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MONETARY POLICY IN IRAQ
Current Developments
CENTRAL BANK OF IRAQ
January 2010
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1- Monetary Policy from dependence to
independence
• Development of Central Banking in Iraq
• The original Iraqi National Bank was established in
1947 with a capital of ID 5.0 million
• It was the nucleus of the Iraqi Central Bank established
according to law 72 of 1956
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• Monetary policy was constricted by two
factors in the past five decades:
- The rentier nature of the Iraqi economy
- The effect of fiscal policy
- Thus money supply was linked to government
expenditures.
- But coordination between monetary and fiscal
policy remained weak.
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• In 1964 the authorities reduced the role of the
private sector, commercial, industrial and
banking.
• Commercial bank transactions were
concentrated, till 1980’s in one government
bank, Rafidain. Later on another government
bank was established, Alrasheed
• In 1991 licenses were given to establish
private banks
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• During this period, the 1990’s, narrow money
supply increased from ID 24.6 billion to ID
20.7 Trillion in March 2008.
• The rate of exchange declined from 4 ID to the
dollar to 1216 ID in April 2008
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• Inflation increased from 6.3 in 1990 (1993=
100) to approach hyper-inflation during the
1990’s which is the period of sanctions
• Government expenditures increased from
ID 17.5 billion to 33.5 Trillion in Dec. 2007.
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2- Monetary Policy in Iraq: Current trends and
challenges
Annual inflation rate was about 5.5% in April
2008. Unemployment reached about 50%
during recent years.
The real sector experienced a decline in
productivity.
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• Negative interest rate incited people to hold
foreign currency giving rise to monetary
substitution (dollarization).
• Industrial and agricultural production have
experienced a serious decline.
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3- The Iraqi financial sector: some salient
features:
• Monetary Policy aims at deepening the monetary
sector given that:
• The percentage of the lent credit to GDP
was only about 7% during 2007.
• Private sector contribution to lending does not
exceed 24% and the rest is extended by
government banks.
• Spread is 8 percent signifying weakness in
intermediation.
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Central Bank independence and tendency for
modernization
• The new law No. 56 of 2004 gave the bank its
independence. CBI does not receive
instructions from government
• For the Iraqi Banking sector to perform its
functions, the monetary authority undertook
the following tasks:
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– A new currency was put into circulation, end of 2003
– Liberalization of financial sector especially interest rate.
– Foreign Banks were allowed to operate in Iraq.
– Rescheduling of domestic debt owed by theMOF, around
ID 5.4 Trillion
– DMFAS has been used (DebtManagement and Financial
analysis system).
– Modernization of the payment system (RTGS)
– Reserve management
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4 - Monetary Policy employed the following rules to
generate stability in the financial market.
1. Daily foreign Currency Auctions. CBI built respectable
level of reserves $44 Billion December 2009.
2. Standing Facilities. This is to control liquidity in two
ways,
- Lending: Primary, Secondary and the last resort.
- Deposits in Dinar and Dollars.
3. Legal reserve requirements: 25% deposits for the
private sector and 75% for Government sector since
July 2007 to be modified as required.
4 – Surplus banking reserves. To monitor and control
liquidity.
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Payment Systems :
- This is done in cooperation with the IMF
and WB.
- A separate department was created.
Liquidity Management – Policy Option
- Treasury Bill Auctions for 91 days, 63
days and 28 days.
- Inter – Bank lending
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4 – Current Trends in Monetary Policy
- Exchange rate appreciation because of inflation.
- Adjusting the policy rate.
• Raising the rate because of inflation
• Reducing the rate because of decline in inflation
5 - New developments in policy
• Inflation declined to 7% after being 50%
• Policy rate was lowered to 9%
• Funds moved from CB to market
• Having moved from market to CB under inflation
Now more attention is paid to growth policy and watching
closely development in inflation
