Technium Business and Management (TBM)

Vol. 1, No. 1, pp.66-75 (2021)

ISSN: 2821-4366
www.techniumscience.com

Foreign Reserves of the Iraqi Central Bank's and its influence on

Foreign Investment flows
((Applied research in the period 2004 - 2019))

Dr. Ali H. N. BniLam

Lecturer at Dijlah University College

Financial & Banking sciences Dept

Dr. Salim S. Hammood

Lecturer at Imam Jaafar AL- Sadig

Abstract: The importance of research results from its analysis of a major

economic variable, which is foreign investment in an unstable environment that has
not been witnessed by any country in the world. And because the research is
applied, it has used real data on the work of the Central Bank of Iraq. Therefore,
the results they will obtain are concrete results, And the problem of research may
therefore be summarized by the following question: Has the Central Bank of Iraq
been able to contribute to attracting foreign investment via its foreign reserves?
To prove the main premise of the research, “there is a significant statistical
relationship between the Central Bank of Iraq's foreign exchange reserves and
foreign investment” the standard quantitative approach has been applied, and the
research reached several conclusions, The relationship between the Iraqi Central
Bank's foreign assets and foreign investment is positive, and this fits into the
theoretical details of the research, which reflects the success of the goal of
accumulating such reserves, especially since they increased in the period under
discussion, It also reflects the success of the Central Bank of Iraq in managing these
assets.
Keyword: foreign reserves, foreign assets, foreign liabilities, central bank.

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 Technium Business and Management (TBM)
Vol. 1, No. 1, pp.66-75 (2021)
ISSN: 2821-4366
www.techniumscience.com
1. Introduction

Foreign investment is a subject of interest to most economists in most of the world's states. Interest
in her increased during the current period due to several factors, perhaps most important is the
economic opening up and transformation of most countries in the world from wave economies to
market economies.

The reason is the interest in foreign investment in the profits the country derives from the inflow
of foreign capital into its economy. Foreign investment helps lower the unemployment rate,
increases the country's gross domestic product and transfers advanced technologies, and has a part
to play in creating a competitive environment and many other benefits,

And based on the profits from foreign investment, most countries do their best to attract as
much foreign capital as they can, Possibly the most important attraction factor is safety, as the
capital seeks a secure investment environment, even if the return on investment is comparatively
low. Among the security elements considered as a positive indicator which attracts foreign capital
into the country, there is the strength of the central bank and its sobriety, Its financial position and
the accessibility of foreign reserves capable of furnishing protection for foreign investments,
Foreign reserves are divided into foreign assets which, if increased, are expected to have a positive
impact on foreign investment, and foreign liabilities with a negative effect on foreign investment.

2. The problem of the Research

From 2004 to 2019, Iraq suffered from security, political and financial instability, which has been
reflected in all aspects of life, including the economy, And the fact that monetary policy is one of
the policies that make up economic policy. Therefore, the Central Bank of Iraq was affected by
the reality, and the implications of this reality on its ability to manage its foreign reserves, as far
as foreign reserves are concerned, they have a major role to play in attracting foreign investment
and will thus be affected by foreign reserves, the problem of research may therefore be summarized
by the following question:

Has the Central Bank of Iraq been able to contribute to attracting foreign investment via its
foreign reserves?

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 Technium Business and Management (TBM)
Vol. 1, No. 1, pp.66-75 (2021)
ISSN: 2821-4366
www.techniumscience.com
3. The important of Research

The importance of research results from its analysis of a major economic variable, which is foreign
investment in an unstable environment that has not been witnessed by any country in the world.
And because the research is applied, it has used real data on the work of the Central Bank of Iraq.
Therefore, the results they will obtain are concrete results, its importance is also evident as it is a
connection between two variables that researchers were unable to see a subject that dealt with in
the Iraqi environment and in the specified time point for the research, in addition to the fact that
the time period is relatively recent as it ends with the data for the year 2019, which is the last data
published by the Central Bank of Iraq.

4. Literature Review

4.1. Hviding et al 2005

The Reserve Bank of South Africa achieved a remarkable and continuous increase in the formation
of foreign reserves after it was suffering from weakness in this aspect, as it reached the same
amount of external debt, that is, it met one of the international standards in the formation of foreign
reserves, so the study sought to know the size of the foreign reserves that should be Their
availability in a country like South Africa adopts a floating exchange rate system, and the study
found that the benefits of foreign reserves diminish once they increase the level of the short-term
debt stock, meaning that the ratio of international reserves to short-term debt must match the
standard ratio in South Africa.

4.2. Kashif et al 2015

The accumulated foreign reserves in developing countries, including India, have increased during
the current decade, and the study sought to measure the effect of the foreign reserves of the Indian
Central Bank on open trade, and the study reached building a standard model for forecasting the
volume of international trade in terms of foreign reserves and using the logarithmic function, and
the equation of the regression line has been proven. And which became evident the moral of the
research hypothesis, which stated that there is a positive-directional relationship between the
accumulation of reserves and foreigners in India in the openness of trade.

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ISSN: 2821-4366
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4.3. Kashif et al 2017

India is among the first ten developing countries possessing international reserves, as it ranked
ninth, noting that most of these states are in Asia, and there are many elements that affect foreign
reserves, and this survey tried to recognize the economic components that bear upon the increase
in foreign reserves. In India, with the aim of proving this relationship, the Phillips-Perron time-
series stability test and the Dickie-Fuller test were performed to test the relationship. An error
correction model was conducted. The study concluded that the negative relationship between trade
openness and foreign reserves is contrary to economic theory, as well as the negative relationship
between The deficit in the balance of payments and foreign reserves, while the relationship was
positive between economic growth and foreign reserves of India.

4.4. Zhou et al 2018

Maintaining a safe level of foreign reserves is a vital matter for most countries of the world, so the
study sought to simulate and estimate the feasibility of maintaining the optimal level of foreign
reserves for China in light of the possibility of exposure to external shocks resulting from the
opening of the Chinese economy to the outside world to provide what was called security. The
study found that the main reason for the increase in foreign reserves in China is the increase in
financial imports resulting from the increase in goods exported from China to the outside world
and that the optimum level of foreign reserves in China is equal to 13% of the gross domestic
product and that the main function of foreign reserves formed in China differed from meeting basic
transactions to providing financial security.

5. Reserves and its relationship to foreign investment

The guidelines of the International Monetary Fund stated that the foreign reserves of any country
are the external assets available at the disposal of the monetary authorities, and under their control
to meet the needs of financing the balance of payments, or to intervene in the exchange markets to
affect the currency exchange rate, or other related purposes such as maintaining confidence in
Local currency and forming a basis for external borrowing (International Monetary Fund, 2013:
3), In addition to being a guarantee for foreign investment, the net foreign reserves represent the
foreign assets with the banking system minus the foreign liabilities on the banking system
represented by the Central Bank and the banks operating (Central Bank of Iraq, 2017: 3).

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Vol. 1, No. 1, pp.66-75 (2021)
ISSN: 2821-4366
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The central bank is responsible for managing reserves. It should strive to maximize foreign
reserves within reasonable limits of risk that represent a framework for reserves management, so
that reserves are always available when needed. As a result, reserve assets portfolios tend to avoid
risk to a high degree, which is the consequence. Giving priority to liquidity and preserving reserves
before considerations of profit, and this necessarily implies making a trade-off between risk and
return when setting priorities for reserves management (Al-Zaghad, 2014: 46), Focusing on the
element of safety in the formation of foreign reserves represents an important attraction for foreign
investment, which always seeks to enter the markets that it deems safe and the countries that have
a financial fortune, as explained by (Thuhid, 2016: 495) as it is considered that foreign companies
will not invest in distant economies. Only in the case of studying the risks of this investment.

6. Hypotheses & Standard model

The economic literature suggests that the financial situation of the country affects the draw of
foreign investments, as it affords an indication of the investment environment for foreign capital,
then the higher the foreign assets of the Central Bank, this will lead to attracting foreign
investments, this will be reflected in the signal from the beta coefficient, which is expected to look
positive. As a result, the proposed model, based on economic theory, is formulated as follows:

Y = α + β1X1 ….. (1)

Therefore, the first research hypothesis stated that “there is a positive and significant statistical
relationship between the foreign assets of the Central Bank of Iraq and foreign investment”

As for the increase in the foreign liabilities of the Central Bank, it will contribute to the
expulsion of foreign investments, and this will appear on the sign of the negative beta coefficient
in the proposed model for the type of relationship between foreign liabilities and foreign
investment, which is based on economic theory:

Y = α - β2X2 ….. (2)

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Vol. 1, No. 1, pp.66-75 (2021)
ISSN: 2821-4366
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Therefore, the second research hypothesis stated that “there is a negative and significant
statistical relationship between the foreign liabilities of the Central Bank of Iraq and foreign
investment”

7. Measurement of the relationship between the rate of banking penetration

and the number of banks funding SME.

8.1. Research variables

The research contained two independent variables FA (foreign Assets) and FL (foreign Liabilities),
and one dependent variable FI (foreign Investment), The period of time researched extended from
2004 and It is the year in which the Central Bank of Iraq was regularly issuing periodic reports
under its new law, which was enacted after the US occupation of Iraq in 2003, until 2019 And It
is the year that witnessed the issuance of the last periodic reports, meaning that the reports of later
years have not yet been issued. And as shown in this figure:

Fig (1) Search data.

Source: Researcher with.

FA (foreign Assets) & FL (foreign Liabilities) Based on Annual Economic Releases of the Central
Bank of Iraq.
FI (foreign Investment) based on The official website of the Central Bank of Iraq.
The FA & FL values = One million Iraqi dinars.
FI values = One thousand US dollars.

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ISSN: 2821-4366
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8.2. Test of normality

Since the time series of research data is below 30 views, the best test for a normal distribution is a
Shapiro-Wilk test, the results of the analysis revealed that the independent research variables and
the dependent variable follow the normal distribution, This is highlighted by the value of Sig for
the FA that reached (0.389), and the value of Sig for the FL that reached (0.000), and the value of
Sig for FI which reached (0.00), The values for FL & FI are less than the level of significance
a=0.05, And as indicated in the following table:

Table (1) Normality test on search variables.

Kolmogorov-Smirnov Shapiro-Wilk
Statistic Df Sig Statistic df Sig
FA 0.165 16 0.200 0.943 16 0.389
FL 0.392 16 0.000 0.582 16 0.000
FI 0.369 16 0.000 0.528 16 0.000
Source: Prepared by the researcher according to SPSS results.

Because the time series of FL & FI does not follow the normal distribution, we will process the
time series data for them in an attempt to make them follow the normal distribution and the results
of the treatment are as shown in the following table:

Table (2) Normality test on (FL) &(FI) after treatment

Kolmogorov-Smirnov Shapiro-Wilk
Statistic Df Sig Statistic df Sig
FL 0.392 16 0.000 0.582 16 0.000
FI 0.369 16 0.000 0.528 16 0.000
Source: Prepared by the researcher according to SPSS results.

The fact that the treatment did not make the time series of FL & FI follow the normal distribution,
so we will have to use Nonparametric Test in an attempt to discover relationships between the

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ISSN: 2821-4366
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study variables, noting that these methods cannot estimate the parameters of the standard models,
but rather discover the relationship and its path.

8.3. Nonparametric Test Between FA & FI

The Wilcoxcon Test demonstrates the existence of a positive sign relationship between (FA) and
(FI), which is a significant relationship, Where the value of Z calculated 3.516 is greater than its
tabular value which is 2.58 at the level of significance 0.01 and this is proved by the p-value which
is 0.000.

As for the path of the relationship, it can be discovered from the values of the mains of the two
variables. The main of FA has reached 71822082 which is greater than the main of FI which
reached 2835371, That is, the relationship runs from (FA) to (FI) and this is proven by Kruskal-
Wallis Test, which appeared significant, as the calculated value of Chi-square was equal to 16 and
it is greater than its tabular value, which is 5.81 at the level of significance 0.01 and this is proved
by the p-value which is 0.000.

Both tests were tested at a degree of freedom (1 , 14), as shown in the following table:

Table (3) Nonparametric Test Between FA & FI

Wilcoxcon Test Z value 3.516

Sign Positive
p-value 0.000
Kruskal-Wallis Test Chi-square 16.000
p-value 0.000
Main of FA 71822082
Main of FI 2835371
Source: Prepared by the researcher according to SPSS results.

8.4. Nonparametric Test Between FL & FI

The Wilcoxcon Test demonstrates the existence of a Negative sign relationship between (FL) and
(FI), which is not significant relationship, Where the value of Z calculated 1.603 is less than its

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Vol. 1, No. 1, pp.66-75 (2021)
ISSN: 2821-4366
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tabular value which is 2.58 at the level of significance 0.05 and this is proved by the p-value which
is 0.109.

As for the path of the relationship, it can be discovered from the values of the mains of the two
variables. The main of FL has reached 5541323 which is greater than the main of FI which reached
2835371, That is, the relationship runs from (FL) to (FI) and this is proven by Kruskal-Wallis Test,
which appeared not significant, as the calculated value of Chi-square was equal to 2.250 and it is
less than its tabular value, which is 5.81 at the level of significance 0.05 and this is proved by the
p-value which is 0.134.

Both tests were tested at a degree of freedom (1 , 14), as shown in the following table:

Table (4) Nonparametric Test Between FL & FI

Wilcoxcon Test Z value 1.603

Sign Negative
p-value 0.109
Kruskal-Wallis Test Chi-square 2.250
p-value 0.134
Main of FL 5541323
Main of FI 2835371
Source: Prepared by the researcher according to SPSS results.

8. Conclusion

8.1. The relationship between the Iraqi Central Bank's foreign assets and foreign investment is
positive, and this fits into the theoretical details of the research, which reflects the success of the
goal of accumulating such reserves, especially since they increased in the period under discussion,
it also reflects the success of the Central Bank of Iraq in managing these assets.

8.2. The time series of foreign liabilities of the Central Bank of Iraq was fluctuating, that is, it was
unstable and did not show an overall trend during the period considered, and this is due to a lack
of relationship between these liabilities and foreign investment. Their sizes are shaped based on
unexplained considerations.

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ISSN: 2821-4366
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8.3. It is imperative for all the economic institutions of the Iraqi state, including the Central Bank
of Iraq, to give foreign investment great importance, on the basis of the encouragement and
concessions granted to it and the guarantees that encourage attractiveness, as well as creating a
mental image that supports it.

References

1. International Monetary Fund 2003 “International Reserves and Liquidity in Foreign

Currency: Guidelines for Preparing a Standard Data Form” Arabic edition.

2. Al-Zaghad, F. 2014 “The problematic of managing foreign financial reserves, a case study of
the Bank of Algeria 2000-2012” Master Thesis, Messila University.

3. Thuhid, N. et al 2016 “Significance of Foreign Direct Investment on Economic Growth in

Bangladesh” International Journal of Scientific & Engineering Research, Volume 7 Issue 9.

4. Hviding K. et al 2005 “The Case for Building International Reserves” International Reserves
of the SARB.

5. Kashif E. et al 2015 “Accumulation of International Reserves and Impact of Trade Openness

Evidence from India” International Research of Business and Management, Issue 6.

6. Kashif E. et al 2017 “Factors Affecting international reserves with Special Reference to

India” SAGE Publications, Vision 21.

7. Zhou G. et al 2018 “Financial Security and Optimal Scale of Foreign Exchange Reserve in
China” Journal of Sustainability 10,1724.

8. Economic report of the Central Bank of Iraq 2017.

9. Annual Economic Releases of the Central Bank of Iraq.

10. The official website of the Central Bank of Iraq.

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