The Government of Iraq has decided to hold off on a plan to knock three zeros off the nominal value of bank notes of its currency because it does not believe the economic climate is suitable. The proposal to restructure the dinar to bring more liquidity into the market has been awaiting parliamentary approval since last year.
The central bank said last August it planned to re-denominate the Iraqi dinar to simplify financial transactions in an economy that is still heavily centralised and dominated by oil, and where deals are often carried out in cash.
Iraq is slowly getting back on its feet after years of war and sanctions. Oil accounts for 95 per cent of government revenues and the country’s banking system is still highly underdeveloped.
Central Bank of Iraq is tightening access to US Dollars after demand ballooned amid suspicions some of the cash was being smuggled to Iran and Syria, both struggling with intensifying international sanctions.
In February, the central bank asked dealers to submit cheques to identify currency buyers. From 2 April 2012, the rules were tightened further, requiring all commercial buyers of dollars at the central bank’s near-daily auctions to produce tax clearance certificate, previously applied only to orders of $50,000 and above, to show the “genuineness” of their need for dollars.
From June 30, the Iraqi traders will have to submit papers to prove that they are allowed to import the goods into the country.
Demand for greenbacks has doubled since November to about $300mn a day, putting pressure on the nation’s foreign reserves of about $60bn. The central bank also has an economic vested interest in holding daily dollar sales at $200mn or below, in order not to deplete the country’s foreign currency reserves.
Currency dealers are expressing doubts over whether the regulations would work. However, some controls and regulations are must to avoid money laundering and financing of terrorist activities. Iraq still being primarily a cash based economy, the tracking the movement of cash is quite difficult.
Every year Hungary recycles approximately $1 billion worth of worn out forints, and converts the used currency into bricks. These bricks are sent to several charities, so they can burn them as heating fuel. The program allows the organization to cover up to a third of their annual heating costs.
Banknotes undergo a quality check at the logistics centre of the National Bank of Hungary in Budapest. Once they are taken out of circulation, the bank notes are recycled for fuel, and a few charities each year get 20-30 tonnes of paper bricks each. Banknotes are shredded and compressed into heating fuel in the shape of bricks.
As per Reuters, Hungary is the only country to recycle its worn cash for fuel each year.
One of the principal goals of Europe’s common currency – euro – has always been to promote greater financial market integration between member countries. It was hoped that the common currency would make it easier for investors in one euro country to find good investment opportunities in other euro countries since they would no longer have to worry about fickle exchange rates.
The adoption of the euro as a common currency was designed also to cause large capital flows from the euro zone core to the periphery. Many believe it is those very capital flows that set the stage for the crisis. The problem is that such surges in capital flows depend on the perceptions and fancies of international investors, and therefore have a notorious tendency to come to a sudden stop if investor sentiment changes.
The economic recession that began in 2008 sucked funds from the market and changed the risk perceptions of the investors. The investors started looking for safe havens in cash and treasuries of stronger economies. In the case of the euro zone, the sudden stop to capital flows in 2009 indiscriminately hit all of the periphery countries, regardless of how well they had managed their finances.
Greece is going to face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.
I doubt, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.
Labor costs in Greece have risen much faster in recent years than in Germany and the rest of the euro core, making its exports expensive and imports cheap. The result is chronic trade deficits, which must be financed through continued borrowing.
Leaving the euro would be big economic disaster. It would cause a run on Greek banks as depositors rushed to move their euros abroad before the balances could be converted to drachmas. Also, Greek borrowers would still owe euros to foreigners. Because the new drachma would instantly depreciate, the borrowers would have a diminished capacity to service those debts, causing new waves of bankruptcies.
On balance, debt restructuring plus internal devaluation – difficult as it may be – looks preferable. Explicit wage cuts, and the recession needed to induce them, don’t have to carry the whole burden of cost adjustment. A combination of increased value-added tax and lower payroll tax mimics a currency devaluation by raising the price of imports relative to the price of exports, lowering real wage costs by stealth. They should be a part of the mix. They must hold growth in wages to the euro area’s rate of inflation plus any increase in national productivity to remain competitive in future and initiate growth of their economy.
Nevertheless Greece, so slow to learn the new rules, would have been better off not joining the euro system in the first place. But it did join, and its best bet now is to make it work.
Banks and brokerages in London are quietly preparing for a more unpredictable but potentially more destabilizing event – the possible break-up of the euro. Many of the industry’s big FX banks, clearing houses and trading platforms say they are looking at ways to ensure their systems can quickly deal with any change in the composition in the euro, the world’s most traded currency after the dollar.
Banks had years – and more money – to prepare for the euro’s launch, but the recent credit crisis has left many in a weaker position to deal with a break-up, which could happen suddenly to minimize damage to the value of assets issued by an exiting country. FX participants acknowledge the difficulty of preparing for an event, which could be kept secret until the last minute.
To ensure it can handle potentially volatile and unusually active trading, ICAP says it has conducted tests to see if its EBS system – the largest currency platform in the world – can effectively quote and trade all 17 legacy eurozone currencies. Reuters have also confirmed that their dealing system can deal and quote in the currencies after break up of euro.
Many in the industry say a currency exit would likely take place over a two or three-day weekend, which would be enough time for trading systems to prepare.
In our bank, the core banking system is equipped to handle the possible transition within a short span. Also, our exposure to likely exiting countries is negligible and therefore, I do not foresee any significant impact on our bank’s business model & portfolio as a result of such an unfortunate development. Nevertheless, the bank management would be required to take a few policy decisions at a very short notice to get over the crisis should euro breaks into 17 eurozone legacy currencies. The preparedness of the bank for such an extreme yet possible situation is, however, yet to be tested.
The Indian rupee on Friday shed a marginal three paise to settle a roller-coaster 2011 at Rs. 53.10/11 against the U.S. Dollar. Sluggish dollar overseas and sustained capital inflows restricted the rupee’s fall. In the calendar year 2011, the rupee has crashed by 18.79 per cent.
Investors preferred to buy dollar as a safe investment, especially at times of crisis. In addition, continued dollar demand from importers, mainly oil refiners, to meet their month-end requirements put pressure on the rupee.
FIIs, which have been the net buyers worth $181.36 million in four continuous sessions since December 23, turned net sellers on December 29 and sold shares worth $115.61 million, as per SEBI data.
RBI fixed the reference rate for the US dollar at Rs 53.2660 and for the euro at Rs 68.9005.
The pressure on the Indian Rupee will continue as long as the stalemate in the European debt crisis lasts and the policy paralysis continues in India. That the Reserve Bank of India does not have sufficient reserves to support the rupee will add to the woes in the coming days. This is also because of the increased volume of USD/INR transactions. The global daily average USD/INR turnover last year was estimated at around USD 36 billion and the volume is increasing.
The economic slowdown, rising fiscal deficit and the widening current account deficit will continue to dent investor confidence. The index of industrial production, or IIP, which measures the growth in output from various sectors of the economy like mining, manufacturing and electricity, weighed in at -5.1% for the month – the first time since June 2009 that industrial production has entered negative territory – compared with 1.9% in September and 11.3% in October 2010. The fall was driven by a 6% fall in manufacturing and a fall of 7.2% in mining, as estimated by Deutsche Bank.
Worries that the European debt crisis could exacerbate the slowdown in India will continue to put pressure on the risk-averse foreign institutional investors (FIIs). This is resulting in dollars being drained out.
On December 13, the rupee fell to a record low of Rs 53.52 a dollar but pared some of the losses to close at Rs 53.23, down 0.7 per cent from yesterday’s close of Rs 52.84. The currency fell to Rs 52.73 on November 22, and is down nearly 17 per cent from its peak in July. In November alone, it lost 7 per cent, the worst monthly fall in over 15 years.
The volatility of the exchange rate is a reflection of the health of the economy and the confidence, or rather the lack of it, that foreign investors have in India’s growth. A weakening Euro, slowing domestic economy, continuing policy paralysis may cause the rupee to fall further and this will have a severe impact on the Indian economy as India’s imports are much higher than its exports.