Tool absent from the actions of the Central Bank of Iraq

This tool is one of the important means (if not more important) than among other tools (the discount rate, the legal reserve) used by central banks to control the money supply for free economies ..

The main open market operations the process of buying and selling government bonds (public debt), ie the State to borrow from the public or the banks against a specific repayment period and interest rate.

The resort’s central bank if he wants to make a change in the size of the monetary bloc who shall underwriting process (bonds) and thus are withdrawing some of the liquidity if they wanted a reduction in mass cash and buys these bonds if they wanted to pump cash into the economy.

The important this means that it has a double effect, it is by dealing with the phenomenon of the continuing rise prices (inflation) or give a boost operational for the economy in recession, the other hand is an effective way to finance the deficit in the public budget without getting any unwanted side effects by Taxes as a means of financing the deficit may have a deflationary impact on the economy as a cause weaker purchasing power per capita and higher costs for projects, and this is reflected negatively on the volume of demand.

The new version of cash method to finance the budget deficit, he may inflationary effects, while open market operations is only the process of transfer of liquidity from the other hand to hand without any increase or decrease or side effects, so the movement of liquidity here free movement involuntarily often subject Standards differentiation economic for individuals and banks between buying bonds or sold and between other economic activity, and this feature is missing her taxes, they are forced to impose on the individual or project without the other option is payment, hence be taxed impact deflationary although It is the process of transferring liquid from one hand to the other as well.

As for the Iraqi scene With all efforts by the Central Bank under the successful management since 2003, which focused on maintaining fluctuations minor allowed in the exchange rate through the method of (floating orbit to determine the exchange rate) and succeeded in doing so through the currency auction and the continuing rise in size currency reserves but as a result of failure of the banking sector and the weakness of dealing between them and the public made it (the discount rate and the legal reserve) means is effective to control the money supply , not to mention the policy actions of the state financial and based on the allocation of the bulk of the budget of the consumer spending that left significant problems including:

1 – sheer size of the money supply that reaches, according to the annual statistical bulletin of the Central Bank for the year 2011, to (51,743,489 trillion Iraqi dinars).

2 – atrophy of the productive sector with political factors Born major weakness in investment opportunities.

3 – Lack of investment opportunities with the social values of Iraqi society led to the rise in the marginal propensity to consume for the increase in income.

4 – rising consumption means an increase in import multiplier and thus more leakage of hard currency abroad.

Hence the central bank should resort to a method (open market) and for the following reasons:

A – It does not require a device banker ahead, but you need to market financial although not a high-tech

B – The Iraqi individual inclined to deal with confidence with the state because of social factors and the weakness of the private sector.

C – the possibility of issuing bonds at low interest rates.

Here, open market operations will have impact in reducing consumption Kamali and reducing leakage of hard currency in addition to the recovery of the financial market, and impact other important is the possibility to rely on bonds to finance the budget deficit and keeping government requests continuing to withdraw currency reserves in the Central Bank to finance deficits in the the general budget, even in the absence of a deficit in the public budget can customize aspects of investment spending to revenues.