy.

Transparency and proceed to provide information similar to the monetary authority and the rest of the economic management and customers alike so that it is in front of everyone with information, such as pre-announced goals of the Bank and the means and the data published by, etc..

This presentation illustrated the close connection between the independence, credibility and transparency so difficult to separate them in practical life.

B. It is known that the Central Bank of Iraq gained independence after 2003, codified in its law (Article 2 of the Act of March 2004). They also stressed the independence of Article (103) of the Constitution. And identified the same article that the bank is responsible to the House of Representatives. Select Bank Act as its objective basis (in Article 3) is to maintain price stability at home (and thus the stability of the currency value). The Bank has followed the following main steps in order to achieve this goal:

- Stabilizing the exchange rate (against the U.S. dollar) and the use of foreign currency reserves to maintain that price.

- Change the interest rate commensurate with the pressure of demand (in addition to the use of a legal reserve requirements for banks have).

C. However, the actual independence of the central bank can not be absolute, especially in the oil country of the general budget of the dominant influence on money supply. Independence at best be relatively objective and reduce the short-term intervention Almakhlkhal to the executive / finance in the work of the monetary authority. Despite this independence of the legal text of the Iraqi Central Bank Law, in Article (24), to hold regular meetings between the conservative / representatives of the Central Bank and government officials, for consultations on and coordination between monetary and fiscal policy. This is necessary and required for the proper implementation of economic policies and consistency. No, but that such coordination and consultation may be the basis for strengthening the confidence of economic policy when he knows that the dealers monetary authorities (the Bank) and Finance (Finance Ministry) to agree with respect to the pace of fiscal and monetary policies, and other economic policies.

Dkhalal past years, the limitations of energy production / supply, on the one hand, and the weakness of the institutional structure of economic governance in the country in general and the weakness of financial intermediation and the spread of dealing with money and the separation of some markets (as markets the drug, for example), on the other hand, are led to restrict the work of monetary policy and the negative impact the consequences of expansion in the financial (fiscal policy) in Iraq. For example, the supply shocks of the internal security situation and scarcity of fuel contributed significantly to the acceleration of the rate of inflation during the period 2003-2007 and then decline sharply after 2007, which also contributed to the reduction of the scarcity of fuel. And this experience has shown that inflation in Iraq was driven by factors of energy supply of goods and services rather than demand pressure.

E. But in light of the expectation of increased investment activity through the expansion of the investment budget and the increasing public spending, on the one hand, and improved security situation and the availability of fuel and work to expand the power in the future, on the other hand, will increase the impact of demand management as the secret of the impact of determinants of energy productivity / supply, the rate of inflation and economic stability.

Therefore, it is appropriate to the presence of an independent monetary point of watching the consequences of monetary expansion and the emergence of demand pressure, which may lead to overcome the limitations of absorptive capacity and igniting inflation.

They take the appropriate policies to mitigate the impact of the expansion of demand, this is at the same time continue the policies and actions expand production capacity and supply taken by other parties and especially the relevant ministries (as well as hope for the increase) private sector investment.

And. With all the parameters that have been able to review the Iraqi Central Bank to build a good credibility and transparency of the occasion during the last eight years has been able to maintain the stability of the value of the currency and the reputation of the internal and external good.And thus not appropriate Dedatha through actually attached to other departments such as management of the executive branch. Because doing so will be subject to political bickering and in some cases, invitations and economic announcements lacked a professional, then the opposite statements may eliminate the transparency of the Bank and Sedktah and then the collapse of confidence in economic policy.

The sacrifice of this role involves a weakening of the institutional structure of the economy mainly complain of great weakness in economic institutions.

G. In light of the above, can be raised the following question: Why are there so call to weaken the independence of the Central Bank? Economically, the proposal could be two reasons, both on the general budget, you may be prompted to try to weaken the legal autonomy.

I go out to find a source of easy to finance the deficit (in particular direct borrowing from the central bank).And second, reducing the cost of operating capital for public facilities by providing low interest rate. We will touch upon these two things in a paragraph, "the budget deficit and its financing" in the fourth.




http://translate.googleusercontent.com/translate_c?hl=en&rurl=translate.google.com&sl=ar&tl=en&u=http://almowatennews.com/news.php%3Faction%3Dview%26id%3D41192&usg=ALkJrhjH4Q-XDZ621qbV65u3KsXid_xMEA