Iraq: A frontier for brave bankers

THE WORLD BANK AND UNITED Nation's Joint Iraq Needs Assessment report (2003) said: "In the medium term, the private sector will be a crucial means to achieve high growth and create employment. Also critical is the revival of a banking system that is able to operateon commercial lines." John Taylor, the US Undersecretary of the Treasury for international affairs, told the Senate committee: "Strengthening and modernising the banking sector is central to achieving overall economic progress in Iraq."

A dysfunctional banking system can have a severe impact upon real economy — consumption, investment and exports. Iraqi policymakers face the challenge not only of liberalising a repressed financial services industry but also of reforming, or creating from scratch, the institutions required to underpin a market-oriented system.

The interim government in Baghdad has devised a long-term strategy for reactivating economic activity on the basis of structural reforms, including price liberalisation, taxes to promote private-sector participation in the reconstruction process, foreign direct investment (FDI) into industries besides petroleum and banking regulations in tune with best practices in developing countries.

However, such an ambitious policy agenda will also require establishing the legal, institutional and regulatory frameworks for the smooth functioning of markets. Dr. Sinan Al Shabibi, governor of the Central Bank of Iraq, formerly a senior economist for the UN Conference on Trade and Development, told the American-based journal Institutional Investor. There is a great potential in this country. The prospects are very bright. Once security is under control, Iraq will be very attractive to investors." A new central bank — restructured under a nine-member governing board comprising the governor, two deputy-governors, three senior managers and three full-time outside directors — has introduced a law that provides for independence and accountability and prohibits the bank from extending credit to the government.

Henceforth, monetary and credit policy actions will not require the approval of the Ministry of Finance. The central bank's extended powers mean that it now holds the responsibility to control money supply, regulate interest rates, and license and supervise Iraq's commercial banks.

However, as the International Monetary Fund (IMF) noted: "The latitude for proper monetary and exchange-rate policy actions is limited by a lack of appropriate instruments, the current low level of foreign exchange reserves, and constraints on institutional and physical infrastructure capacity."

A new commercial banking legislation, based on global standards and adopted in October 2003, lays down stringent fit-and-proper criteria for bank ownership and higher minimum capital requirements, as well as plans to open the sector to foreign competition.