A Wild Ride for the Dinar

By Mark DeWeaver.

This has been quite a year for the Iraqi dinar. From a level of IQD 1,217: USD 1 at the end of 2014, the market rate for the currency weekend steadily during the first quarter, penetrated a key support level at 1,290 in late April, and reached a low of 1,379 on June 16. By that point the dinar had lost 11.7% year-to-date and appeared to be in free fall.

Last week, however, the exchange rate rebounded sharply. As of June 25, it was back at 1,258, bringing the year-to-date loss to just 3.3%. (See chart. Exchange rates are from the CBI and Rabee Securities.)

Like the currency’s last big moves in 2013 and 2014, this year’s action seems to have been driven primarily by changes in the rules for the central bank’s dollar auctions, where qualifying buyers (e.g. importers making wire transfers to vendors) can buy the dollar for IQD 1,166. (This rate has been unchanged since the beginning of 2014.)

The last two times, the rule change involved new measures to combat money laundering. This time the trouble resulted from an attempt to collect income and customs taxes directly from outgoing remittances, combined with a reduction in the daily supply of dollars auctioned (an apparent attempt to conserve the CBI’s dwindling forex reserves).

Collecting taxes directly from importers’ payments to their suppliers sounds like a good idea in theory. Rather than trying to collect these amounts at border crossings, where there will be many ways for importers to avoid paying, why not simply add an extra charge—8% of the total—to their wire transfers and have their banks remit this to the government?

If importers were going to be stuck with this 8% charge regardless of how it was collected, it would have no effect on the exchange rate at all. Apparently many of them aren’t used to paying anything, which meant they were facing a de facto 8% deprecation in the auction rate—from 1,166 to 1,259.

Had the market rate remained at the year-end 2014 4.4% premium to the auction rate, it would have peaked at 1,314. But the central bank’s decision to limit the supply of dollars available to auction participants put the currency under even greater pressure. The resulting dollar shortage ended up pushing the dinar to its lowest level since 2006.

In the end, the government was forced to give up on the scheme to collect taxes on remittances. On June 18 the CBI announced that it was cancelling the 8% charge, at which point the dinar appreciated rapidly, regaining the 1,250 level by June 21.

Since 2011 there have been four major peaks in the IQD/USD exchange rate. The last three times, the dinar eventually returned to IQD 1,200: USD 1. This time the outcome is less certain. The 8% charge may have been cancelled but the CBI’s forex reserves are still falling. As of April 23 (the last reported date) they had dropped to USD 68 billion, down from USD 83 billion at the end of April, 2014, mainly as a result of lower oil prices and increased imports of military hardware. Until this trend reverses, the currency will continue to be weak.

The dinar’s wild ride may not be over yet.

Private banks the main reason for the collapse of the dinar exchange rate

Parliamentary Finance: private banks the main reason for the collapse of the dinar exchange rate BAGHDAD / revealed the parliamentary finance committee member Masood Haider, on Tuesday, on the reasons for the high dollar, and the collapse of the dinar…

Will the CBI Try Dinar QE?

By Mark DeWeaver.

This year the Ministry of Finance (MoF) is set to sell IQD 11 trillion in new debt to the state sector banks, thereby partially filling the hole in the central government budget left by the recent collapse in oil prices. The new issuance should bring total treasury bills outstanding to IQD 18 trillion, a 156% increase over the end of last year and more than double the previous peak level of November, 2010.

T-bill issues of this magnitude could potentially provide a sizable boost to money supply growth. Consider what would happen if the state banks didn’t keep any of the new bills on their balance sheets but instead sold all of them to the CBI (Central Bank of Iraq). The central bank would pay the banks by crediting their reserve accounts, thereby monetizing the increase in government debt by “printing” new money. (Such operations are allowed under Article 26, Section 2 of the CBI Law.)

The resulting IQD 11 trillion increase in base money (commercial bank reserves + cash in circulation) could increase Iraq’s M2 money supply by as much as IQD 15 trillion (assuming the current M2 multiplier of 1.37 times). (M2 includes base money and commercial bank deposits.) That would be a 17% jump, a dramatic acceleration from December’s year-on-year M2 growth of just 3.3% to growth rates last seen in 2013. (See Chart.)

Engineering a monetary stimulus of this magnitude might be a good policy for the government to pursue. With GDP growth at a multi-year low (see my last post) and year-on-year inflation dropping to -0.41% in January, why shouldn’t the CBI attempt its own version of “quantitative easing?”

Yet it is far from clear that the government has any such plan.

This year’s T-bill sales will not be unprecedented. From April, 2009 – April 2010, total T-bills outstanding rose by IQD 7.2 trillion—the same 17% of initial base money that IQD 11 trillion would represent today. And none of those earlier T-bills were sold to the CBI. In fact, the central bank hasn’t had any T-bills on its balance sheet since March, 2006.

If this precedent is repeated, this year’s new issuance will have no impact on the money supply at all.

CBI Announces Withdrawal of 50 Dinar Banknotes

Thursday February 26, 2015

 Baghdad – Said the Iraqi Central Bank, on Thursday, for the withdrawal of currency 50 dinars category of trading, indicating that the replacement will continue for two months. The bank said in a statement received ” Alsumaria News “, a copy of it, he was” given to stop the public from trading paper Cash category 50 dinars, he decided to withdraw this banknote trading based authorized to article 36 of the powers of the Bank Act No. 56 of 2004 “.

The bank added that “the banks and their branches will start replacing these banknotes presented to it and without fee or commission,” noting that “banks will deposited with the bank and its branches for the purpose of being the equivalent value in the accounts we have.

The Bank noted that “the term that will replace these banknotes will begin on the first of March to 30 of April next,” stressing that “the end of the period of replacement will be banknote void and have no discharge power will not be accepted in Iraq.”

It is noteworthy that the bank CBI issued after 2003 and banknotes from the category of 50 dinars, but he is not traded due to the high prices of the products offered in the market.

Central Bank announces the withdrawal of 50 dinar

Central Bank announces the withdrawal of 50 dinar a class of trading Iraqi Central Bank, on Thursday, for the withdrawal of currency 50 dinar category of trading, indicating that the replacement will continue for two months. The bank said in a statement received ” Alsumaria News “, a copy of it, he was” given to stop the public from trading paper Cash category 50 dinar, he decided to withdraw this banknote trading […]

CBI sales rising to more than 69 million dollars

CBI sales rising to more than 69 million dollars BAGHDAD / Baghdadi News / .. CBI sales slightly, rose in the auction for the sale of foreign currencies, on Wednesday to more than $ 69 million, after the sales yesterday 64 million and 505 thousand dollars. In a statement to the bank received / Baghdadi News /, a copy of the “amount sold size by the bank today at a price of […]