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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” |
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.
How are the restructuring plans of the existing banks, such as Al-Rashid Bank and Al-Rafidayn Bank, going, especially with respect to their commitments from the Saddam era?
It’s a big job but they are making progress. The restructuring is both financial and operational. Because they are in debt, there are committees working to resolve the financial issues so that we can then tackle the operational issues.
Saudi Arabia has just indicated that it will relieve the debt owed to it. Once it agrees, what will Iraq’s overall level of debt be?
Iraq started with about $140 billion of debt. It will fall to about $30 billion. Already we have reached agreements with the Paris Club, many non-Paris Club countries, and practically all the commercial debt that we owed, so a big portion is already gone.
Is Iraq making any concessions to get its debts cancelled? For example, the Russians have indicated that they would like Lukoil to get a contract in the oil sector.
This is not an issue to be raised at all. Debt is debt. Oil is something different. We are not linking at all any kind of debt cancellation or debt forgiveness to other projects. The two are separate issues and two different institutions are dealing with them.
So there is no link between, say, the Russians forgiving debt and them getting a contract in the oil industry?
There is no link.
Who controls Iraq’s oil proceeds? The government?
Of course the government. They are held in the DFI but it is government money.
One investor told Euromoney the problem in Iraq is not so much the lack of security but politics and corruption that are holding back reconstruction.
We have to fight corruption. No doubt there are inefficiencies in the government sector, which affect project implementation. But the government is committed to implementing projects as quickly as possible, although things would be better if the security situation was better.
What has been your biggest achievement since you became central bank governor?
The stability of the exchange rate. Before the change in the regime we used to have an exchange rate that was 500 dinars to the dollar one day, 1,000 dinars the next and 3,000 dinars the next. Now we have a very stable and predictable exchange rate. That is one. Another is that the central bank, together with the ministry of finance, was a very important participant in solving the debt deal. Third, we have established a payments system at the central bank. In addition, Iraq has accumulated a good reserves level.
