Transcript MGT 4240: Organizations: Theory and Behavior

Monetary Policy and Currency
Alignment in Post War Iraq
Kevin A. Vetelino
ECO 6226
Summer 2004
OUTLINE
Introduction - where are we now
 Historical Monetary Policy in Iraq
 Possible Options

 Central
bank, currency board, dollarization
Experts Recommendations
 Analysis


post-war and petroleum-based economies
 Conclusion
and Recommendations
Introduction
 2003

invasion of Iraq
An oppressive dictatorial regime removed
 Lack
of security and relative lawlessness
 Suggests
 Future
success lies with economic growth + stability,
 currency
 Price
efforts required was underestimated
system and monetary policy
control is of utmost importance
 discourage
investment in DIs +stunt financial system growth
Iraqi Monetary History
 Iraq
- created by the British in in 1916
 Used
 Iraqi
independence in 1932
 Iraqi

 Iraqi
the Indian rupee
currency board established
1 Iraqi Dinar = 1 British pound sterling
Central Bank established in1947
 support
 2003,
government debt + drove inflation
official exchange was 3.22 dinars/dollar
 money
bazaars rates were 4000 dinars/dollar
At the Time of the Invasion
 Two
currencies in Iraq
 Saddam
dinar: nationwide
 Swiss dinar: Kurdish region
 Six
private commercial banks
 limited
independence from from the government
 completely insolvent
 Current
international debt in excess of $300B
Central Banks
 Established
 regulate
to provide a money + credit system
monetary forces to promote economic growth.
 Functions
 regulation
of the money supply, issuing currency, being a
lender of last resort, fiscal advisor, bank regulator
 Conducts
 open
monetary policy
market operations, setting the prime lending rate,
setting reserve requirement, printing money moral suasion
Currency Boards
 Issues
domestic currency at fixed rate to anchor currency
 pound
sterling, EURO, US dollar (maintains 100% reserve)
 Do not lend to public or government (not a lender of last resort )

Advantages:
 Force
strict fiscal discipline
 low inflation
 develops responsible banking practices.

Disadvantages:
 Can’t
implement monetary policy
 “lack of sovereignty”
Arguments for Currency Board
 Hanke
and Sekerke, Johns Hopkins University
 need
to strictly control of inflation
 historical lack of fiscal discipline w/high debt
 Central bank cannot function in currently in Iraq
Not financial markets
 Insolvent banks
 Lack of data and experience
 “flying blind without instruments”

 Mark
Spiegel Fed in San Francisco
 establish
currency credibility
Steven Hanke
Arguments for Central Bank
 Coalition
Provincial Authority
 Established
the Central Bank of Iraq
 Issued new dinar, floating exchange rate
Paul Bremmer
 Roubini
+ Setser (NYU, Council on Foreign Relations)
 Superior
for commodity based economy
 Currency boards adopt MP of anchor
 Oil supply shock (outside of Iraq)
drive prices and demand for Iraq’s oil: tight money
 importing nations: loose money
 recipe for deflation

Nouriel Roubini
Analysis: Petroleum Exporters
Norwa y
Saudi
Arabia
Ve nezuela
Iraq
Pe trole um
Production 3.4M bl/day 6.0M bl/day 3.0M bl/day 3.0M bl/day
(6M exp )
Pe trole um
GDP
35%
90%
85%
80-90%
DEBT in
2002
Currenc y
Exchange
$0
(creditor)
Float
$25B
$38B
$300B
Peg
“managed
peg”
Float?
Analysis: Petroleum Exporters
INFLATION
Analysis: Petroleum Exporters
GDP per capita annual growth
Analysis: currency board nations
Bosnia
and
He rzego vina
Establish ed
curre nc y
boar d
De bt/GD P
(2002 )

Eston ia Lithuan ia
Bul garia
1998
1992
1994
1997
51%
10%
9.4%
21%
Iraqi debt/GDP is expected to be 300% in 2005
 Dependent
on debt restructuring
Analysis: currency board nations
INFLATION
Analysis: currency board nations
GDP per capita
Conclusions
 Initiate
a currency board arrangement
 To
the dollar (or possibly to the Euro)
 Temporary measure for period of 5-7 years
 Establish
a central bank
 gradual
replacement of reserve w/domestic gov’t bonds
 conduct open market operations
 critical for a petroleum-based economy such as Iraq
 Temporary
nature is critical
for cultural and political reasons.
 allow the financial system to grow and mature

Questions?