Shabibi and Stability (9/4/12)

The other day our little buddy Breitling made the comment that Shabibi’s job is to raise the value of the dinar.  I didn’t recall ever hearing that, so I started researching the job description for a central bank head.  Contrary to what Breitling said, I found numerous examples of Shabibi saying that he wanted stability with the exchange rate.  Every time he has ever referred to an increase in the value of the dinar it was either in the context of deleting the zeros (which means redenomination – producing no increase in the purchasing power) or he was referring to the auctions where they were manipulating the supply of dinar to raise the street value to reflect the official value which has nothing to do with the value of IQD outside of Iraq.  If anybody can provide a link for me to prove that Shabibi has ever stated that he intends to raise the official value of the dinar to incease the purchasing power I’d love to see it.

Consider the following:

Baghdad, Search House Ousama Alngivi with Central Bank Governor Sinan Al-Shabibi exchange rates and how to stabilize the national currency in order to revive the country’s economic situation.

Question: Is there nothing to suggest a link between Iraq’s central and executive power in the constitution?

Answer: The Constitution confirms that the CBI is responsible to the House of Representatives in the implementation of its monetary policy, and the close relationship between the CBI and the House of Representatives are in favor of the executive branch that need economic stability, who works for it’s central. And economic stability is the stability of the currency and prices and inflation, and on this occasion to talk about the need to develop a strategy for the management of fiscal and monetary policies as it provides the opportunity to promote the economic performance better without restrictions shackle workers in these vital sectors and prevent their movement.

A market-driven monetary policy has reduced the Iraqi dinar’s vulnerability to political upheaval and is keeping the exchange rate stable, Central Bank Governor Sinan al-Shabibi said.

Breitling also says that we know the exchange rate of 1166 to the dollar is bogus because their money supply figures are growing but the rate doesn’t change. Well that might be true except for the way Iraq arrives at their valuation. They’re backing the dinar with their foreign currency reserves which are currently a little over $60 billion (recent reports have it up around $67 billion so I’m expecting that to be reflected soon in their M2 figures, which will probably be reported between 75 and 78 trillion by the end of the year) and they’re backing all of it which includes the electronic currency as well as the cash. That’s why you have to go by the M2 figures rather than the M1 which is only cash. The current M2 is a little over 70 trillion dinar. If you divide $60 billion by 70 trillion you get a figure of about $.000857. Sound familiar? That’s the current value of the dinar. Now, why doesn’t that change as their money supply increases? Because their foreign currency reserves are also growing. In fact, that’s the very reason their money supply is growing. It’s how they reflect the growth in those reserves and their economy. Here’s how it works.  (FCR = Foreign Currency Reserves)

$40 billion (FCR) x 1170 = 46.8 trillion dinar

$45 billion (FCR) x 1170 = 52.6 trillion dinar

$50 billion (FCR) x 1170 = 58.5 trillion dinar

$55 billion (FCR) x 1166 = 64.1 trillion dinar

$60 billion (FCR) x 1166 = 69.9 trillion dinar

These are all approximations of course. Money is constantly going in and out but this is pretty much what they’re doing. As their foreign currency reserves grow they increase the money supply to the extent necessary to maintain equilibrium resulting in a stable exchange rate. They could leave the money supply as it is and just increase the value instead, but Shabibi wants stability in the exchange rate.

In the March 2011 IMF Country Report we read:

“The central bank followed a policy of exchange rate stability which has translated in a de facto peg of the exchange rate since early 2004. However, from November 2006 until end 2008, the CBI allowed the exchange rate to gradually appreciate. As a result, the exchange rate arrangement of Iraq was reclassified to the category of crawling peg effective November 1, 2006. Since the start of 2009, the CBI returned to its earlier policy of maintaining a stable dinar. Consequently, the exchange rate arrangement of Iraq was reclassified effective January 1 2009 as a stabilized arrangement.”


You see the value increased from 2006 to 2009 because the CBI abandoned temporarily its policy of exchange rate stability. As I have pointed out more than once they did this in order to get inflation under control. Then they returned to their policy of stability. Since then the dinar has only increased in value a third of 1% to correct another spike in inflation in January 2012.

Type the keywords “Shabibi” and “stability” in Google and do a quick study. You’ll see time and again Shabibi has talked about maintaining stability in prices, in the exchange rate, and in the economy. He has only increased the official value of the dinar when he was forced to by inflation. And once he got the results he was after he locked it down.

For the head of a nation’s central bank stability is the holy grail. There are so many competing forces and agendas that he has to address that it’s almost impossible to attain. Think of it as a guy plugging holes in a dam.  No leaks means stability.  If Shabibi can go home at the end of the day with the same exchange rate, the same interest rates, and the same inflation rate as he had at the start of the day he can prop his feet up, drink a beer, watch TV and relax because he’s pretty much done his job.

Given that stability was and still is the policy, and given the numerous references that Shabibi has made about stability, and given the history of restraint utilized by Shabibi one has to wonder why all of us gullible shmucks ever felt that there was any intention of anybody at the CBI to revalue the IQD?