FOREIGN RESERVES AND THE DOLLAR PRICE.. WHAT DO YOU KNOW ABOUT THEIR FUNCTIONS IN IRAQ?, 13 FEB

FOREIGN RESERVES AND THE DOLLAR PRICE.. WHAT DO YOU KNOW ABOUT THEIR FUNCTIONS IN IRAQ?

Experts in Iraqi economic affairs believe that the reserves of Mesopotamia and its investment portfolio, after the reserves recorded 106.7 billion dollars during the year 2024, are Iraq’s fortress and incubator in providing overall stability and protecting the national economy from external shocks that are reflected in the Iraqi balance of payments, in addition to its role in stabilizing the general level of prices internally through intervention policies in the organized money market.

Iraq ranked third in the Arab world in terms of foreign exchange reserves for the year 2024, as this reserve is considered “very large” and “reassuring” because it represents 20-40% of the volume of the issued currency. The foreign reserves of any country also contribute to maintaining the value of the local currency and liquidity to meet international financial obligations, in addition to financing domestic projects and reassuring investors, in addition to diversifying investment portfolios.

The cash reserve is defined as the total deposits and bonds of foreign currencies held by the central banks and monetary authorities in the country with the aim of supporting the local currency and paying the debts owed by the country. The cash reserve usually consists of several elements, which are foreign currencies, such as the dollar, the euro, the Japanese yen and other currencies, in addition to gold.

QUASI SOVEREIGN WEALTH FUND

In this context, the financial advisor to the Iraqi Prime Minister, Mazhar Mohammed Salih, says that Iraq’s foreign reserves, their formation and management are considered a quasi-sovereign wealth fund (which is currently managed by a well-diversified investment portfolio in different currencies and short-term derivative investment instruments), and the aforementioned portfolio of reserves performs two basic functions at the same time.

Saleh reviewed these two functions by saying to the “Al-Jabal” platform: “The first is to protect macroeconomic stability, i.e. the stability of the general level of prices internally by controlling the levels of local liquidity in line with the real flows of goods, services and benefits that are financed by part of these reserves and what results from them and are called here international reserves, by influencing the control of growth in the money supply through intervention in the money market by withdrawing excess liquidity by exchanging it for foreign currency, in order to finance foreign trade for the private sector in particular, indicating that these activities are called in monetary policy (monetary sterilization) using a mechanism called open market operations, which is the operational (quantitative) aspect of the objectives of monetary policy called operational objectives to combat the growth of monetary inflation rates and stabilize cash flows.”

The second is to use those foreign reserves in part by intervening in the monetary market to provide (price) stability in the exchange market by adhering to the fixed and stable exchange rate (signals) that the regular foreign currency exchange market is the basis of that market and the leader of the stability of the exchange rate itself, according to Saleh.

The advisor stressed in his statement to “Al-Jabal” that there is a specialized central administration for these reserves, as the foreign portfolio is subject to highly precise investment standards in adopting short-term international financial instruments that generate interest returns, including investing in treasury bonds of central countries in the world that are guaranteed with high-rated returns, but are semi-liquid, and this is what distinguishes the sovereign wealth fund from stability funds. I mean here the foreign reserves portfolio, which requires it to be semi-highly liquid to confront fluctuations in the national balance of payments when needed.

Cash gold, which may constitute more than 10% of these reserves, is a safe haven within the aforementioned investment portfolio of the reserves under study against the risks of currency fluctuations and the interest that makes up the portfolio itself, since the gold asset cycle is a long-term and relatively stable cycle, as monetary authorities can issue gold bonds guaranteed by the reserve gold itself and with interest when needed, and these are globally desirable bonds, according to the Iraqi government advisor.

Saleh added that “Iraq currently enjoys foreign reserves that are considered high in terms of efficiency, especially in terms of their coverage of the broad money supply, which covers 75% or more, which is the global measure required to measure the efficiency of foreign exchange reserves in maintaining stability for the national economy, in addition to the fact that the aforementioned foreign reserve covers approximately 15 months of import trade, which is a measure superior to the global measure that indicates 3 months of trade sufficiency.” Thus, “Iraq’s reserves and investment portfolio are Iraq’s fortress and incubator in providing overall stability and protecting the national economy from external shocks that are reflected in the Iraqi balance of payments, in addition to its role in stabilizing the general level of prices internally through policies of intervention in the organized money market.”

Gives Iraq the ability to control the exchange rate of the dinar

In contrast, Professor of International Economics, Nawar Al-Saadi, acknowledged that “these reserves go beyond being mere numbers registered with the Central Bank. They represent the foundation on which the state relies in confronting economic crises, whether they result from a decline in oil prices, which is the main source of revenue, or due to turmoil in global financial markets that may affect cash flows and investments.”

Al-Saadi added in his interview with Al-Jabal, “Having strong foreign reserves gives Iraq the ability to control the exchange rate of the dinar, which reduces its violent fluctuations that may lead to high inflation rates and an increase in the cost of living for citizens. These reserves are also used to finance vital import operations, especially for basic commodities such as food and medicine, which ensures the continued flow of these materials to Iraqi markets without being significantly affected by external circumstances.”

He added, “The level of foreign reserves directly affects Iraq’s credit rating and the confidence of international financial institutions in the local economy. The higher these reserves are, the more confident investors are, which enhances the chances of attracting foreign capital and supports investments in non-oil sectors, which is what Iraq needs to reduce its dependence on oil as the sole source of revenue.”

He believed that “having large reserves alone is not enough to ensure economic stability, as they must be accompanied by sound financial and economic policies. These reserves cannot be considered a resource that is consumed merely to cover the financial deficit, calling for “investing them wisely to enhance economic development and support productive sectors, because using reserves in an ill-considered manner may lead to their depletion over time, which exposes the country to great risks when unexpected economic shocks occur.”

Al-Saadi concluded his speech by saying, “Iraq needs a clear strategy for managing its foreign reserves, so that they are employed in a way that achieves a balance between monetary and financial stability on the one hand, and supporting development and investment projects on the other hand. Maintaining these reserves at safe levels enhances the Iraqi economy’s ability to withstand crises, and gives decision-makers more room to maneuver in facing future economic challenges.”