Friday, June 25, 2004

previous entry | main | next entry | TrackBack (2)

Actual financial reform in Iraq

I've been pretty hard on the CPA as of late, so it's only fair to highlight an area where they played a clearly positive role. The Economist reports on the state of reform in the banking sector:

During the looting that followed the fall of Baghdad in April last year, the ten-storey headquarters of the Central Bank of Iraq (CBI) was burgled and torched before it collapsed into a pile of soot-stained rubble. Fourteen months later, the charred ruins have been cleared, and the CBI's staff work on American-provided computers in a building nearby....

Despite the unpromising conditions, the CPA, which will be dissolved next week to make way for an interim government run by Iraqis, has made some headway. It has drawn up a framework of laws and rules for the new banking system. A law that came into effect in March established the CBI's independence and laid down its procedures for everything from the management of foreign reserves to bank supervision. A new commercial-bank law governs the functioning of Iraq's 17 private banks, which were legalised by Mr Hussein in the early 1990s in response to a cash crunch following UN sanctions.

A huge training effort has been going on. Advisers from America's Treasury and bank regulators have given classes on subjects ranging from the use of Microsoft Word to the basics of Basel 2, a new treaty on bank supervision. “It is a big challenge, a new way of thinking,” says one American adviser. “Banking based on risk and judgment is radically different from bank decisions based on Saddam's say-so.”

A basic currency reform was also necessary. Under Mr Hussein, there were two lots of dinars: one in the Kurdish north, another elsewhere. Because there were only two or three denominations, worth up to at most $5 or so, even basic purchases required thick wads of notes. So the CPA set to work designing a new, unified currency with several denominations. After frenzied printing in factories from Germany to Kenya, 27 Boeing 747s crammed with bank notes flew to Baghdad. Armed convoys delivered the cash to 240 bank branches across Iraq and officials distributed, in all, two billion pieces of paper. The exchange was completed by January this year with virtually no hitches, a remarkable feat given the insurgency already in progress.

The creation of a single currency has permitted the CBI to carry out a basic monetary policy. The central bank carries out daily currency auctions, receiving about a dozen bids a day according to the CPA. The new dinar has appreciated by 25% or so since its launch, and has traded steadily at around 1,450 to the dollar since January. Inflation has been kept in check, no small thing given that hyperinflation often occurs during and after wars....

Some observers worry that once the guiding hands of American advisers have gone, the CBI will become politicised and print money to pay off state debts. It is also possible that the new bank laws will one day be overturned altogether, because of nationalistic bias against foreign ownership or their lack of reference to Islamic teaching. And important as the state of the banking system might be, Iraq's economic health is sure to rest, in the final analysis, on political stability. The future, in other words, is still in the balance.

Of course, that last paragraph is kind of important -- and that goes back to the CPA's mistakes. Bill Powell and Aparism Ghosh are the latest to dissect Paul Bremer's errors in Time.

posted by Dan on 06.25.04 at 12:59 AM


“It is also possible that the new bank laws will one day be overturned altogether, because of nationalistic bias against foreign ownership or their lack of reference to Islamic teaching.”

The odds are that the Iraqi leadership will continue to desire a modern and affluent society. I sense that the religious extremists are already being marginalized. The only real risk to a bright Iraqi future is if the United States and its coalition partners get cold feet.

posted by: David Thomson on 06.25.04 at 12:59 AM [permalink]

I no sooner posted my earlier comments of some ten minuts ago when I found this bit of good news via Andrew Sullivan:

“A large majority of Iraqis say they have confidence in the new interim government of Prime Minister Ayad Allawi that is set to assume political power on Wednesday, according to a poll commissioned by U.S. officials in Iraq.

The results are a significant victory for the United States and the United Nations. Together they negotiated with squabbling Iraqi factions in an attempt to cobble together a viable government that balanced disparate ethnic and religious groups.”

Things are indeed looking better in Iraq. Knock on wood, let’s hope that it continues. I just don’t see the Iraqi majority tending toward Islamic extremism.

posted by: David Thomson on 06.25.04 at 12:59 AM [permalink]

Muslims have some pretty strong opinions regarding the payment of interest. Many go to great lengths to avoid it, and have created Islamic financial instruments which are more like equity than debt. It wouldn't surprise me if a government influenced by Sistani required more "reference to Islamic teaching" when it comes to financial instruments.

posted by: rickheller on 06.25.04 at 12:59 AM [permalink]

“It wouldn't surprise me if a government influenced by Sistani required more "reference to Islamic teaching" when it comes to financial instruments.”

I doubt this very much. The Iraqi leaderships seems to take religion with a certain degree of salt. They appear economically astute enough to realize the harm caused by usury laws. A society enforcing such ridiculous statutes---are inevitably poverty stricken. The Protestants had to push the Catholic Church into the modern age. It’s time for the Muslims to also have their reformation.

posted by: David Thomson on 06.25.04 at 12:59 AM [permalink]

Here is another take on our success in Iraq.

posted by: MWS on 06.25.04 at 12:59 AM [permalink]

Banks that operate on Islamic principals don't charge "interest" or offer "interest" on deposits. However, dividends on investments are perfectly okay, so they often describe their revenue-generating activities in those terms.

posted by: Scott Ferguson on 06.25.04 at 12:59 AM [permalink]

I think Dan's post on Iraq's currency is a little too optimistic.

First of all, I wouldn't call a rise from 1600-something to 1400-something a 25% upvaluation - it's a bit less than that, if we are using the same CPA weekly reports on the business.

But even with the moves in the exchange value of the currency, I think it's not because it's a stable currency, with roughly the same numbers of buyers and seller, but because it's a dead currency. There are only about a dozen open market tranactions each day, after all, and it's not a whole lot of money. When I call it a dead currency, I mean that people don't really use it. It's a warzone, after all, and in warzones, no matter what country, or what war, you use the dollar. You don't take your chances on toilet paper money. The currency is stable because no one uses it. It's stable for the same reason the Taliban's afghani was stable. What it means is that other currencies were more important (opium and dollars). Iraqis use dollars for serious stuff and dinars to pay taxes and shopkeepers. I doubt anyone working for CPA would swap their dollar-salary for this creation of theirs. This scrip is strictly for powerless peasants who can't demand dollar salaries of the CPA and the NGOs, and they aren't going to like the eventual result in store for them with this toilet paper money.

And Dan is right about the last paragraph being important: Steve Hanke has written that the central bank will start printing money when the budget shortfall of the Iraqi government became evident - there would be no other way to do it. So much for the independence of the central bank. But by then, the US will be out of there and can blame it all on Iraqi 'incompetence' when push comes to shove and the money finally shows its true worth.

And then a new war of some kind will follow. Name a war, any war, and notice that currency devaluation was there first.

posted by: Coral on 06.25.04 at 12:59 AM [permalink]

When they were setting up the new currency, why didn't they move the decimal point, making it 1.6 dinars to the dollar?

posted by: Bill Woods on 06.25.04 at 12:59 AM [permalink]

new iraqidinars very low rate why?1USD=1450IRD tell me

posted by: nadeem on 06.25.04 at 12:59 AM [permalink]

Post a Comment:


Email Address:



Remember your info?