Conscious / oil revenues and the options available under the economic policies / researcher Ammar Abdul Wahid / Head of Economic Policy in the Ministry of Finance / c 3
Conscious / Center for Studies and news agency the Iraqi media
20/2/2010 10:11am 20/2/2010 10:11 am
Oil revenues and economic variables:
Of Petroleum Exporting Countries face a particular challenge is how to manage their economies, not only because of volatility in the prices of oil revenues, but also because the oil is depleted and the day will come for the end of this resource.
The instability of the oil revenues generated in a number of complexities of fiscal policy on short-term and long term, is linked to a number of substantive issues, including the size of the relative importance of the oil sector in the national economy and the size of reserves of crude oil and the development of the oil industry and stage of development of sectors other than oil.
That the biggest challenge of the state's oil is how to manage oil wealth wisely and without waste and waste of revenues earned, especially since the oil prices and fluctuating commodity revenue volatile trend.
Therefore, the focus must first be placed on the long term, the key challenge for fiscal policy is the decision about how to allocate and manage resources for many generations, and that challenge should turn attention to fairness in distribution of resources and burdens of a number of current and future generations, as they often get additional income per capita higher of his income which makes normally act on the basis that he has a permanent income and non-pressure consumer spending if it had been a decline in the level of current income, in an attempt to preserve the style of consumption, which used to it even if he had to draw on past savings or by borrowing from others and it seems that this phenomenon may have infected the individual to the government (oil), especially to act as if have a cash surplus continues without understanding the consequences of this belief or disposition has been made this clear in the procedures of successive Iraqi governments have traditionally open appointments significantly to government departments after the high returns oil and if this case proceeds is continuous and permanent, then working to lock the door after getting a substantial reduction in global oil prices, without straining itself in the creation of economic opportunities in the real productive sectors of the hands of the new working wishing to enter the labor market.
Governments in the oil country faces the challenge of uncertainty associated with, or make sure the oil wealth, the size of volatility in oil revenues because of swings in oil prices is a big problem for financial management, especially in the short term, which passes easily into a state of uncertainty in the long term is linked to oil wealth itself, particularly in cases the future course of oil prices and the volume of oil reserves and the rate of the cost of oil extraction is very important considerations in the long term.
That this situation of uncertainty make governments in the oil country adopts monetary policies more conservative than if all the variables taking place in an atmosphere of stability.
That the rise in global oil prices resulting in higher oil revenues at the beginning of last year, 2008 sign-oil economies of the countries, including Iraq or the problems in four basic variables, namely:
1. 1. Loss of flexibility of production: The larger than expected rise in oil prices has A large increase in the size of government budgets, which means increasing public expenditure, both current and investment, which in turn reflected the expansion of individual consumption expenditures, particularly in Iraq where the marginal propensity to consume very high as a result of deprivation suffered by many citizens during the past years and this was a great burden on the budget Assembly to increase its current expenditures from wages and salaries and retirement expenses of goods and maintenance work of the ministries, which requires access to higher revenues to cover expenditures required and this has been to rely on one sector, which the oil sector, which is required to increase the production and export in order to meet the economic needs of the new increased both the government and individuals, knowing that this sector in Iraq suffers from major problems in the infrastructure, as mentioned above.
2. 2. Deepen the structural imbalance of the economy: With high oil revenues has become the oil sector is the only sector that leads the economy and declining share of other sectors of the relative contribution to the GDP and create a quick session in the local markets to make productive sectors are unable to keep up with this session, both terms of production or operation and requiring a longer period to adapt to the new reality resulting from the increased demand resulting from growing oil revenues, leading to the creation of a gap between supply and demand under which many economic variables to a state of imbalance with high inflationary pressures and volatility in real exchange rates Which is known to be unstable macroeconomic variables where we are witnessing a state of Economic growth accompanied by high inflation and is an environment that is economically desirable. As the internal imbalances arising from a difference between the potential output of the economy and aggregate demand (actual output), since potential output is the most it can be produced in the economy at full utilization of economic resources without creating inflationary pressures are high, either in aggregate demand is the sum of domestic absorption and net sector demand We recall that the outside the following equation:
GDP=C+I+(XM GDP = C + I + (XM ) )
Where it refers:
GDP = Nominal GDP.
C = Final consumption.
I = Gross investment.
X = Exports of goods and services.
M = Imports of goods and services.
Distortions arise there is a gap in local resources, which reflect the difference between savings and investment and show the form of balance of payments imbalances, especially in the current account imbalance, where either the form of deficit or surplus, in case of disability definition covers either by the movement of capital (external borrowing) or drag In the case of reserves surplus Veetm exit of capital and the accumulation of reserves With some countries facing a non-temporary imbalances must be fixed in the budget and balance of payments and debt service, where there must be a comprehensive reform program must develop a plan designed to adjust to balance aggregate demand with aggregate supply (stabilization policies), where it has effects on growth because economic growth rates and viable requires the achievement of economic stability (the stability of inflation and the development of an external sound)
That the policy of stabilization comes from the policy of reducing the current expenditure and the use of taxes to reach a balanced budget in terms of:
S – I = CAB S - I = CAB
( SI)g +(S –I)p =CAB (SI) g + (S-I) p = CAB
حيث تشير الى : Where refers to:
CAB = Current account balance of payments
S-Ig = Savings - government investment
S-Ip = Saving - private investment
اذا كان If ( SI (SI ) موجب فيدل على ان هناك فائض في الموازنة . ) Fidel positive that there is a surplus in the budget.
اذا كان If ( SI (SI ) سالب ) Negative Fidel that there is a deficiency In the budget.
The procedures for fiscal policy (expenditure and income) affect the development of the current budget that if they raised taxes and other income decreased spending improved (SI) g This means improving the situation of current account in balance of payments and external stability is achieved.
In the field of monetary policy instruments are used to influence money supply and interest rates in order to achieve internal and external stability in the case of a desire to limit spending and pushed to reduce money supply (M2 ) ) = Currency in circulation + current deposits + savings deposits resorting monetary policy to raise the interest rate decreases by domestic demand, lower imports improves the current account.
Where there are many of the mechanisms of monetary policy applied by the mismatch between the target growth rates of money supply and interest rates and some newly targeted rates of inflation and exchange rates.
3. Breadth of the degree of economic vulnerability: the large oil revenues by means of another stronger link between local and global economy, making these economies more exposed and the impact of global economic developments, particularly those relating to financial variables and this is what was evident in the global financial crisis that reflected the negative effects quickly States oil.
4. Crowding out the private sector: The initial impact of the surge in oil revenues is high government spending, which leads to a change in aggregate demand curve upward and then the high points of the income to the top too, but this increase in demand and income will lead to increased demand for money in high interest rate which leads to the retreat point of balance and reduce the impact of the multiplier effect of higher government spending as a result of competition created by the latter with the private sector which is witnessing a decline in investment spending due to higher interest rates, thereby reducing the impact of the expansion effect of a high government spending.
This is what actually happened in the Iraqi economy as a result of the sharp rise in oil revenues, which led to a significant expansion in government spending, which created demand for broad money, the variable that make the Central Bank of Iraq to resort to raising interest rates to a broad ranges to reduce the inflation prevailing in the economy, which led to reduced private sector spending and limit its role in investment activity which was contrary to the stated objective of the State to encourage the private sector and make it synonymous with the public sector.
That the key to evaluating the financial standing of the problem of fluctuating oil revenues from the perspective of long-term is determined by the following points:
First: It is very important to focus on non-oil revenues in the budget and the best way is to separate the oil revenues and non-oil and verification of real deficit suffered by the budget regardless of the size of oil revenues and this provides an important indicator to measure the direction and sustainability of fiscal policy, keeping in mind the situation the uncertainty surrounding oil wealth. Any financial management should not increase public spending in the same growth rates achieved in the volume of oil revenues and to take into account the fact that budget deficits should not be overlooked. Where you can finance the deficit from domestic sources or from external sources and fiscal policy must be evaluated to take into account method of financing the deficit because each method of financing are the effects and costs of certain macroeconomic example, local funding include:
• Borrowing from the Central Bank:
Where the government borrows directly from the central bank by selling long-term bonds arising from the possession of this authority to increase the assets of the Central Bank and the increase in deposits from the government to have no significant change in net receivables on the government n But when the government uses the funds in the form of reduced payments and farewell to the Central Bank and the increase Private sector deposits in banks becoming more and more monetary base, which includes cash source + commercial bank deposits with the CBE and this funding leads to an equivalent increase the monetary base, in terms of increasing the monetary base leads to an increase in the money supply by the money multiplier.
It is possible that non-inflationary financing of the fiscal deficit in the money supply can be increased to meet the growing demand for money where it is possible that this demand as a result the economy needs more money to facilitate transactions (if the economy is growing), but if money supply exceeds the demand for lead to large cash balances eventually lead to inflation.
• Borrowing from banks within the banking system:
If the Central Bank to meet the additional demand for credit by the banks through the supply of additional reserves of these banks, this type of borrowing is like borrowing from the central bank and thus lead to inflation and has not provided the central bank to meet the demand for credit by the banks, the banks will be obliged to reduce its credit to the private sector to meet the increased demand for credit the government and this leads to higher interest rates and thus crowding out the private sector and thus lower private investment They affect negatively on economic growth
• To borrow permits across the public debt:
This type of borrowing leads to higher interest rates, which in turn lead to private sector competition and thus harm growth and lead to an increased cost of debt in the future and thereby increase the fiscal deficit, creating a crisis of confidence continued fiscal policy.
• Borrowing from external sources:
This is done through bonds to non-residents and this leads to the lifting of exchange rate and damage the competitiveness of the export sector and is the expansionary impact if used to finance domestic consumption.
Second: Give special attention to investment in productive sectors are able to increase the net value-added as is the case with the manufacturing sector, have revealed the global financial crisis and the consequent decline in global economic growth and lower demand for oil prices retreated by about 70% of non-wisdom of economic policies
In Iraq, which has spent billions of dollars in recent years on the oil sector to enable it to increase its production and export a limited number of barrels of oil, which evaporated Okiemha all under the big decline in prices, which have nothing to do variable external Of the national economy. Note that the level of global oil prices is the most important variable in determining the volume of oil revenues and not the volume of production, which faces significant hurdles, including aging infrastructure, lack the technological capacity to increase production is widespread and also to identify the levels of production by the Organization of Petroleum Exporting Countries OPEC which is not possible for Iraq to keep away from him a lot, despite the fact that Iraqi oil exports have not reached the limits of what is specific to him (3-3.5) million barrels a day, except that it is not expected to continue so in the long term.
From the perspective of the short term, the volatility of world oil prices lead to volatility in financial flows The adoption of fiscal revenue to the government on oil revenues makes the financial system is not immune and susceptible to fluctuations occurring in the external variables, thus weakening the economic decision of the fiscal authorities, and this leads to the instability of macroeconomic variables and large fluctuations in public spending and aggregate demand, which extends to their impact on the real exchange rate and increase the risk of investing in non-oil sectors where it would be difficult for the public and private sector development decisions and investment plans Long-term, leading to declining investment in non-oil sectors.
These considerations had to choose a path of financial management of public spending quiet so that they can meet the fluctuation in oil revenues, note that the previous phase, which saw a sharp drop in oil revenues despite the difficult but we believe that they carry with them a number of positives that can be identified the following:
• As an opportunity to review all policies and programs, including operational spending power and investment. Where the influence of fiscal policy on aggregate supply in the economy through savings, investment and efficient allocation of resources, especially if the spending is directed towards increasing the efficiency of human energy and build infrastructure
• Need to focus on the rationalization of consumer decisions and attention to the principle of improving the economic performance of various activities, including productivity, service and act always fully aware of the realities of economic scarcity and limited resources, which helps to install a sound basis for future economic development.
• This stage provides a great opportunity for the private sector to move towards expanding its investment activities and to compensate the shortfall that will occur in government investment expenditure and restore the ground it had lost by the effect of competition during the period of the oil windfall and the extent of government spending.
Conscious / Center for Studies and news agency the Iraqi media
20/2/2010 10:11am 20/2/2010 10:11 am
Oil revenues and economic variables:
Of Petroleum Exporting Countries face a particular challenge is how to manage their economies, not only because of volatility in the prices of oil revenues, but also because the oil is depleted and the day will come for the end of this resource.
The instability of the oil revenues generated in a number of complexities of fiscal policy on short-term and long term, is linked to a number of substantive issues, including the size of the relative importance of the oil sector in the national economy and the size of reserves of crude oil and the development of the oil industry and stage of development of sectors other than oil.
That the biggest challenge of the state's oil is how to manage oil wealth wisely and without waste and waste of revenues earned, especially since the oil prices and fluctuating commodity revenue volatile trend.
Therefore, the focus must first be placed on the long term, the key challenge for fiscal policy is the decision about how to allocate and manage resources for many generations, and that challenge should turn attention to fairness in distribution of resources and burdens of a number of current and future generations, as they often get additional income per capita higher of his income which makes normally act on the basis that he has a permanent income and non-pressure consumer spending if it had been a decline in the level of current income, in an attempt to preserve the style of consumption, which used to it even if he had to draw on past savings or by borrowing from others and it seems that this phenomenon may have infected the individual to the government (oil), especially to act as if have a cash surplus continues without understanding the consequences of this belief or disposition has been made this clear in the procedures of successive Iraqi governments have traditionally open appointments significantly to government departments after the high returns oil and if this case proceeds is continuous and permanent, then working to lock the door after getting a substantial reduction in global oil prices, without straining itself in the creation of economic opportunities in the real productive sectors of the hands of the new working wishing to enter the labor market.
Governments in the oil country faces the challenge of uncertainty associated with, or make sure the oil wealth, the size of volatility in oil revenues because of swings in oil prices is a big problem for financial management, especially in the short term, which passes easily into a state of uncertainty in the long term is linked to oil wealth itself, particularly in cases the future course of oil prices and the volume of oil reserves and the rate of the cost of oil extraction is very important considerations in the long term.
That this situation of uncertainty make governments in the oil country adopts monetary policies more conservative than if all the variables taking place in an atmosphere of stability.
That the rise in global oil prices resulting in higher oil revenues at the beginning of last year, 2008 sign-oil economies of the countries, including Iraq or the problems in four basic variables, namely:
1. 1. Loss of flexibility of production: The larger than expected rise in oil prices has A large increase in the size of government budgets, which means increasing public expenditure, both current and investment, which in turn reflected the expansion of individual consumption expenditures, particularly in Iraq where the marginal propensity to consume very high as a result of deprivation suffered by many citizens during the past years and this was a great burden on the budget Assembly to increase its current expenditures from wages and salaries and retirement expenses of goods and maintenance work of the ministries, which requires access to higher revenues to cover expenditures required and this has been to rely on one sector, which the oil sector, which is required to increase the production and export in order to meet the economic needs of the new increased both the government and individuals, knowing that this sector in Iraq suffers from major problems in the infrastructure, as mentioned above.
2. 2. Deepen the structural imbalance of the economy: With high oil revenues has become the oil sector is the only sector that leads the economy and declining share of other sectors of the relative contribution to the GDP and create a quick session in the local markets to make productive sectors are unable to keep up with this session, both terms of production or operation and requiring a longer period to adapt to the new reality resulting from the increased demand resulting from growing oil revenues, leading to the creation of a gap between supply and demand under which many economic variables to a state of imbalance with high inflationary pressures and volatility in real exchange rates Which is known to be unstable macroeconomic variables where we are witnessing a state of Economic growth accompanied by high inflation and is an environment that is economically desirable. As the internal imbalances arising from a difference between the potential output of the economy and aggregate demand (actual output), since potential output is the most it can be produced in the economy at full utilization of economic resources without creating inflationary pressures are high, either in aggregate demand is the sum of domestic absorption and net sector demand We recall that the outside the following equation:
GDP=C+I+(XM GDP = C + I + (XM ) )
Where it refers:
GDP = Nominal GDP.
C = Final consumption.
I = Gross investment.
X = Exports of goods and services.
M = Imports of goods and services.
Distortions arise there is a gap in local resources, which reflect the difference between savings and investment and show the form of balance of payments imbalances, especially in the current account imbalance, where either the form of deficit or surplus, in case of disability definition covers either by the movement of capital (external borrowing) or drag In the case of reserves surplus Veetm exit of capital and the accumulation of reserves With some countries facing a non-temporary imbalances must be fixed in the budget and balance of payments and debt service, where there must be a comprehensive reform program must develop a plan designed to adjust to balance aggregate demand with aggregate supply (stabilization policies), where it has effects on growth because economic growth rates and viable requires the achievement of economic stability (the stability of inflation and the development of an external sound)
That the policy of stabilization comes from the policy of reducing the current expenditure and the use of taxes to reach a balanced budget in terms of:
S – I = CAB S - I = CAB
( SI)g +(S –I)p =CAB (SI) g + (S-I) p = CAB
حيث تشير الى : Where refers to:
CAB = Current account balance of payments
S-Ig = Savings - government investment
S-Ip = Saving - private investment
اذا كان If ( SI (SI ) موجب فيدل على ان هناك فائض في الموازنة . ) Fidel positive that there is a surplus in the budget.
اذا كان If ( SI (SI ) سالب ) Negative Fidel that there is a deficiency In the budget.
The procedures for fiscal policy (expenditure and income) affect the development of the current budget that if they raised taxes and other income decreased spending improved (SI) g This means improving the situation of current account in balance of payments and external stability is achieved.
In the field of monetary policy instruments are used to influence money supply and interest rates in order to achieve internal and external stability in the case of a desire to limit spending and pushed to reduce money supply (M2 ) ) = Currency in circulation + current deposits + savings deposits resorting monetary policy to raise the interest rate decreases by domestic demand, lower imports improves the current account.
Where there are many of the mechanisms of monetary policy applied by the mismatch between the target growth rates of money supply and interest rates and some newly targeted rates of inflation and exchange rates.
3. Breadth of the degree of economic vulnerability: the large oil revenues by means of another stronger link between local and global economy, making these economies more exposed and the impact of global economic developments, particularly those relating to financial variables and this is what was evident in the global financial crisis that reflected the negative effects quickly States oil.
4. Crowding out the private sector: The initial impact of the surge in oil revenues is high government spending, which leads to a change in aggregate demand curve upward and then the high points of the income to the top too, but this increase in demand and income will lead to increased demand for money in high interest rate which leads to the retreat point of balance and reduce the impact of the multiplier effect of higher government spending as a result of competition created by the latter with the private sector which is witnessing a decline in investment spending due to higher interest rates, thereby reducing the impact of the expansion effect of a high government spending.
This is what actually happened in the Iraqi economy as a result of the sharp rise in oil revenues, which led to a significant expansion in government spending, which created demand for broad money, the variable that make the Central Bank of Iraq to resort to raising interest rates to a broad ranges to reduce the inflation prevailing in the economy, which led to reduced private sector spending and limit its role in investment activity which was contrary to the stated objective of the State to encourage the private sector and make it synonymous with the public sector.
That the key to evaluating the financial standing of the problem of fluctuating oil revenues from the perspective of long-term is determined by the following points:
First: It is very important to focus on non-oil revenues in the budget and the best way is to separate the oil revenues and non-oil and verification of real deficit suffered by the budget regardless of the size of oil revenues and this provides an important indicator to measure the direction and sustainability of fiscal policy, keeping in mind the situation the uncertainty surrounding oil wealth. Any financial management should not increase public spending in the same growth rates achieved in the volume of oil revenues and to take into account the fact that budget deficits should not be overlooked. Where you can finance the deficit from domestic sources or from external sources and fiscal policy must be evaluated to take into account method of financing the deficit because each method of financing are the effects and costs of certain macroeconomic example, local funding include:
• Borrowing from the Central Bank:
Where the government borrows directly from the central bank by selling long-term bonds arising from the possession of this authority to increase the assets of the Central Bank and the increase in deposits from the government to have no significant change in net receivables on the government n But when the government uses the funds in the form of reduced payments and farewell to the Central Bank and the increase Private sector deposits in banks becoming more and more monetary base, which includes cash source + commercial bank deposits with the CBE and this funding leads to an equivalent increase the monetary base, in terms of increasing the monetary base leads to an increase in the money supply by the money multiplier.
It is possible that non-inflationary financing of the fiscal deficit in the money supply can be increased to meet the growing demand for money where it is possible that this demand as a result the economy needs more money to facilitate transactions (if the economy is growing), but if money supply exceeds the demand for lead to large cash balances eventually lead to inflation.
• Borrowing from banks within the banking system:
If the Central Bank to meet the additional demand for credit by the banks through the supply of additional reserves of these banks, this type of borrowing is like borrowing from the central bank and thus lead to inflation and has not provided the central bank to meet the demand for credit by the banks, the banks will be obliged to reduce its credit to the private sector to meet the increased demand for credit the government and this leads to higher interest rates and thus crowding out the private sector and thus lower private investment They affect negatively on economic growth
• To borrow permits across the public debt:
This type of borrowing leads to higher interest rates, which in turn lead to private sector competition and thus harm growth and lead to an increased cost of debt in the future and thereby increase the fiscal deficit, creating a crisis of confidence continued fiscal policy.
• Borrowing from external sources:
This is done through bonds to non-residents and this leads to the lifting of exchange rate and damage the competitiveness of the export sector and is the expansionary impact if used to finance domestic consumption.
Second: Give special attention to investment in productive sectors are able to increase the net value-added as is the case with the manufacturing sector, have revealed the global financial crisis and the consequent decline in global economic growth and lower demand for oil prices retreated by about 70% of non-wisdom of economic policies
In Iraq, which has spent billions of dollars in recent years on the oil sector to enable it to increase its production and export a limited number of barrels of oil, which evaporated Okiemha all under the big decline in prices, which have nothing to do variable external Of the national economy. Note that the level of global oil prices is the most important variable in determining the volume of oil revenues and not the volume of production, which faces significant hurdles, including aging infrastructure, lack the technological capacity to increase production is widespread and also to identify the levels of production by the Organization of Petroleum Exporting Countries OPEC which is not possible for Iraq to keep away from him a lot, despite the fact that Iraqi oil exports have not reached the limits of what is specific to him (3-3.5) million barrels a day, except that it is not expected to continue so in the long term.
From the perspective of the short term, the volatility of world oil prices lead to volatility in financial flows The adoption of fiscal revenue to the government on oil revenues makes the financial system is not immune and susceptible to fluctuations occurring in the external variables, thus weakening the economic decision of the fiscal authorities, and this leads to the instability of macroeconomic variables and large fluctuations in public spending and aggregate demand, which extends to their impact on the real exchange rate and increase the risk of investing in non-oil sectors where it would be difficult for the public and private sector development decisions and investment plans Long-term, leading to declining investment in non-oil sectors.
These considerations had to choose a path of financial management of public spending quiet so that they can meet the fluctuation in oil revenues, note that the previous phase, which saw a sharp drop in oil revenues despite the difficult but we believe that they carry with them a number of positives that can be identified the following:
• As an opportunity to review all policies and programs, including operational spending power and investment. Where the influence of fiscal policy on aggregate supply in the economy through savings, investment and efficient allocation of resources, especially if the spending is directed towards increasing the efficiency of human energy and build infrastructure
• Need to focus on the rationalization of consumer decisions and attention to the principle of improving the economic performance of various activities, including productivity, service and act always fully aware of the realities of economic scarcity and limited resources, which helps to install a sound basis for future economic development.
• This stage provides a great opportunity for the private sector to move towards expanding its investment activities and to compensate the shortfall that will occur in government investment expenditure and restore the ground it had lost by the effect of competition during the period of the oil windfall and the extent of government spending.