The Role of Foreign Reserves in promoting Monetary Sterilization Policy in Iraq after 2003

Sabreen Kasem Beda
supervised
Dr. Thuria Abdulraheem Alkhazraji Dr.Mohammed Salih AlKubaisy

Abstract

The rentier nature of the Iraqi economy and its great dependence on crude oil exports as the main and only source of public revenues increased foreign exchange flows (US dollar) and with the significant improvement in oil prices, this matter greatly contributed to strengthening and developing foreign reserves, which is good for any country. But, it constitutes a challenge either to the monetary authority represented by the Central Bank of Iraq to manage these reserves in a way that reduces the harmful effects that accompany their accumulation, especially with determining the primary objective of the central bank to achieve price stability and target inflation rates. Therefore, the Central bank sought to use modern tools and policies in order to reduce the negative effects of the accumulation of foreign reserves represented by monetary sterilization, similar to developed and developing countries alike, but with different available tools that are possible and imposed by the local financial and monetary environment, such as the window for buying and selling foreign currency, open market operations and deposit/lending facilities. Because any increase in the monetary base resulting from the accumulation of foreign reserves will affect price stability directly due to the consumer nature of the Iraqi citizen. Despite the central bank’s success in targeting and reducing inflation rates and bringing it to zero degrees, the use of these tools and policy was at the expense of depleting a large part of foreign reserves in addition to the central bank incurring additional costs that weighed down its financial budget, in light of the large and steady increase in government spending Consumption, the external pressures and shocks that the Iraqi economy has witnessed, represented by the drop in world oil prices and the occupation of important and vital areas in the country by ISIS.