Dinar Reporter (IQDUSD)

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The parallel exchange rate to official exchange rates
06-05-2008
The parallel exchange rate to official exchange rates and one of the indicators of economic and financial mouthpiece of the robustness of the economy of any state, whether from developed countries or developing countries, affected by exchange rate factors, political and economic multi Among these economic factors, inflation rates, interest rates prevailing in the market, Which reflected the impact of the exchange rate of the national currency on the parallel market exchange rate for the official national, and this research focuses on the impact of inflation and interest rates in the parallel exchange rates and for the period from (1992 2001) in Iraq and some neighboring countries, has triggered several research findings and recommendations, namely. .

First: inflation and its economic impact:
A definition of inflation:
Inflation is known that the increasingly high prices of consumer goods. This is the simplest definition of the types of tariffs for inflation. Where there are other definitions, but this definition is more visible from the viewpoint of consumers, inflation has been accompanied by full operation compared to a decline in unemployment to push prices higher proportion of the operation of the unemployed

B types of inflation:
1 - inflation afternoon: achieved this kind of inflation rate does not offset the increase in aggregate demand an increase in production rates, which reflected the impact of high prices.

2 - inflation creeping: This type of slow inflation rise in prices.

3 - the repressed inflation: a situation in which to prevent prices from rising through policies is to establish controls and restrictions prevented agreement holistic and high prices.

4 - hyperinflation: a situation that high inflation is associated with high rates of speed in handling cash in the market and lead this kind of inflation to the collapse of the national currency, as happened in each of Germany during the years 1921 and 1923 in Hungary in 1945 after the Second World War

C reasons for the emergence of inflation:
Inflation arises due to economic factors different Prominent among these reasons:

1 - inflation resulting from the costs: arises this type of inflation due to high operating costs in industrial companies or other industrial companies as departments in raising the salaries and wages are affiliates of workers, especially those working in production sites, which comes because of a claim workers lift wages.

2 - inflation resulting from the application: arises from this kind of inflation as increased demand cash, which is accompanied by fixed width of goods and services, as rising aggregate demand is offset by an increase in production. Which leads to higher prices.

3 - the sum of inflation changes in the composition of the Faculty of aggregate demand in the economy even if the request is excessive or not there is an economic focus as the price be high and not low despite the drop in demand


4 - inflation resulting from the exercise of the economic blockade against other countries, exercised by outside forces, as is happening to Iraq, Cuba and therefore no import and export in the event of total blockade which leads to high rates of inflation and consequently lower the value of national currency and high prices unreasonable rates.

D economic effects of inflation:
The effects of inflation economic powerhouse in the march of economic and social development and highlighted these effects are:

1 - high prices and money supply in circulation: Aliartvaa consequent rise in inflation in the prices of consumer and the first groups affected by this rise are the owners of limited income, as well as a large bloc of cash in circulation in the market may be limited bloc in the hands of a small group are not only a Very little of the population, reflecting the negative economic effects on the pension levels of the population.

2 - increasing rates of inflation lead to a reduction in the purchasing value of cash, leading to increased demand for capital to finance the proposed projects and increased demand for capital leads to a rise in interest rates.

3 - affected the economic life of the projects (investment) and their inflation rates and this value is calculated in accordance with the following equation, after taking into consideration the inflation rate:

F (T) =-C + e-(l + g) T [(1 - T) F (T) egT + TC]

WHEREAS:

(Brenner & venzia, 1998, p. 1521)



The value of investment [T] = F

Inflation rate g =

The cost of investment-C

Gradient e-(I + g) =

Nominal value of the assets egt f (t)

1 - reduction of exports to international markets:

The increase in inflation meant to lower the competitiveness of domestic products in international markets and this causes an increase payments for low income hence the trade balance deficit.

2 - inflation leads to increased interest rates and, accordingly, more established business profits, these profits go down, down interest rates, which are funded assets to issue bonds indebtedness. While these characteristics do not apply in a number of industrial projects in economies with low inflation. But this would happen in economies with high rates of inflation, which causes high inflation rise in revenues and rates of lead. They are not real rates if treated and returned to fixed prices.

(Damodaran, 1999, p. 327)

3 - action to reduce inflation: inflation can be reduced, particularly in developed countries to implement procedures fiscal and monetary policies:

A. Fiscal policy:

First: The Ministry of Finance of fiscal policy ((fiscal policy of the state and which is determined by income sources and uses of the excess (surplus) in the budget (Buelget) leads to reduce the volume of liquidity available. And therefore this will reduce the rate of inflation.

Second: the Ministry of Finance to sell the volume of public debt to the public and thus withdraw cash available in the market and lead to limit the supply of cash.

Third: increase taxes on luxury goods, which handled a few people from high-income earners.

Fourth: reduce government spending: Government spending is one of the reasons leading to the increase of cash rolling in the market, and thus reduce expenditure and this curtailment will reduce money in circulation in the market

B - monetary policy:
The central bank (central bank) in various countries develop and implement monetary policy to adopt a set of qualitative and quantitative tools:

First: quantitative tools:
1. Rediscount rate increase: It is normal activities undertaken by commercial banks: discount securities business for individuals in other cases re-chargeable with the CBE in this case the central bank raised the price of rediscount view to influencing the ability of banks belonging to reduce the volume of liquidity in circulation Market and this procedure is one of the measures to combat inflation.

2. The entry of banks (central bank) market sells securities in order to withdraw the sanction of the liquidity circulating in the market. Or what is called to enter the open market.

3. Increase the legal reserve ratio. Retain a portion of the commercial bank deposits with central banks and the higher the ratio decreased capacity as belonging to the banks. If the deposits, for example, (300) billion dinars, the proportion of reserve amount (25%) mean retention (75) billion, although the Central Bank lifted this ratio to (50%) mean reducing the ability of banks by affiliation (75) billion dinars will be no Legal reserve (150) billion, instead of (75) billion, and certainly affect the liquidity in circulation and thus reduce the rate of inflation.

Second: quality tools:
The quality tools, it is a way to persuade managers of commercial banks and officials from the banking association, state policy aimed at reducing liquidity in circulation in the market, and this policy is effective in developing the state more than in other countries.

Third: interest rates: (Interest rates)
Often accompanies interest rates borrowed funding sources, whether these sources, short or medium or long term, since capital is allocated in the framework of financial theory through interest rates, these rates vary according to varying terms of borrowing, interest on short-term loans are lower in When interest rates on loans while the long-term high interest rates on medium-term loans are between the two rates of exchange and increase interest rates when increased demand Capital from the current economic boom, has been available investment opportunities encourages investors to exploit the investment opportunities. And the expectations of investors a clear impact in increasing the demand for capital, as their expectations are that the economic situation is improving and that will lead to a boom economically provide investment opportunities available to investors and therefore increasing demand for capital and in the form of short-term loans which leads to increased short-term interest rates More than interest rates on long-term loans in contrast to rule which says that the interest rates on loans of more long-term interest rates on short-term loans, interest rates are affected by several factors consequent effects of these factors can ask the lender (creditor) bonuses added to real interest rates are Foremost among these factors:

1. Inflation rate (Inflation):
Affect inflation rates in industrial production costs for businesses generally, and there has been increased demand for capital to cover these costs. As noted previously, the decline in the purchasing power of money caused the increased need for funding. On the assumption that the estimates of a business, she pointed out that the cost of production line within a proposed annual plan for the coming year amounted to (10) million dinars, and when to implement a production line shows that this amount is not enough to cover the costs of setting up such a production line, but (15) Million dinars, the increase resulting from the increasing rate of inflation and devaluation of national currency, which has led to increased demand for capital and the increasing demand, leading to increased interest rates to finance the borrower, if the affected financial decisions for the installation work is not limited influence on interest rates but affects Inflation in the exchange rate of the national currency against other currencies, and adjust interest rates with inflation rates. In Germany, interest rates were less than their counterparts in the United States of America and is due to the rate of inflation in Germany was lower than in the latter State.

(Weston, et.al, 1996, p 774)

The inflation rates in the countries of South America between (10% 20%), which led to a rise in interest rates in the southern African states decreased compared to other States where inflation rates, and this is consistent with the theory Afshari (Fisher effect) over the difference between official interest rates in the country And another should be equal to the difference between the rates of inflation (mud ura, 2000, p. 232). This discrepancy explained the differences in the presentation of funds from the hand and saved the other hand, in the interest rates and a number of reasons for example, Japan's prominent role in the Japanese people to maintain high savings rates.

(H enning, et.al 1988, p. 427)

Because of inflation required lenders (creditors) as well as well known as inflation (Risk premium) added to the real interest rate, if the real interest-free risk (Kx) as well as the addition of inflation (IP) becomes the interest required as follows: K = Kx + IP

Weston & Brighan, 1993, P. 13 0))
Some lenders may be asked allowances for liquidity and liquidity meant the ability of any asset to be converted into cash quickly and without loss, and thus a measure of the degree of liquidity of the investment policy instruments, bonds and cash is in addition (LP) as well as calls by some credit risk (DRP) and the addition entitlement (MRP) and therefore become the equation Interest required by the lender are:

K = Kx + IP + DRP + MRP

2. Supply and demand:
Increasing demand for borrowed funds in cases where the national economy of the state in case of recovery and boom, to provide investment opportunities for investors and different levels of risk and return potential of any investment opportunity, to be selected, and the attendant increase in demand for funds increase in interest rates, while increasing Show laundering leads to lower interest rates.

3. Exchange rate (Exchange rates)
A. The exchange rate relationship between the currency conversion, depending on supply and demand relations between the two currencies, the foreign exchange rate, is the rate of a currency unit with a currency unit to another interview, and is expressed in the process of national Iraqi dinar against the dollar or dinar Jordanian or Syrian lira or the French franc against the deutsche mark, which reflects the foreign exchange rate (Foreign Exchange Rate). On the quantity of units from one of the two currencies are traded one unit of currency other, and there are two kinds of exchange rates are fixed exchange rates (Fixed Exchange rate) and the free exchange rate (Free Exchange Rates).

1. Fixed exchange rates: Fixed exchange rates determined in light of some of the foundations set by the administration official in the State to determine the fixed exchange rate does not change this relationship between the two currencies only within very limited margins

2. Free exchange rates: changing the exchange rate of the national currency against other currencies based on the relationship between supply and demand for the currency in the foreign exchange market, and this change is being freely in the exchange rate free

B factors influencing exchange rates:

The exchange rates are affected by several factors, notably:

1. The high exchange rates of foreign currencies which leads to the devaluation of national currency against these currencies.

2. Decline of exports or lower prices affect the volume of cash flows into the country

3. Wars and natural disasters affecting the national economies of the countries affected, since the imbalance in the national economy which leads to the devaluation of national currency against other currencies.

4. Inflation rate: high inflation rate in national economies to the depreciation of the national currency against other currencies, and thus affected the exchange rate leading to an increase in the number of units of the national currency to be exchanged one unit of foreign currency to meet them.

5. External debt and debt service: The external debt burden is one of the burdens of the national economy as well as debt servicing of the annual premiums benefits some countries may resort to reschedule its debt with creditors in return for the benefits of high, which makes these countries benefits not paid the premiums and original this means disruption The national currency against other currencies.

6. Interest rates: Interest rates affect the exchange rate in an indirect, Falling interest rates with the availability of investment opportunities, leading to increased demand for capital investment of view, and realized investment and stimulate the national economy and investment to achieve double the strength of the national economy, leading to an improvement in the value of national currency Against other currencies. While such high interest rates to avoid the trend towards borrowing by investors and result in declining investment and low economic growth leading to counterproductive results lessen the strength of the national economy and reflected the value of national currency against other currencies.

The exchange rate does not accurately reflect the nature of reality or exchange rates against other currencies since this had been officially fixed price, the parallel exchange rate is a clear indication of the national currency. However, the overall situation in Iraq and because of the blockade imposed since mid in 1990 where no export or import only limits the memorandum of understanding quite different exchange rates and excessive, as the U.S. dollar exchange rate against the dinar exceeded (2000%) up and down, has got higher The value of Iraqi dinar against the dollar in 1996 due to the oil for food agreement and therefore the U.S. dollar exchange rate fell to 50% from the previous exchange rate sometimes less than that except that the continuation of the general situation of the blockade led to a decline in the exchange rate of the dinar against the dollar once again, where is Decline to become a U.S. dollar exchange rate beyond 2000%.

Despite the lifting of economic sanctions on Iraq after the occupation of Iraq Anglo American occupation forces to pump millions of dollars into the market through the salaries of employees in state organs which had been expected to lead to a rise in the value of Iraqi dinar against the dollar which has actually happened since the exchange rate is 1200 Dinar against the dollar, but the continued absence of power back to this price to rise again to become currently exceed 1800 dinars to the dollar since the market mechanism is subject to the wishes of speculators and traders of war, is due to inflation resulting from the blockade destruction. The interest rates are the prices at which the update of borrowers and banks were firm throughout the duration versus low interest rates granted to depositors for deposits Generally speaking, interest rates were not moving at variable rates of inflation and for reasons that the most prominent of the three countries and Muslim countries that deal did not benefit and common He found a limited deal.

IV: Conclusions and Recommendations:

A. Conclusions: The conclusions are highlighted as follows:

1. High or low rate of inflation will lead to higher rates of interest rates.

2. Higher interest rates reduce demand by investors and businessmen on the assumption, while pared encourage assumption and investment, which would double the investment and follow-up to the national economy and improve the value of national currency.

3. Affected by exchange rate inflation rates, high inflation leads to the depreciation of the national currency and, accordingly, changed the exchange rate.

4. Stability of exchange rates in some countries and this is not consistent with changing economic conditions.

B. Recommendations: researcher recommends the following:

1. Reduced government spending in all its forms and raise the tax rate on the profitability of activities that do not reflect the positive effects on the national economy.

2. Activating the role of central banks (central banks) in the practice of monetary policy to influence the direction of liquidity circulating in the market.

3. Activating the role of the Ministry of Finance in the exercise of fiscal policy to influence the liquidity circulating in the market as well.

4. Make data available to researchers on inflation and interest rates and exchange rates, the official and parallel specific.

5. Revitalizing the role of productive enterprises to increase production and improve performance.

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