Monday, 27 April 2015

Who is right about the currency auctions in Iraq?

Ahmed Chalabi’s campaign against the currency auctions is based on weak economics.

The currency auctions continue to divide opinions in Iraq. The Central Bank of Iraq (CBI) is appealing before the Supreme Court against the imposition of Article 50 in the budget law. The article, imposed by parliament, prevents the CBI from selling more than $75m a day in the auctions. Meanwhile, Ahmed Chalabi, the chairman of the parliamentary finance committee who is now spear-heading the attack against the auctions, has claimed that they have been a source of corruption, which led to the depletion of the country’s reserves. Undeterred by critics, the CBI has restarted the auctions on 6 April, after a few weeks’ suspension. Its daily sales averaged $133m in the first nine sessions, well above the limit set by parliament. Who is right and who is wrong in this debate?

1. On form alone, it was wrong to include Article 50 in the budget law. The budget law should be about fiscal policy: the government’s expenditure, sources of revenue, new taxes etc. Article 50, however, was about the conduct of monetary policy. It can be debated whether it intrudes into on the CBI’s independence, but the article was certainly out of place in a budget law.

2. Chalabi’s argument that the auctions were a source of corruption and have wasted the country’s reserves might be right. Around a quarter of the dollars sold in the currency auctions in 2013 were not used for their intended purposes, which is funding the private sector imports. But imposing a limit on dollar sales is not the right response.

If Iraq wants to maintain its peg to the dollar and eliminate the black currency market, it has no choice but inject enough dollars to meet demand. Failing that, market prices would decouple from the official price, making the peg redundant.

This is something that was confirmed time and again by Iraq’s recent experience, and is happening now too. Although the CBI no longer publishes data on the market rate, press reports suggest that the price of the dollar has reached 1340 as a result of the suspension of the auctions. This is 15% above the official exchange rate and represents the highest deviation probably since the data became available in 2004.

3. It may be argued that the official exchange rate itself should be revised. Iraq may need to either devalue its currency by choosing a higher price for the dollar or even let its currency float freely. Chalabi has hinted at that in his interview, saying that “the price set by the central bank is its choice and is not based on a particular rule”. This is a debate that could be had, especially against the background of of lower oil prices. But as long as Iraq wants to maintain its current peg and as long as it wants to eliminate the need for an unofficial currency market, the CBI should to be allowed to supply enough dollars without restrictions. 

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