“Look at these prices,” Abu Mustafa said, as he gestured at the mounds of fruits and vegetables around his stall at Karrada market. “Look what the dollar has done to them. Who can afford to buy okra at that cost?” Now retailing at 12,000 Iraqi dinars a kilo (about $4 a pound), it’s just one of the locally produced goods to have tripled in price over the past year.
Over the road and beneath a billboard commemorating three brothers killed in a recent attack, Mohammed Jassim, a chicken and dairy distributor, is even more worked up.
“We’ve had three bombs [in this area] this year. Three! But it’s the prices, even more than [the Islamic State] that are keeping customers away,” he said. Usually, in this leafy district perched in a bend in the Tigris river, he’d be doing a thriving trade on a midweek morning. But with shredded storefronts, blackened sidewalks, and sky-high price tags, the few buyers linger in their cars and shout their shopping lists to stall holders.
“Bombs and bad money are not good for business,” Jassim adds with a wry smile.
Ever since the Islamic State (ISIL) seized up to a third of Iraq’s territory last summer, Baghdad has been reeling from a barrage of economic blows. the loss of land and consumer confidence has dented economic activity, while the collapse in the price of oil- which accounts for around 97% of government revenues- has struck the state budget, at the same time as military and humanitarian expenses have rocketed.
And without foreign reserves to prop up the struggling local currency, the strong dollar in particular has wreaked havoc among shopkeepers and consumers alike.
“As the dinar has shrunk, the cost of imports has gone up. And as is well known, Iraq imports almost all of its food,” said Zaab Sethna, a partner at Northern Gulf Partners, an investment firm active in Iraq, and a former advisor to the Iraqi minister of finance. “I hate to use the cliché, but Iraq’s been hit by a perfect storm.”
Passing on the costs
It wasn’t always like this, of course. Iraq was a net food exporter until the 1970s, when wheat from Nineveh was particularly prized in the Middle Eastern market. But Saddam Hussein’s misrule-during which many farmers were press-ganged into the army to fight Iran in the 1980s-along with 12 years of flux since the US-led invasion of 2003, have hobbled domestic agriculture and left Iraq reliant on its neighbors for bare essentials.
The consequences of a lack of local production were brought into sharp relief last June when ISIL cut off many of the highways in the north and west-the territory it controls-and applied sizeable tolls on all goods passing through its turf. With the journey from Jordan now taking two to three days instead of the usual 10-12 hours, and truck drivers from Turkey forced until recently to navigate longer back routes, the higher fuel expenses were passed right on to the consumer.
Already suffering from a renewed car-bomb campaign, Baghdad residents felt the effects almost immediately.
“One day apples were affordable, the next they were basically a luxury,” said Maryam, a civil servant from the El Dora neighborhood who declined to give her surname. Her salary from the health ministry has been delayed as the government grapples with a budget shortfall estimated at over $1 billion for January alone, and she’s consequently reined in her spending.
With the Iraqi dinar also weakening up to 10% against the US dollar over the past year, many merchants have raised prices. But some feel they can’t, since almost six million working or retired Iraqis depend on the government’s precarious finances for their salaries and pensions.
“If things are too expensive, people just won’t come. I tried to up my prices a little in December and some customers stopped buying here,” said Abu Hayder, who owns a bakery known for its decorative cakes two blocks from the National Theater in Karrada. “35% of my business came from Anbar, Samarra, Tikrit [areas under the control of or threatened by ISIL], so I’m already close to shutting down.”
Not enough help from up high
In a city riven by sectarian divides and chilled by attacks that have only escalated since the jihadists suffered setbacks earlier in the year, business owners can’t agree on much. But most are angry at government officials for what they perceive as a total unwillingness to help them.
Fruit and vegetable purveyors are furious at Iraq’s low tariffs on imported goods-amongst the lowest in the region. Those who depend on refrigeration are frustrated that the government won’t help them deal with the consequences of an intermittent power supply. Regular blackouts require the use of generators, which can eat up over 500,000 dinars ($430) worth of fuel for only a few fridges in the sizzling summer months between May and September.
Agriculture officials acknowledge the difficulties, but they insist they’re taking steps. “We gave orders for three governorates to stop planting rice [which is water-intensive], banned the import of cucumbers, and now allow the import of live animals to give Iraqis more work in slaughtering them,” said Mehdi al-Kaisy, the deputy minister of agriculture, when we met in his office in a heavily fortified strip of buildings off Firdos Square.
He’s also adamant that Iraq would have had enough domestic wheat in 2014 had ISIL not seized and appropriated fertile swathes of land around Mosul. “If we add the one million tonnes from Nineveh to the 3.4 million tonnes that other provinces delivered to the trade ministry this would have been enough for all of Iraq. This gives you a clear idea of our agricultural development,” al-Kaisy said.
“Iraq imports refined flour from Saudi Arabia,” said Zaab Sethna. “When you think of the historic context, it seems crazy that the Land of the Two Rivers is importing bread from the Empty Quarter.” But with costs continuing to climb, more and more Iraqi farmers appear to be abandoning agriculture for other trades, leaving the country ever more dependent on imports, and thus vulnerable to shifts in the currency markets.
By Mark DeWeaver.
This year the Ministry of Finance (MoF) is set to sell IQD 11 trillion in new debt to the state sector banks, thereby partially filling the hole in the central government budget left by the recent collapse in oil prices. The new issuance should bring total treasury bills outstanding to IQD 18 trillion, a 156% increase over the end of last year and more than double the previous peak level of November, 2010.
T-bill issues of this magnitude could potentially provide a sizable boost to money supply growth. Consider what would happen if the state banks didn’t keep any of the new bills on their balance sheets but instead sold all of them to the CBI (Central Bank of Iraq). The central bank would pay the banks by crediting their reserve accounts, thereby monetizing the increase in government debt by “printing” new money. (Such operations are allowed under Article 26, Section 2 of the CBI Law.)
The resulting IQD 11 trillion increase in base money (commercial bank reserves + cash in circulation) could increase Iraq’s M2 money supply by as much as IQD 15 trillion (assuming the current M2 multiplier of 1.37 times). (M2 includes base money and commercial bank deposits.) That would be a 17% jump, a dramatic acceleration from December’s year-on-year M2 growth of just 3.3% to growth rates last seen in 2013. (See Chart.)
Engineering a monetary stimulus of this magnitude might be a good policy for the government to pursue. With GDP growth at a multi-year low (see my last post) and year-on-year inflation dropping to -0.41% in January, why shouldn’t the CBI attempt its own version of “quantitative easing?”
Yet it is far from clear that the government has any such plan.
This year’s T-bill sales will not be unprecedented. From April, 2009 – April 2010, total T-bills outstanding rose by IQD 7.2 trillion—the same 17% of initial base money that IQD 11 trillion would represent today. And none of those earlier T-bills were sold to the CBI. In fact, the central bank hasn’t had any T-bills on its balance sheet since March, 2006.
If this precedent is repeated, this year’s new issuance will have no impact on the money supply at all.
Ali Allaq, Central Bank general manager, told the Al-Hayat newspaper on Monday that the CBI is responsible for the stability of the market, adding that the parliament’s Economic Committee called on Iraqi ministries to open bank accounts in the privatebanks, “but it seems like Iraq’s finance ministry … think they do not have to deal with private banks, only the governmental ones.”
According to Allaq, $4.29 billion of the loans will go to the Industrial Bank, Agriculture Bank, and Housing Bank and the other $841 million will go to private banks.
|May 14, 2015 | 21:48 GMT|
|May 1, 2015 | 14:37 GMT|
Iraq’s crude oil exports for the month of April were the highest they have been since the 1980s the Iraqi Oil Ministry announced May 1, Alsumaria News reported. A total of 92.3 million barrels were exported during the month, amounting to approximately $4.8 billion in revenue. An estimated 2 million barrels per day were exported at prices that reached $51.70 per barrel.
U.S.: Obama To Host Gulf Leaders
|April 17, 2015 | 14:13 GMT|
President Barack Obama will host leaders from the Gulf Cooperation Council (GCC) at the White House and Camp David from May 13-14, Reuters reported April 17. The summit will provide an opportunity for Obama to discuss the ongoing nuclear negotiations with Iran and the conflict in Yemen with GCC leaders. Reperesentatives from Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates are expected to attend.
PARIS – Switzerland stunned the markets on Thursday by abandoning a crucial part of its effort to hold down the value of its currency, concluding that the strategy was too risky and too costly given the enormous forces pushing in the other direction.
The move underscores the turbulent state of the global economy. Around the world, smaller economies are grappling with how to navigate the aggressive monetary activism of major central banks like the Federal Reserve in the United States and the European Central Bank.
The Swiss central bank had been trying to cap the value of its currency, the franc, against the euro, with nervous investors fleeing the market tumult and seeking the relative safety of Switzerland. But the euro’s decline has been particularly steep – and the rout may accelerate.
The European Central Bank is expected to announce a major new stimulus program next week to pump money into the region’s troubled economy, which is creating downward pressure on the euro. That pressure is particularly marked against the dollar, which is rising in part because of a strong United States economy and plans by the Fed to raise interest rates.
If the Europeans undertake such an effort, it would make it that much more expensive for the Swiss to buy enough euros to maintain the value of the franc. So the Swiss leaders’ abandonment of its target was taken as a bet that easier money from the European Central Bank is on the way, and potentially on a vast scale.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the Swiss central bank said in the announcement.
The abrupt decision on Thursday sent the value of the Swiss franc soaring, as the country’s stocks broadly plummeted. The shares of exporters, in particular, got slammed over fears that the rising currency would weigh on profit.
“Words fail me!” Nick Hayek, the chief executive of the Swiss watchmaker the Swatch Group, said in a statement distributed to news media, adding that today’s action “is a tsunami: for the export industry and for tourism, and finally for the entire country.”
The move hit some traders especially hard. FXCM, an online currency trading house based in New York City, said that the “unprecedented volatility” had led to significant losses by clients. The company said it had a negative equity balance of about $225 million. As a result, FXCM said it “may be in breach of some regulatory capital requirements.”
The Swiss policy dates to September 2011, near the height of the sovereign debt crisis in Europe.
As panic set in, investors and savers dumped euros in favor of the Swiss franc and other safe havens. The rising value of the Swiss franc, however, could contribute to pushing the country into deflation and create problems for the country’s exporters, which suddenly found their products less competitive overseas. Switzerland’s economy is heavily dependent on such companies.
So the Swiss monetary authorities instituted a policy to try to keep the euro to a floor of 1.20 francs. Only last month, it reiterated a pledge to continue to support that floor by buying the euro in “unlimited quantities” if needed.
The Swiss central bank’s strategy, which involves selling francs on the open market in exchange for euros, has been controversial at home. Many exporters had welcomed the decision to hold down the franc.
But as the central bank’s balance sheet grew by several hundred billion euros, the central bank came under fire from opponents. In a December referendum, those critics tried to force the central bank to convert much of its foreign exchange holdings into gold. That initiative failed.
On Thursday, the central bank surrendered to the market dynamics, saying in a statement that it was giving up the minimum exchange rate.
“This exceptional and temporary measure protected the Swiss economy from serious harm,” the central bank said in a statement. “While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”
Phyllis Papadavid, foreign exchange strategist at BNP Paribas in London, said after the Swiss central bank action that monetary authorities were “still sensitive” to the overvaluation of the franc, but that they had adapted to changed conditions – particularly the dollar’s recent rise – by changing course.
“They haven’t given up,” Ms. Papadavid said. “They’re clearly going to continue watching it.”
As it scrapped the cap, the Swiss central bank simultaneously cut interest rates, already in negative terrain, hoping to offset some of the damage in foreign exchange markets. It changed the rate on deposits to minus 0.75 percent from minus 0.25 percent, tripling what it costs lenders to park money at the central bank.
But that was too little to stop the tide, and the franc jolted 15 percent higher against the euro. Swiss stocks plummeted in value as investors hastened to sell equities priced in francs.
Shares of Swatch, the global watch brand, fell 16 percent, leading the Swiss Market Index nearly 9 percent lower. But the decline was broad-based, including Nestlé, the food manufacturer; Holcim, the giant cement maker; and the chemical company Syngenta.
“We can only guess at what was in their minds,” Carl B. Weinberg, chief global economist at High Frequency Economics, said of the Swiss central bank’s move. “Maybe they are afraid that the euro is coming on some hard times, and they didn’t want to be tied to a sinking ship.”
Mr. Weinberg said it was hard at the moment to tell what the fallout would ultimately be, but that it would mainly be “micro effects, rather than macro effects.”
“A lot of people were borrowing in Swiss francs because they were cheap,” Mr. Weinberg said. “Well, anyone who borrowed in francs now owes something like 15 percent more than they did yesterday.”
“But anyone who has Swiss assets is a little bit richer today,” he added. “Net, there are winners and losers.”
David Jolly reported from Paris and Neil Irwin from Washington.
|December 22, 2014 | 14:57 GMT|
Russian energy company Gazprom will heed the request of Russian President Vladimir Putin and will sell its foreign currency reserves on the domestic market, Reuters reported Dec. 22. The move is meant to help stabilize the ruble, which is down some 45 percent against the dollar so far this year.
|December 19, 2014 | 16:50 GMT|
Russia’s deteriorating economic situation has struck another blow to Russian President Vladimir Putin and his ability to maintain a firm hold on the country and the government. Uncertainty in the Russian economy continued for another day Dec. 17 as the Russian government was forced to step in to stabilize the ruble after the currency plummeted 20 percent the previous day. The fall in the ruble’s value came after the Central Bank of Russia raised interest rates from 10.5 percent to 17 percent — the largest interest hike since the devastating 1998 financial crisis that led to Russia’s massive defaults. These developments in what was already a weakening economy increased pressure on and within the Kremlin, spawning rumors throughout Russia about the cause of this instability and about what could come next.
Before the past few frantic days, the Russian economy was already in a sharp decline caused by several factors. Russian industrial growth and production began stagnating in 2013, and the Russian-supported conflict in Ukraine had soured investor sentiment and prompted economic sanctions from the West. Moreover, oil prices fell below the government budget’s forecast of $93 per barrel for 2014 and $80 per barrel for 2015.
Fissures and disagreements have formed within Putin’s top team on how to manage the current economic crisis, just as Putin is already losing the confidence of Russia’s security chiefs. Because of the failure to predict a change in Ukraine, Putin has already purged factions within the Federal Security Service. Moreover, in recent weeks, Nikolai Patrushev — head of the Russian Security Council and former Federal Security Service chief — has faced public criticism and allegations of corruption from opposition factions led by Alexei Navalny. This could signal even greater pressure among Russia’s security elite, one of Putin’s primary sources of power and stability. With his supporting factions in disarray, Putin is facing another test of his ability to retain the confidence of the people and those inside the Kremlin.