Dialectical dialogue between Dr. Ward al-Aqili* and d. Bariq Shipper** about financial and monetary policies in light of the crises facing the Iraqi government
Dr. Ward Najm Al-Okaili commented (in the following Dr. Ward) on the statements of Dr. Bareq Shubar to Radu site on 8/8/2020 in the "Elite Economic Group" on WhatsApp, with the presence of 178 members of the group consisting of businessmen and elite academics in addition to a number of senior officials in the Iraqi state, and the following controversial dialogue took place between them.
I respect very much Dr. Bariq's publications, but I think recommending internal borrowing will only make matters worse and remind us of the austerity policy adopted by the previous government.
The domestic financial situation is witnessing a severe shortage of liquidity, the suspension of many private businesses and the increase in unemployment.
This requires pumping more domestic liquidity and not withdrawing it from the market. It also requires professionals to urge officials and the media to refrain from invitations to procedures that lead to an increase in the need for liquidity, as it will exacerbate the damage of the private sector and increase the level of local unemployment, and thus will reduce people's incomes and increase the pressure on the government and its demand to continue providing aid and honors.
I believe that all calls should be made in this circumstance to support the private sector, its institutions and businesses through operational packages to overcome its repression resulting from the policies of previous governments, adding to the conditions of the demonstrations and stopping the formation of the government and Crohn's disease.
The government must accelerate the provision of these packages, it is a thousand times better than stopping private activity and turning the millions who live in this sector into an added burden on the government.
By the way, increasing domestic liquidity does not only mean increasing the amount of cash printed,
but also includes increasing banking transactions and increasing confidence in the banking system and leaving the exchange rate to the dollar for market forces by a certain amount calculated by reducing the amounts of dollar sales and adopting the multiple price policy or the two-price policy to separate the import of basic commodities and materials Supported priority between importing luxury and unnecessary goods that can be produced locally.
As for the claim that this increases the level of inflation, it is a theoretical claim that depends on the concept of imported inflation only and wants (in terms of whether or not he intends) to keep the level of the cheap dollar exchange rate as it is.
I sincerely apologize to Dr. Bariq, the esteemed, but I think what was published was fragmented in a way that affected its content.
Dr.. Sparkle an inch
My Excellency Ward Ward Najm. I welcome your criticism of my intellectual thesis, and I do not need to apologize, because I do not see in your intervention a derogation from my personality, but an open dialogue of my thoughts.
I fear that you misunderstood my recommendation for internal borrowing as an alternative to external borrowing in the event that this is required to finance an expected fiscal deficit in the next budget.
There is no need to explain the reasons that will lead to the emergence of an inevitable decrease in state revenues, as they are known to all because of the collapse of oil prices in half compared to last year.
I do not recommend any borrowing, internal or external, but the financial conditions will make it necessary for the country to borrow, especially since you are demanding financial packages to revitalize the economy as other countries do.
Let me show you how other countries finance these packages.
The German government, for example, has approved a supplementary budget for this year of 150 billion euros and will borrow the entire amount from financial markets by issuing government bonds.
The US government has approved a $3 trillion package and will finance that with a loan from the US Federal Reserve, thereby increasing the government’s debt to the Fed by $27 trillion.
America is the only country in the world that imposed its currency on us as an international currency.
Until the beginning of the 1970s, it was covered with gold.
After that, it became exposed without cover, but it was imposed on Saudi Arabia to sell its oil in dollars and other oil countries followed.
Iraq has a successful experience in overcoming the financial crisis in the years 2014-2017, where the budget deficit was funded through the issuance of the so-called government permits, which are short-term bills-like securities sold to local banks and allowed banks to deduct them from the central bank.
This means creating cash and pumping liquidity into the economy.
The government that received the amounts of these loans disbursed them, that is, to return them to the economic cycle.
Dear Sir, these are the ABCs of Economics, which I have been practicing professionally for 45 years, because I know what I'm talking about.
And what concerns the risk of inflation by printing money without covering it is a fact witnessed by all who lived in Iraq during the siege period, and I personally lived through it indirectly through my dollar transfers as monthly salaries for 9 families except for aid and other donations.
With appreciation and respect for your honorable person.
Barik Muhammad Reda Shebar - Berlin
Dr.. Take a star
Greetings to you, our honorable doctor.
I would like to add the following comments to you for the purpose of scientific and practical benefit:
Germany and the United States will finance its issuance from the primary market.
America will borrow from the federalist who will pump (additional new money).
As for domestic borrowing from the secondary market, it is a process (recycling) of domestic liquidity and there is no new cash addition.
this is not true.
Any borrowing from government or private banks represents an addition to deposits with the banking sector in favor of the customer from the non-banking sector (producers, consumers and the state).
This means issuance of money (Money Creation) and with it increase the liquidity meaning the money block in the narrow sense M1.
The government's borrowing from banks is considered the primary market, but selling these bonds or treasury transfers to the central bank is called the secondary market.
With the deduction process, the banking sector receives the dinar that was sleeping in the treasury of the Central Bank.
Look An article by the expert on monetary policy and researcher at the Central Bank, Hussein Atwan And the controversy with the government economic adviser d. Abdul Hassan Al-Anbuge, published on the website of the Iraqi Economist Network.
Economic theories emphasize the need to inject (new liquidity) in such circumstances.
And if there is a theory based on the concept of (rotating) liquidity, I would be grateful to those who guide us for it.
There is no disagreement about the task of monetary policy in managing the money supply (the monetary block),
which is subject to daily money creation (i.e. money creation), i.e. injecting new liquidity by banks when it gives loans to non-banking sectors including the private sector on the part of the money destruction (Money destruction)
In the language of the central bank, sterilization is cash, that is, the withdrawal of liquidity from another side.
The conditions for printing the Iraqi currency in the 1990s are completely different from the current conditions.
Iraq at that time was forbidden to export oil, but now it sells oil and holds the dollar and can raise the exchange rate to a higher level as happened in Lebanon or the adoption of multiple price policy or at least leave the exchange rate to determine market forces and the Iraqi dinars will increase in volume against the dollar to greater needs Current and future.
The problem does not lie in printing the currency (paper dinar) per se, as this process is currently under way as I understood it from an official in the central bank, where the printing and printing of the dinar is in the treasury of the central bank and does not come out of it only
after the bank receives for that dollar from the Ministry of Finance (the monetary process)
Or from the private sector and through its export or tourism activities.
This, unfortunately, is not present in Iraq, unlike the situation in Lebanon, Jordan, or Turkey.
As you know, the only source of foreign currency is the Iraqi government, which has a monopoly on the export of crude oil.
The central bank law prevents it from lending to the government by withdrawing from foreign currency reserves because the function of this reserve is to finance the deficit in the trade balance and the balance of payments and not the fiscal deficit in the public budget.
In the event that the law is exceeded, the value of the Iraqi dinar will decrease against the dollar.
This means that the Iraqi dinar will lose its value, as was the case during the 1990-2003 siege period, where the cash issue was in the sense of creating cash and pumping liquidity without coverage and without limits and is not matched by sterilization of cash, i.e. withdrawing liquidity, no increase in commodity production and all
This inevitably leads to hyperinflation, as happened in the mid-1990s in Iraq
Regarding the idea of floating the Iraqi dinar, this will actually lead to increasing the volume of Iraqi dinars, but to the loss of its purchasing power in the absence of local production that covers the volume of domestic demand, in the absence of export and tourism industries that can supply the country with foreign currency, as is the case in Turkey.
The whole world (after krona) will return to the old economics theories (self-sufficiency) in an attempt to ensure that most of its needs are met locally after the krona pandemic crisis demonstrated structural and practical weaknesses in theories of specialization and comparative advantage, and we in Iraq are still (talking) only about supporting the sector The private.
How do you think turning words into action without pumping huge new liquidity into the local market and limiting this import diarrhea?
How is this pumping done without increasing the size of the local currency and increasing banking?
I don’t know what do you mean by ancient economics theories and their relationship to self-sufficiency.
According to my reading of the history of economic thought,
the Mercantilist theory is considered one of the oldest economic theories (the seventeenth century, in the early capitalism stage and the process of accumulation of primitive capital,
which coincided historically with the domination of the colonial powers over the countries of Africa and Asia and the plunder of their wealth).
This theory promoted self-sufficiency in the sense of concentrating production inside the country and creating cash (in today's concept of monetary issuance) by achieving a surplus in the trade balance by all possible means, including the use of force and waging wars against other countries.
Colonial Britain used this method in India with the destruction of the local textile industries and forcing them to grow and export cotton in order to be manufactured in Britain and then exported to India.
This theory views foreign trade as a winning-losing process according to the zero equation.
In recent years, this theory has reappeared in a new dress, as practiced by President Trump under the name "America First" and declaring trade war on all countries that enjoy comparative advantages and achieve surpluses in their trade balance.
And it is clear that Trump's pure trading mentality and zero-sum game does not realize that most countries ’trade surplus returns to America to buy government bonds or US shares.
Unlike the old mercantile theory that builds on a large state intervention in the economy, the classical theory that emerged in the eighteenth century with the beginnings of the industrial revolution relies on market forces as the invisible hand that coordinates the conflicting interests of producers and consumers and achieving balance in the market.
Adam Smith and David Ricardo laid the intellectual foundation for economic liberalism and freedom of international trade, and Ricardo demonstrated his well-known model and numbers of benefits countries derive from labor distribution and international specialization.
Since then, international trade has been growing and prospering at very high rates, and with it the pace of globalization of production and financial markets has increased after the end of the Cold War in the early 1990s.
We agree on the need to support the private sector, not with government words and promises, but through a comprehensive program and policy package that is not only limited to pumping cash liquidity,
but must include the provision of material requirements from qualified infrastructure and human resources as well as legal frameworks and investor protection.
Your honorable side knows that the level of inflation is not necessary to rise in the case of an increase in the size of the monetary block,
but that it can decrease even if the mass increases or increases its rotation if the additional local production volume is higher than that increase, and it is strange that everyone focuses on one side and neglect the side The second is (volume of production).
It is true. But as I mentioned, Iraq lacks a local agricultural and industrial production that covers the country’s need.
And the past years attest to the leakage of purchasing power generated by government spending outside the country, as you have described in the form of import diarrhea.
I remind everyone of the actions of the Ministry of Agriculture, which was subjected to a lot of attack and criticism, but the ministry held out and its work was in the interest of Iraq and the market was filled with local agricultural products with low prices, and if we remained on the chaos of importers and beneficiaries, the food situation in Iraq would be tragic.
These are encouraging beginnings and I have previously called for focusing on agricultural development: a top priority because investment in them is relatively little and the return is fast compared to industrial expansion.
The growth of agricultural production will provide a good ground for industrial development, especially for food industry Agro Industry
Most economic theories in the event of a dual confrontation (unemployment - inflation) is concerned with tackling unemployment even if inflation increases,
but I personally think that Iraq has a special advantage as it can reduce unemployment without exposure to large (domestic) inflation by adopting a correct monetary policy.
Do you, my honorable Janab, agree that wasting millions of dollars to import trivial goods that can be produced locally, or the central bank’s investment in (foreign) investments, the lack of improvement in the local banking system, the lack of confidence in the banking deal, or the failure to finance local production sector activities Is monetary policy so bad?
Yes, I completely agree with you, but the foreign currency reserves should be preserved to finance the necessary imports that go into the process of domestic production of capital goods and advanced technologies.
With my sincere regards and appreciation.
I greatly appreciate and respect your sincere and inspiring views on the dialogue.
I thank fellow Mesbah Kamal for reviewing the original text and editing it linguistically.
Sparkle an inch
(*) Industrialist, Iraqi businessman and civil activist
(**) International economist and global coordinator of the Iraqi Economist Network
Copyright reserved for the Iraqi Economist Network. Republishing is permitted provided the source is indicated. June 21, 2020
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A dialectical dialogue between Dr. Ward Najm Al-Okaili and Dr. Bariq Shubr on financial and monetary policies in light of the crises facing the Iraqi government – liberated
Dr.. Bariq Muhammad Reda Shebar