Riyam Amer Al-Fahdawi – College of Management and Economics – Anbar University
Conclusion:
– Fiscal policy resorting to the central bank to finance its spending will generate a real increase in the amount of money in circulation, which is an important aspect of the monetary base, leading to inflation of the money supply and the national currency.
– Most economies, especially those that depend on oil recourses, or extractive recourses to finance their expenditures, are more vulnerable to financial and spending shocks than those economics that depends on many sources of revenue.
– Whenever the Ministry of Finance’s sales to the Central Bank of Iraq increase, this will lead to the expansion of the government’s ability to increase the money supply and then lead to the monetary base being linked to the volume of government sales of hard currency, means: the monetary base is linked to the level of government spending.
– The government usually works in financial crises that hit Iraq due to the crises of low oil prices to recompense for this decline through the strategic reserve of the currency, which increased the amount of foreign currency sales volume through the currency sale window, which affected the money supply.
– Investment expenditures constitute very small percentages, not exceeding (20%) in the current budgets, and the decrease in the percentage is due to the lack of planning for the investment environment, and the dominance of the political dimension over the economy.
– Net foreign assets represent the main axis on which the State and the Ministry of Finance are based in the process of expanding government spending, as it represents an important source in the formation of the monetary base in the Iraqi economy, and enables the Central Bank to increase the money supply.
– The ineffectiveness of some monetary policy tools in the Iraqi economy, such as the legal reserve ratio, because the banking system is often reluctant to grant credit, which made the liquidity available to it high to the extent that it disrupted the effectiveness of that tool, The shocks to which the Iraqi economy is exposed are the result of the structural imbalances it suffers from, which made its stability depends on the stability of crude oil prices, and any disruption in the oil market will have a direct impact on the stability of the Iraqi economy.
Introduction
Increasing government spending based on government revenues – financed by lending from other entities and taxes – increases the money supply in the local economy, because excess spending means financing the government by borrowing from the Central Bank by selling government bonds, including treasury bills, and working to sell them to the banking system, or printing a certain amount of banknotes, through which the deficit is financed.
The operations of the government sector increase the financial assets of the banking system, so when the government finances its spending through deposits held by the central bank, the liabilities side of the banking system will decrease, If the government finances the deficit, the currency – on the liabilities side – will increase for the public, thus increasing the money supply, and when financing the budget deficit, In the case of a budget surplus, it reduces the money supply, If the government deficit is based on foreign exchange, the government will resort to buying foreign currency from the central bank, which will reduce the foreign exchange balances, which are in the central bank, and this will reduce the central bank’s cash liabilities, The central bank’s authority to issue banknotes would be reduced, but if the government bought foreign currency, it would not change the money supply.
