Wednesday, September 16, 2009

A Crude Peg for the Iraqi Dinar

Op-Ed, Financial Times

June 13, 2003

Author: Jeffrey Frankel, James W. Harpel Professor of Capital Formation and Growth

Rebuilding Iraq involves many difficult problems. It may seem that the question of the exchange rate should be one of the easier ones to solve. The choice of currency regime - particularly what to anchor the currency to -is perhaps the most widely studied topic in international monetary economics. Yet this question too turns out to be difficult; none of the traditional solutions will quite fit.

Given instability in the region and the absence of credible institutions, the Iraqi dinar requires an anchor of considerable credibility. Some have proposed a rigid peg to the dollar, as through a currency board. But this idea has significant drawbacks. That it would mean giving up the ability to set monetary policy independently is not such a big cost, as few governments have been able to use such discretionary policy well anyway. But there are other serious disadvantages.

One big drawback of a fixed exchange rate is that it means giving up the automatic depreciation that a floating currency would experience at times when the world market for the country's exports were weak. In the case of Iraq, the most important export is of course oil. Large fluctuations in the world price of oil have wrought havoc on the economies of other big oil-producing debtor nations such as Indonesia and Venezuela, often entailing a serious currency crisis before a change in the terms of trade is accommodated.

A second big drawback of fixing the dinar to the dollar would be the introduction of gratuitous volatility when the dollar fluctuates against other leading currencies. Argentina's currency board collapsed two years ago, not just because the straitjacket was so rigid but also because the rigid link was to a currency, the dollar, that had appreciated strongly against the euro and other trading partner currencies during the second half of the 1990s. That meant Argentine exports suffered a huge loss in competitiveness at a time when world market conditions were already weak.

Finally, imposing the dollar on Iraq could also feed widespread fears of US imperialism. The politics would get even trickier if, as in Argentina, the arrangement hit a crisis - for example, as a consequence of an increase in US interest rates.

An alternative would be to peg the dinar to the euro. But this idea has big drawbacks as well. The euro has been appreciating against the dollar and might continue to do so as a result of ever-widening US trade deficits. A peg to the euro would thus risk a future loss of competitiveness against non-euro trading partners. The problem is that, as Iraq's trade returns to normal, its trading partners will be so dispersed geographically that a peg to either currency alone - the dollar or the euro - would introduce unwanted volatility with respect to the other. Like other countries with geographically diverse trading partners, Iraq may thus be headed for a basket peg, with equal weight given to the dollar and euro.

But a basket peg does not solve the problem that, in the event of large future declines in the world price of oil, the currency of an oil exporter must be able to depreciate in order to accommodate the adverse shift in the terms of trade and help stabilise export earnings. Fortunately a proposal designed for small commodity-exporters, which I have called "peg the export price", addresses precisely this issue.

The proposal is for a country to peg its currency to the export commodity. It could be implemented as follows. The central bank would set the daily price of dinars in terms of dollars in direct proportion to the daily price of a barrel of oil in terms of dollars. The result would be to stabilise the price of oil in domestic terms. This approach combines the best features of both fixed and floating exchange rates. Like fixed exchange rates, it constitutes a transparent nominal anchor and also helps promote integration into world markets. And yet, at the same time, it retains a crucial advantage claimed by floating exchange rates: automatic accommodation of fluctuations in world markets for the export commodity. In short, it offers the best of both worlds.

To fix the dinar simply to oil alone may be too radical a proposal. While it would facilitate the recovery and expansion of the oil sector, it might at the same time discourage production of other internationally tradeable goods by shifting the entire burden of price uncertainty on to them. My proposal for Iraq, therefore, is to add oil to the basket of currencies to which the dinar is pegged. For simplicity, give equal weight to all three units. Or, what is almost equivalent, define the value of the dinar as one-third of a dollar plus one-third of a euro, plus one-hundredth of a barrel of oil.

Unlike other proposals for nominal anchors, this is one that Iraq could live with even if there are big swings in world exchange rates or oil prices in the future. The country faces enough challenges without worrying about the risks of a future currency crash.

For more information about this publication please contact the Belfer Center Communications Office at 617-495-9858.

For Academic Citation:

Frankel, Jeffrey. "A Crude Peg for the Iraqi Dinar." Financial Times, June 13, 2003.

Saturday, September 5, 2009

9/5 Alsumaria TV Iraq, Iraq news | Economics |


Najaf province to set regulations for cement
September 4, 2009 at 9:52 am

Najaf governor promised to set regulations on entering imported cement to the region in order to encourage the local production. Meanwhile, South Cement Company tries to develop its productions by giving way to foreign companies to take part in development works.

Friday, September 4, 2009

9/4 NPR Topics: Iraq

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Portable Bomb Detector Prompts Debate In Iraq
September 3, 2009 at 4:04 pm

Iraqi security forces are using a simple hand-held device that they claim is effective in detecting potential car bombs. The "sniffers" are deployed at roadside checkpoints throughout the country. But U.S. military officials say the science behind the devices is suspect at best.

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Drought Withers Iraqi Farms, Food Supplies
September 3, 2009 at 12:01 am

As a two-year drought drags on, water is now so limited for agriculture that Iraq imports 80 percent of the food Iraqis eat. That means during the holy month of Ramadan, traditional foods that came from Iraqi farms are getting harder to find.

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Thursday, September 3, 2009

9/3 Yahoo! News: Iraq News | Full Coverage

Yahoo! News: Iraq News | Full Coverage

Body handed over in Iraq may be UK hostage
September 2, 2009 at 4:00 pm

LONDON (Reuters) - A body was handed over to Iraqi authorities on Wednesday that Iraq believes is one of the British hostages seized in Baghdad in 2007, Foreign Secretary David Miliband said.

Turkish FM says talks in Iraq and Syria were 'positive'
September 2, 2009 at 1:36 pm

CAIRO (AFP) - Turkish Foreign Minister Ahmet Davutoglu said on Wednesday he felt positive about his visits to Syria and Iraq aimed at defusing tensions between the neighbours after Iraqi claims that Damascus was sheltering insurgents.

Four sentenced to die for deadly Iraq bank robbery
September 2, 2009 at 8:36 am

BAGHDAD (AFP) - A court sentenced four Iraqi security force members to death on Wednesday for Iraq's bloodiest ever bank robbery, in which eight police guards were shot dead and millions of dollars stolen.

Security developments in Iraq, Sept 2
September 2, 2009 at 6:29 am

MOSUL - Gunmen shot and killed two men inside a mosque on Tuesday evening in Mosul, 390 km (240 miles) - (Reuters) - Following are security developments in Iraq at 11:15 a.m.

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9/3 - WORLD/Middle East

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Body of possible UK hostage handed over in Iraq
September 2, 2009 at 2:55 pm

A body that may be that of a Briton taken hostage in Iraq two years ago has been handed over to Iraqi authorities, British Foreign Secretary David Miliband announced Wednesday.

Saudis detail attempted assassination
September 2, 2009 at 2:42 pm

Saudi Arabia's Interior Ministry has identified the suicide bomber who attempted to assassinate the country's assistant interior minister last Thursday and released details of a phone conversation between the two men prior to the attack.

Dead Iran detainee's father satisfied
September 1, 2009 at 10:44 pm

The father of a detainee beaten to death in an Iranian prison says he's satisfied with the way the Islamic government has handled the case -- even as it serves as proof imprisoned protesters were abused.

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Wednesday, September 2, 2009

9/2 Iraqi Dinar - Can you gain profit?

Iraqi Dinar - Can you gain profit?

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September 1, 2009 at 2:05 pm

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September 1, 2009 at 2:05 pm

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9/2 Iraq Dinar Speculation

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New 40,000 BPd refinery opens in Kurdistan
September 1, 2009 at 10:25 pm

More good news on the Iraqi front. Kurdistan is the northern region in Iraq, home of the Kurds, that has huge untapped resources. The area is plagued with political upsets on a constant basis that have been largely responsible for the lack of progress recently. As seen on blackhillsportal:

Iraq’s largely autonomous Kurdistan region opened a new oil refinery on Saturday, with a projected capacity of 40,000 barrels per day (bpd), the director of the group that built the refinery said. The refinery near the Kurdish capital Arbil is run by private Kurdish group Kar, which will process crude from the Khurmala Dome oilfield, its director Baz Karim told Reuters.

“The (Kurdistan Regional Government) will pay us for what the refinery produces. Our capacity is now 20,000 bpd but it will be 40,000 bpd by the end of the year,” Karim said.

As well as producing gasoline for cars, the refinery will make kerosene, heavy fuel oil, diesel, paraffin and airplane fuel, Karim said.

The northern Kurdistan region, hoping to quickly develop its oil and gas sector, is entrenched in a long-running feud with the central government in Baghdad over energy contracts Kurds have signed unilaterally with foreign firms and which Baghdad deems illegal.

Last November, Oil Minister Hussain al-Shahristani said that development of Khurmala to supply refining in Kurdistan was a priority. The Oil Ministry was not immediately available for comment on the Arbil refinery opening.


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