Iraq struggles with a funding shortfall By Mark Dempsey
Iraq these days barely makes it to the main pages of the international press or the top of the foreign policy agenda. It lies in ninth place on the latest Failed State Index – unchanged from 2011 and unsurprisingly classified as ‘critical’.
Key measures such as “poverty and economic decline” are up, as are “group grievances”. The latter is importantly described as “when tension and violence exists between groups and the state’s ability to provide security is undermined and fear and further violence may ensue”.
Financial woes in the US and Europe and the momentous, continuing events in the Arab world have, perhaps understandably, pushed Iraq to the back pages. In the interim, the situation has become grave.
Politically, prime minister Nouri al-Maliki has wreaked havoc on the country, all in the name of consolidating power by various means. Economic reform is one of the main victims.
A paper by the Iraq Institute for Strategic Studies bluntly sums it up: “The economy in shambles; save oil there is hardly an economy. Worst still, is the pursuance of the same age-old objective: enhancement of command and, by extension, distributive economy. With no strategy to rehabilitate the market economy, the prospects of reducing unemployment (now at 19 per cent nationwide), and alleviating poverty (23 per cent of Iraqis live below international poverty standards), let alone restoring much needed basic services (electricity, housing), seems bleak.” Billions have been poured into Iraq over the years, with the specific mandate to develop a sustainable private sector and promote a civil society in the long term. But 10 years on, it is no closer to being what was envisaged.
Instead, the state appears to have reinforced itself by some distance as the main employer and has in fact dramatically increased its numbers. Iraq has become synonymous with corruption and cronyism, sitting at number 175 of the 182 countries on Transparency International’s 2011 Corruption Perceptions Index.
Amid the political challenges, the banking sector, which is overseen by the Central Bank of Iraq and its governor, Dr Sinan al-Shabibi, has done an admirable job in containing inflation. But as an institution, it is still woefully short of resources.
In particular, its ability to hire new and appropriately qualified staff for mid- and senior-level management positions is limited. This kind of hiring is necessary to implement any type of supervisory policy and gain the respect of the private banking community. Not surprisingly, an understaffed regulator does not encourage foreign investors who are looking to do business in Iraq.
Since chosen to head the newly independent CBI in 2004, Governor al-Shabibi has resolutely defended the independence of the institution in the face of pressure by the central government. Inflation has remained in the single digits since 2007 – year-on-year core inflation has risen slightly to 6.3 per cent, but still remains below December 2011’s 6.97 per cent and the IMF’s most recent 2012 projection of 7.7 per cent for Mena (Middle East and north Africa) oil exporters.
The CBI has also made sincere attempts to force a consolidation of the private banking sector by increasing capital requirements and lowering its base rate to 6 per cent. As stated in the April 2012 report by the US special inspector-general for Iraqi Reconstruction, an initial deadline of June 2011 was set by the CBI for banks to meet these new requirements.
Over a year later, four of 22 private banks listed on the Iraqi Stock Exchange were still unable to meet the central bank’s minimum reserve requirement of 100bn Iraqi dinars ($85.8m). The CBI’s next deadline is June 2013, when all private banks are supposed to have minimum reserves of 250bn dinars.
A 2011 World Bank review of Iraq’s financial sector envisioned a greater role for privately-owned banks. However, it was the state-owned banking sector that expanded in the first quarter of 2012. Rasheed and Rafidain banks, which together account for
about 85 per cent of all bank transactions in the country, added staff and the Council of Representatives – the main elected body of Iraq – considered draft legislation that would expand the role of a third state-owned bank, the Trade Bank of Iraq.
Loan-to-equity ratios for public and private sector banks remain low, in part because potential borrowers do not have the necessary knowhow to apply for loans and no credit bureau operates in Iraq to enable banks to assess risk. The latter point is a broader reflection of banking in the region, where few countries have effective credit bureaus.
A number of feasibility studies have been carried out to assess how such a bureau might be structured in Iraq. As of yet, however, there has been next to no progress, with a major bone of contention being the issue of such a body’s status – should it operate within the CBI or as an independent body? In most developed countries such an organisation is separate from the central bank.
Iraq’s international partners, in particular the US, have a moral responsibility to the country and need to continue providing effective and transparent assistance. However, Iraq needs to uphold its side of the bargain. By continuing in its current path, the government is doing no one but its own citizens a tragic disservice.
Mark Dempsey is a former regional director for the Financial Services Volunteer Corps, a New York based non-profit organisation which focuses on building financial systems. He has spent the last four years working in the financial sector in Baghdad.
Iraq these days barely makes it to the main pages of the international press or the top of the foreign policy agenda. It lies in ninth place on the latest Failed State Index – unchanged from 2011 and unsurprisingly classified as ‘critical’.
Key measures such as “poverty and economic decline” are up, as are “group grievances”. The latter is importantly described as “when tension and violence exists between groups and the state’s ability to provide security is undermined and fear and further violence may ensue”.
Financial woes in the US and Europe and the momentous, continuing events in the Arab world have, perhaps understandably, pushed Iraq to the back pages. In the interim, the situation has become grave.
Politically, prime minister Nouri al-Maliki has wreaked havoc on the country, all in the name of consolidating power by various means. Economic reform is one of the main victims.
A paper by the Iraq Institute for Strategic Studies bluntly sums it up: “The economy in shambles; save oil there is hardly an economy. Worst still, is the pursuance of the same age-old objective: enhancement of command and, by extension, distributive economy. With no strategy to rehabilitate the market economy, the prospects of reducing unemployment (now at 19 per cent nationwide), and alleviating poverty (23 per cent of Iraqis live below international poverty standards), let alone restoring much needed basic services (electricity, housing), seems bleak.” Billions have been poured into Iraq over the years, with the specific mandate to develop a sustainable private sector and promote a civil society in the long term. But 10 years on, it is no closer to being what was envisaged.
Instead, the state appears to have reinforced itself by some distance as the main employer and has in fact dramatically increased its numbers. Iraq has become synonymous with corruption and cronyism, sitting at number 175 of the 182 countries on Transparency International’s 2011 Corruption Perceptions Index.
Amid the political challenges, the banking sector, which is overseen by the Central Bank of Iraq and its governor, Dr Sinan al-Shabibi, has done an admirable job in containing inflation. But as an institution, it is still woefully short of resources.
In particular, its ability to hire new and appropriately qualified staff for mid- and senior-level management positions is limited. This kind of hiring is necessary to implement any type of supervisory policy and gain the respect of the private banking community. Not surprisingly, an understaffed regulator does not encourage foreign investors who are looking to do business in Iraq.
Since chosen to head the newly independent CBI in 2004, Governor al-Shabibi has resolutely defended the independence of the institution in the face of pressure by the central government. Inflation has remained in the single digits since 2007 – year-on-year core inflation has risen slightly to 6.3 per cent, but still remains below December 2011’s 6.97 per cent and the IMF’s most recent 2012 projection of 7.7 per cent for Mena (Middle East and north Africa) oil exporters.
The CBI has also made sincere attempts to force a consolidation of the private banking sector by increasing capital requirements and lowering its base rate to 6 per cent. As stated in the April 2012 report by the US special inspector-general for Iraqi Reconstruction, an initial deadline of June 2011 was set by the CBI for banks to meet these new requirements.
Over a year later, four of 22 private banks listed on the Iraqi Stock Exchange were still unable to meet the central bank’s minimum reserve requirement of 100bn Iraqi dinars ($85.8m). The CBI’s next deadline is June 2013, when all private banks are supposed to have minimum reserves of 250bn dinars.
A 2011 World Bank review of Iraq’s financial sector envisioned a greater role for privately-owned banks. However, it was the state-owned banking sector that expanded in the first quarter of 2012. Rasheed and Rafidain banks, which together account for
about 85 per cent of all bank transactions in the country, added staff and the Council of Representatives – the main elected body of Iraq – considered draft legislation that would expand the role of a third state-owned bank, the Trade Bank of Iraq.
Loan-to-equity ratios for public and private sector banks remain low, in part because potential borrowers do not have the necessary knowhow to apply for loans and no credit bureau operates in Iraq to enable banks to assess risk. The latter point is a broader reflection of banking in the region, where few countries have effective credit bureaus.
A number of feasibility studies have been carried out to assess how such a bureau might be structured in Iraq. As of yet, however, there has been next to no progress, with a major bone of contention being the issue of such a body’s status – should it operate within the CBI or as an independent body? In most developed countries such an organisation is separate from the central bank.
Iraq’s international partners, in particular the US, have a moral responsibility to the country and need to continue providing effective and transparent assistance. However, Iraq needs to uphold its side of the bargain. By continuing in its current path, the government is doing no one but its own citizens a tragic disservice.
Mark Dempsey is a former regional director for the Financial Services Volunteer Corps, a New York based non-profit organisation which focuses on building financial systems. He has spent the last four years working in the financial sector in Baghdad.