Inflation in Iraq between wasting public spending and excessive imports
Prof. Dr. Abdul-Hussein Jalil Al-Ghalbi
University of Kufa
the introduction
After the 1990s, the Iraqi economy witnessed unbridled inflation following the invasion of Kuwait and the imposition of economic sanctions on the country, which led to dollarization and the loss of the Iraqi dinar to its most important function, which is a store of value, in addition to social problems such as the spread of crime and migration outside the country to search for a living and financial corruption, which was manifested In bribery, however, after the political change in April 2003, the main goal of the Central Bank was to stabilize prices, and it succeeded in that by controlling the money supply and working through the currency selling window to finance imports in order to meet domestic demand. Because inflation in Iraq is the source of monetary factors represented by an increase in the money supply, and real factors represented in the shortcomings of the total supply as well as external factors.
First: An overview of inflation over three decades (1990-2019)
Government spending and economic rents led inflation in Iraq for a long time (after the second Gulf War 1990), as government spending depended on cash issuance during the 1990s was the main source of inflation, and monetary policy bore the inflationary burdens generated by the continued pressure on aggregate demand generated from government spending. which shows inflation rates, government spending growth rates, and narrow money supply growth rates. The average government spending growth rates during the period (1991-2002) reached (68%), which is a high percentage that was directly reflected in On the growth of the money supply, as its average rates were (64%), which is a very high percentage, and then found its echo in inflation, whose average rates in the same period reached (103%), and it must be emphasized that this came as a result of relying on cash issuance to cover expenses government because of the economic sanctions imposed on Iraq during that era. In addition to the suffering of the Iraqi economy from high prices due to the weakness of the productive sectors and its exposure to crises, wars, and economic and political instability, which deepened the phenomenon of inflation.
Here, it must be emphasized that the highest rates of inflation were in the years (1994 and 1995), as they reached (492.19, 351.38%), respectively, in addition to that the highest growth rates of government spending were in these two years (189.24, 246.36%), respectively. And that the money supply growth reached (176.4, 195.2%), respectively. The large increase in the money supply crystallized in the rise in the general level of prices and the decrease in the purchasing power of the dinar, and then to a difference in the functions that money performs, as the tendency of individuals to get rid of liquidity increases towards converting it into real assets that can increase in value over time. As a result of the agreement that took place between Iraq and the United Nations and was named (the oil-for-food agreement) in 1996, it partially changed the behavior of those variables, as it eased the economic sanctions imposed on Iraq. Price levels decreased and inflation reached a negative rate (-15.43%) and the same rate Government spending growth (-21.46) and the money supply growth rate to (36.2%). Inflation rates proceeded until the end of the remaining period of the life of the former regime with average growth rates for the three variables. Before 2003, the Central Bank was a financial lever that financed the budget deficit through monetary issuance (cheap money policy), which caused a remarkable rise in inflation. The size of the inflationary gap can be estimated when comparing consumer and investment spending as a component of final demand with the total supply of goods and services. However, the change that occurred after 2003 pushed the behavior of the studied variables towards a new path, as it was more stable than before, as the average inflation rates over the period (2003-2019) were (12.95%) and the average Spending rates are (48.28%) for the same period, in addition to the narrow money supply, whose average growth rates reached (23.9%).
What attracts attention during this period is that government spending has less impact on the growth of the money supply, as well as the latter's impact on inflation compared to the previous period, and this can be read from a close statistical look, as the relationships between these variables have been estimated, and some results indicate that government spending explained It accounted for (88%) of the changes in the money supply, which in turn explained what amounted to (89%) of the changes in inflation before and after 2003. Until 2019, government spending did not explain changes in the money supply except (34%), which only explained ( 26%) of the fluctuations in inflation, which clearly indicates that the factors influencing inflation are very different from what they were previously, which indicates the entry of new variables driven by the new independent monetary policy of the Central Bank of Iraq. It must be emphasized that the underdevelopment of the production structure, expressed in the dominance of the production of raw materials over the branches of the manufacturing industry, created a kind of dependence of the Iraqi economy on the outside, especially the developed countries.
Thanks to the independence it enjoyed by virtue of its new Law No. (56) of 2004, the Central Bank was able to control the monetary variables affecting inflation, as its main objective is to control price levels and work to stabilize them. Here, the Central Bank devised the idea of a foreign currency auction, which was later called (the window for buying and selling foreign currency) to control the sales and purchases of the intervention currency, which is the dollar to control price levels, as well as the other objectives of the auction in providing the dollar for trade and savings, and so on from other sources of demand on foreign currency. It is natural for central banks to focus their attention on keeping inflation below certain levels, and accordingly, banks find themselves compelled to achieve stability in the economy, that is, to ensure slow rates of movement of price levels. It must be emphasized that prices rose during the years 2003-2007, following the application of the Fund's prescriptions for lifting subsidies on oil derivatives prices, and after this period, this shock was absorbed. The rise came in the group of foodstuffs, rents, fuel, transport, communications and other totals. The rise in transport prices is due to the rise in fuel prices. When fuel is excluded, the underlying inflation decreases significantly.
In fact, inflation decreased to one rank, especially after 2009 until 2019, and more than that, in some years it fell to negative levels, as in 2014, when it reached (-0.8%), and in 2019 (-0.2%), and this indicates that the economy since Before 2014 has entered a downturn. In general, the increases in 2011 were concentrated in the prices of foodstuffs, commodities, and rents, which raised the rates of the consumer price index.
Here it is inevitable that we make it clear that the Central Bank has resorted to using the foreign exchange rate as a nominal fixer, and began to reduce its levels until it reached the limits of (1182 dinars / dollars) after it had approached (3000 dinars / dollars) in late 2002 and early 2003 before The fall of the previous regime, and the value of the dinar became very strong, to the point of exaggeration, compared to the currencies of the regional neighboring countries of Iraq, which have been seizing this opportunity to extend their commercial and economic influence over the entire Iraqi economic sectors through the continuous expansion of their exports to Iraq, and the Iraqi society has become enjoying those commercial advantages that He was granted the strong dinar at the expense of the spread of unemployment and the decline in production in the productive sectors, and the Iraqi economy has become dependent on the oil rent bench, which constitutes more than (95%) of the revenues that finance the Iraqi general budget from selling oil rent dollars to the central window and receiving dinars, and he watches from This place is high on unemployment and desertification, which seemed to devour agricultural lands, rust and erosion that took its toll from the abandoned industrial machinery and equipment of the remaining Iraqi industrial factories and institutions, and the decline in the education, health, tourism and other sectors for the benefit of those countries. Here, government spending no longer has the usual and governing effect of inflation, as in the days of economic sanctions. Rather, inflation is affected by the variables that govern imports, including global price levels, transportation costs to Iraq, problems related to supply chains, the problems of the Corona pandemic, the Russian-Ukrainian war, and other international economic and political variables. In addition to the fluctuations and shocks that may affect the foreign exchange rates against the different currencies of the trading partners, major countries and others.
Therefore, the Central Bank had to take decisions that allow inflation to move upward to take advantage of the advantages that the economy can obtain from it, as it will activate the wheel of the economy. Quality, and to move some of the aforementioned economic sectors in which the spirit can be emitted to absorb the rampant unemployment among Iraqi youth.
Second: the exchange rate and the monthly behavior of inflation
The decision of the Central Bank at the end of 2020, especially on the nineteenth day of December, to raise the exchange rate of the dollar by (23%), came as a surprise to the economic and social circles, but it was in political agreement with the government and the main political movements, and with the blessing of the International Monetary Fund, and it came to meet the economic need, but What is taken from it is that it was too late, as the appropriate date for change is between the years (2010-2012), because tomorrow it was greatly exaggerated starting from those days, and it is also taken into account that the rate of lifting was large, as the central bank was supposed to resort to the creeping exchange rate, meaning that Change takes place through two or three stages, depending on the circumstances it assesses, but what happened is that the Central Bank wanted change, but feared the social and political reactions (the thorny environment in which it operates) that were standing as an obstacle to change, but the government’s insistence and its exposure to a stifling financial crisis prompted it to demand The insistence to raise the price of its sales of the dollar (since it has a monopoly on it) generated pressure on the Central Bank to buy its dollars at the price it imposes, which is not less than (1450 dinars / dollars) from its point of view, and these pressures came in line with the pent-up desire of the Central Bank, which gave it strong public justifications to take The decision to raise, and in all those cases and regardless of the circumstances, the Iraqi economy was in dire need of change, whether to restore balance to trade relations with trading partners or to move inflation to revitalize the economy, and before leaving this topic, there is talk going on in the political and social circles to undo this change after the rise Oil prices and the presence of financial abundance with the government, this alleged decline poses a great danger to the central bank and the Iraqi economy because it (very briefly) has directed towards standing up to the fierce import attack that has destroyed the productive sectors in Iraq and will threaten confidence, which is an essential element of the work of the central and an encouragement to speculators Those who wreak havoc on the economy, especially the Iraqi financial and banking sector.
it can be seen that inflation in January 2020 reached (3.3%) compared to November of the same year in which inflation was negative (-0.9%), and when compared to January In the second of 2021, it increased by a small percentage, reaching (0.8%). As for comparing inflation rates for the month of December 2020 with the previous year, it reached (3.2%), and with the following year 2021 and for the same month, it increased by a greater rate, reaching (5.3%). And when compared with the year 2022 (for which data was available at the end of September), the increase in inflation reached (5.3%) compared to September of 2021, in which inflation was high (7.3%).
These monthly increases in inflation rates cannot be entirely attributed to the rise in the foreign exchange rate. Rather, there are many internal and external factors that contributed to it, including the Corona pandemic, which impeded the movement of goods locally and internationally due to the general closure of movement and obstruction of supply and supply chains, as well as the rise in wages. Transport resulting from the rise in global oil prices, which constitutes a great burden on transportation fares, in addition to the global rise in prices due to the Russian-Ukrainian war that occurred in February 2022, which pushed up energy and food prices.
Third: commodity aggregates and their role in triggering inflation
Inflation in commodity aggregates is directly related to the inflation rate because the consumer price index from which the inflation rate is calculated is originally calculated from commodity aggregates, and the main aggregates were selected, which constitute (80.763%) of the total weights of those aggregates, and from it we see The food and non-alcoholic beverages group had inflation moving at a reasonable rate during the year 2021, reaching (4.7%) and less than the inflation rate itself, due to its inclusion of subsidies and the ration card, as well as the housing, construction, electricity, gas, clothing and shoes group, but the transportation group moved at a high rate of ( 13.3%. This is due to the increase in global oil prices, while the health group increased more than before, which was high in previous years, reaching (16.1%) due to the Corona pandemic, the rise in global transportation wages and the exchange rate, in addition to that this sector is characterized by high wages and profits. It has a lot more than the rest of the other sectors, which pushed inflation in it towards an increase. It must be emphasized that the commodities that fall within these totals are imported commodities and carry inflation in their prices towards the Iraqi economy for the reasons mentioned above.
Fourth: the conclusion
In conclusion, and what must be taken, government spending must be carefully controlled as it is the source of aggregate demand and the basis in the light of which inflation moves, investing financial abundance in operating productive sectors and expanding and diversifying the supply base, to meet the growing demand and curb it, not in employment in the government sector, and placing strict restrictions On unnecessary imports and controlling border crossings to control imports and provide wasted financial resources, and the need to maintain the current exchange rate at least until 2025, and then it is possible to think about raising it again because it is still overpriced and according to the circumstances that the Central Bank deems.
This is supported by the opinion of the experts of the International Cod Fund after the conclusion of their visit to Iraq, as they issued a statement bearing the number (159/22) on May 19, 2022, in which they affirmed that the Iraqi economy will recover well in light of the rise in oil prices, and it is expected that the gross domestic product will reach Total in 2022 to pre-pandemic levels, and the priority must be focused on mitigating the effects of high food prices on the groups most vulnerable to risks is the most urgent priority, and the statement stressed the need to exploit the favorable conditions in the oil market to accelerate the implementation of structural reforms and support social priorities – Economic to enhance the strength of the Iraqi economy in the medium and long term.
