In a remote meeting organized by the Asharqia Chamber:
An international economist: the stability of the national currency is a strategic decision
The former adviser at the International Monetary Fund, Dr. Raja Al Marzouqi, affirmed the Kingdom’s choice in stabilizing the national currency against the dollar, because of the presence of certain advantages in this direction, and given the Kingdom’s financial and economic capabilities that qualify it to follow up on what is officially approved to be a reality on the economic level.
Al-Marzouki explained, during a meeting organized by the Asharqia Chamber from a distance (Monday 18/5/2020), entitled “Monetary Policy and Exchange Rate” administered by a member of the Board of Directors of the Asharqia Chamber Ibrahim bin Mohammed al-sheik that fixing the currency is a decision that some countries formally issue and maintain economically, as the state With the same huge reserves in the ground or in the central bank you can enlist them to continue to apply what they officially issued, and apply them economically, through the use of official reserves to ensure stability in the event of an imbalance in supply and demand for currency, which affects the official price. While we find in some countries that do not have this economic ability can not maintain the official confirmation, which creates a black market for currency, which negatively affects liquidity in the financial sector and reduces the efficiency of the economy and raises the costs of lending, and such countries have no choice but to switch to the flexible exchange rate.
Al-Marzouki reviewed a number of the advantages of fixed exchange and the advantages of flexible exchange, to confirm that this depends on the capabilities and capabilities of countries, as well as the goal that they are seeking for, as there is no optimal exchange system at the present time.
He said that the reality today is the result of the composition of the international system that took place after the Second World War, as the countries of the world agreed to establish the International Monetary Fund and discuss the issue of currencies, and a fixed exchange system was established that relies on the dollar and its relationship to gold so that the price of an ounce of gold equals 35 dollars.
Al-Marzouki adds that this period was a historical turning point in the exchange systems in the world, as it was going in a certain pattern, everyone is committed to it, now it is in another domain, the great state did not adhere to it, and that happened from one side, instead of a fixed exchange rate, it appeared Different exchange rates (fixed and floating), and different exchange systems have emerged since then ranging from full linkage to float in several forms, most notably (dollarization, fixed linkage, monetary union, currency board, creeping linkage, directed float, and free float.
As for the dollar – according to the former adviser to the International Monetary Fund – it is that the state uses the dollar in commercial transactions next to the country’s currency or alone, and this we see for example in Lebanon, in return for that, we find the “monetary union”, that is, canceling the currency of the countries and replacing them with one currency for the region as it is happening In the European Union, while we find a “currency board” in which currency printing is covered 100% of gold or hard currencies, and fixed pegs against one currency or basket of currencies.
In this regard, Dr. Al Marzouqi indicates that oil countries like the Kingdom, in which oil constitutes an important factor in the economy and an important proportion of exports depend on the fixed exchange, and some of these countries – which are few – adopt a flexible exchange rate and that whose oil exports are low or in the direction of decline. And all its justifications and factors for taking a step, because it is proven that fluctuations in the price of oil affect the balance of payments and its stability. In the case of a fixed exchange rate, it is official reserves that rebalance the balance of payments.
He goes on explaining the situation that the oil states live in their exchange systems to say that there is a trilogy that is impossible to meet under any circumstance, this trio is “the movement of capital, monetary independence, and a fixed exchange system”. Any country must give up one of these trios, It is impossible to meet, as monetary policy is affected by the movement of capital, and it is also affected by the fixed price.
Accordingly, Al Marzouqi says that the most important channel that affects the exchange rate in the oil states is the channel of spending and its relationship to the economy. If the tunnels become greater than the state’s economic capacity, it will lead to higher wages and higher prices, thus weakening competitiveness, declining profits, and increasing demand for goods Non-commercial (such as real estate).
He adds that the two most important sectors are positively affected by increased spending, namely, “contracting, construction, and services”, where resources and investments are directed towards them, because the investment is looking for the most profitable investment, so this will be reflected on other sectors, and banks tend to lend to these sectors at the expense of other sectors, which may be important To achieve sustainable growth.
In this context, it indicates that the infusion of unstable financial policy that is affected by oil prices down and up negatively affects the stability of the economy through its impact on inflation and wages, which leads to changes in the real exchange rate, which in turn affects the stability of the economy, which raises the degree of uncertainty in the economy It negatively affects sustainable economic growth and leads to a large fluctuation in growth, which constitutes an impediment to the growth of export-dependent investments. To avoid this effect, Al Marzouqi sees the importance of adopting financial policy frameworks that help the private sector in forecasting fiscal policy trends and reducing volatility in the economy due to changes in oil prices.
China is trying to present the Chinese currency as an international currency through bilateral agreements with several countries and financing Chinese exports made with countries in the Chinese currency to encourage its use. A futures market for oil in yuan has also been established, with the option of delivery at the end of the contract in yuan or gold.
Within the discussions of the meeting, the government fees and taxes were discussed, he said: the feasibility of these fees depends on the type of fees and the goal for which they were imposed, is it in exchange for a specific service, or to increase the return on the budget, or to change certain behaviors such as the fees imposed on tobacco and soft drinks, and so the matter in it Details have to be taken into consideration before judging their usefulness.
Source: Asharqia Chamber