Ilustración de la historia titulada “E-Waste Sutra” del grupo Chintan y Damage Control,

Country The Pagged

Currency

Domestic currency

Date

Brazil US dollar Brazilian Real 1967 to 1990 Ecuador Us dollar Abandon its local

currency

Dollarization since 2000 to present

Libya US dollar Dinar 1973-1986

Saudi Arabia US dollar Riyal 2003 to present Venezuela US dollar Bolivar 2013 to present

Qatar US dollar Riyal 2001 to present

United Arab Emirates

US dolar Dirham 1997 to present

Kuwaiti US dollar Dinar 2003 till 2007 and later replaced with basket currency

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2.11

Central Bank and Fiscal Policy

Fiscal policy involves the use of budget and taxation by governments to stabilise the economy and allocate resources. A budget reflects government planned expenditure in a period and a source of the revenue that will be used to finance the budget. The Budget can be classified into three categories: surplus, deficits and a balanced budget. When the government is running a budgetdeficit; it means that total government expenditure exceeds its income for a particular period. On the other hand, a budget surplus occurs when all taxes and other government revenues exceed government expenditures. The balanced budget equates the cost and revenue together. Traditionally, when a government is experiencing a budget deficit, the central bank will either print money or borrow from the public to pay the debt and finance government activities. However, the printing of excess money by central banks could cause inflation and have a direct consequence on economic growth. To avoid this economic consequence, the government could use fiscal policy to regulate the economy. The fiscal policy uses tax to mobilise savings, promote investment and reduce income inequality. For example, if the economic system is threatened with higher inflation; the government may decide to increase income tax, reduce expenditure and reduce the money supply. In this regard, personal income will be reduced, and individual expenditure will also reduce and decrease the aggregate demand for goods and services. However, the direct use of the tax to regulate inflation in developing countries may not be efficient; because it is generally accepted that the developing countries have less efficient tax collection, limited access to external borrowing and political instability (Catao and Terrones, 2005). Tariq et al. (2014) documented that the costs of imposing a tax in many developing countries are high and its effects may harm the living standards and purchasing power of the society.

Furthermore, the relationship between the tax increase and inflation are subject to an academic debate. Researchers have not provided reliable statistical evidence that supports the positive relationship between tax and inflation. For example, recent studies show a positive relationship between the fiscal deficit and inflation in developing countries (Domac and Yucel 2004; Catao and Terrones, 2005; Chukwu, 2013; Tariq et al. 2014). While Haan and Zelhorst (1990) do not provide support for the hypothesis that deficits influence money growth but give evidence of a positive relationship between

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budget deficits and inflation during high inflation periods. Lin and Chu, (2013) added that the fiscal deficit is strongly related to inflation in high inflation economies and a weak impact on inflation in low inflation economies. Komulainen and Pirttila (2002) show that fiscal deficits increased inflation. While John, 1998; Tekin-Koru and Ozmen, 2003 argue that there was no evidence of a direct relationship between inflation and the budget deficit.

2.12 Interest rates and monetary regulation in OPEC countries

Monetary policy affects economic activities by providing liquidity and credit to the domestic market. The decision to regulate money and inject credit into the economy depends on government initiatives. Governments inject money through public expenditure under the exclusive control of the central bank. In most cases, Central bank uses the interest rate, money supply and the minimum reserve ratio to control inflation. However, the use of the interest rate to control inflation is limited in OPEC countries and most of the oil exporting nations. This is due to reasons of religion, social beliefs, the usury activities of financial institutions and the sovereignty of many of these countries that independently regulate their financial institutions. In many of these countries, religious beliefs are against financial institutions charging interest and when interest rates are charged, they were charged at unreasonably high price to encourage saving. For instance, Islamic law forbids the use of interest as an instrument of monetary policy in Saudi Arabia. In Nigeria, interest rates have not played a significant role in monetary policy due to low incomes. Instead, they use credit control of private firms, statutory reserve requirements and moral suasion as alternative methods to control inflation and regulate monetary policy. For example, in early 1970 before the rise in the price of oil, the annual growth rates in money supply in most of the oil exporting countries were low and estimated at 20% (see: Amuzega, 1983 pg. 49). Following the rise in the oil price; most of the oil exporting countries experienced a rapid increase in domestic liquidity as a result of government expansion in expenditure into the private sectors and the establishment of development banking institutions (see: Amuzega, 1983 pg. 49). Similarly, Algeria established a Development Bank to finance private company investment and supervised the operation of many of the private companies. Iraq created several credit institutions to give loans to private institutions at very low-interest rates.

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Nigeria and Venezuela established financial institutions and channelled their credit resources into the agriculture and industrial sectors.42

2.13. Chapter summary

In this chapter, we have discussed the various theoretical models that are commonly used to model and forecast inflation and considers the policies implemented by the central bank to control inflation for BRICS and OPEC countries. This chapter demonstrates that most of the policies implemented by the central bank to regulate inflation focus more on the interest rate (for example, via Inflation targeting and Taylor rules as well as through the exchange rate). According to the Taylor rule, the central bank assumes inflation and the interest rate are directly related, especially in the short term. When inflation is above the target rate, the central bank will increase the interest rate to reduce inflation and, if inflation is below the target rate, the central bank will decrease the interest rate to raise the rate of inflation (Taylor 2008). For the exchange rate, the government may allow the value of the domestic currency to be fixed at the value of a selected foreign currency to control inflation. In particular, if the government experiences a balance of payments deficit the central bank may be tempted to reduce capital outflows to improve the balance of payments. In this case, the central bank may decide to increase the interest rate to technically increase the cost of borrowing to discourage people from borrowing and decrease consumer spending. However, the use of the interest rate to control inflation is limited in OPEC countries and most of the oil exporting nations. This is due to reasons of religion, social beliefs, the usury activities of financial institutions and the sovereignty of many of these countries that independently regulate their financial institutions. Instead, central bank use credit control of private firms, statutory reserve requirements and moral suasion as alternative methods to control inflation and regulate monetary policy. The main conclusion of this chapter is that the injection of liquidity into the private sector and direct price control remain the most effective monetary policies to control inflation in many developing countries that include OPEC countries.

42_{In summary, injection of liquidity in to private sector and direct price control remain the most}

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CHAPTER 3