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"People cannot go to a bank and deposit a lot of cash. If there was security, then the banks would see more flows and they would be able to lend more easily to all sectors of the economy"
Sinan Al-Shabibi, central bank governor of Iraq |
Even though economic growth is at about 6.3%, Iraq needs a much higher rate. How can you kick-start the economy given the level of violence?
It is of course difficult. There is a lot of instability and insecurity. But I would say that the government is trying its best to attain and maintain a good rate of growth.
How is monetary policy determined? Do you have a committee? Do you consult members of the government?
The central bank is completely independent from the government. We have a board and we have various committees at the bank, which are at a lower level than the board. The board, though, ratifies any change in the direction of interest rates or exchange rates, which are discussed and decided by the consultative banking committee.
Who sits on that committee?
All of the bank’s director generals and the two deputy governors.
And you meet monthly?
Yes, and as required sometimes.
How would you describe your monetary policy?
At the moment we are preoccupied with [combating] inflation, which is at a high level. This is the most important objective of the central bank – to stabilize price levels.
What is the inflation level – about 65%.
I don’t think it is 65%. There is a headline inflation rate, which is announced monthly, and that fluctuates. The latest figure is about 45%. But this includes energy, transportation and so on, areas that are affected by supply and political problems. Core inflation, which the central bank influences through liquidity management, is at 17% and it is getting lower every month.
Is it true that you have a stated goal of 8% for core inflation?
Not really, though of course if we achieve something close to that figure that would be very good.
You’ve had a policy of currency appreciation to combat inflation. Do you have an exchange rate target for the dinar?
The exchange rate is determined by the inflation level. Our main objective is to see how the exchange rate influences liquidity and inflation. Tackling inflation requires a lot of consultation with the government, and even though the central bank is independent we have plenty to discuss with the government as the headline rate is the result of our broad actions.
Can you clarify the size of your reserves and how much is held in the Development Fund of Iraq in New York and how much is held locally?
The overall amount of reserves is about $21 billion. Two or three years ago it was only about $4 billion.
How much of the money is being allocated to the federal government?
The figure I mentioned is the central bank’s reserves. Our reserves should be distinguished from the resources of the federal government. These are the nation’s reserves, not government money. We are the government’s bank, of course, but central bank money is used for exchange rate stability. The government cannot have access to these reserves but exchange rate stability is extremely important for the government and its decision-making process, and its purchasing and importing power. According to Iraqi law, the government cannot borrow from the central bank.
Given that the US Federal Reserve oversees the DFI does it have any influence over the Iraqi economy?
No, not at all. Of course, as colleagues we have a lot of discussion [with them], the IMF, the World Bank, and regional institutions.
Turning to the banking system, how does it function? How do banks get cash around branches and to ATMs, given the violence?
Well the banks are affected of course but we have a policy to encourage them. There are no restrictions on the transfer of money although we have regulations in place to counter money laundering and terrorist financing, which are very important. So we consult frequently with the banks but we want to encourage a free market.
What is the biggest issue facing the local banks?
Insecurity. I mean it’s not economics. There is a lot of demand for their products. What is preventing them from functioning freely is [the lack of] security in the country. Given the circumstances the banking system is performing well.
Is there enough liquidity in the banking system?
Yes, but it is a very important issue as we have to monitor the amount of liquidity to achieve the right balance. Too much liquidity is a problem, not enough liquidity is a problem too. This is a broad issue because if it relates basically to liquidity in government banks, it’s an issue that requires discussion with the government.
Do the Iraqi people trust and use the banks?
Yes, I think they trust them a lot. The only problem is again the security situation. People cannot go to a bank and deposit a lot of cash. It’s unfortunate. If there was security, then the banks would see more flows and they would be able to lend more easily to all sectors of the economy.
But isn’t one of the problems that the banks are charging high rates, especially to businesses, and that this is holding back economic development?
That’s a good question. There’s a lot of discussion about this issue. It is central bank policy to have bank rates high because tackling inflation is the overriding objective.
What benefits, if any, are the foreign banks bringing?
The benefits would be much greater if the situation was better. There are some Iraqi banks working with the foreign banks. Initially we wanted the foreign banks to come and establish a presence but that hasn’t been possible but they are working in partnership with some local banks. This is proving to be good and we support that. But eventually we want them to come and establish themselves.