Iraqis relieved over 'stable dinar'

July 25, 2005

A market-driven monetary policy has reduced the Iraqi dinar's vulnerability to political upheaval and is keeping the exchange rate stable, Central Bank Governor Sinan al-Shabibi said.

A $5 billion build-up of central bank foreign reserves, after its assets were mostly looted following the 2003- invasion, has helped maintain the rate at 1,465-1,475 dinars to the dollar, Shabibi said.

'We are very comfortable with the present exchange rate,' said Shabibi, who was on a visit to Jordan.

'It is a boost to the donors because it introduces predictability, stability and maintains the external purchasing power of the currency,' Shabibi said, referring to billions of dollars of international aid flows for reconstruction.

Despite the postwar violence that has badly delayed economic recovery, the dinar remained stable for more than a year compared with violent fluctuations during Saddam's rule, when it was battered by wars and crushing UN sanctions.

In its heyday in the 1980s, one dinar fetched almost three dollars compared to 2,000 dinars to the dollar in the final years of Saddam's rule.

The build-up in foreign exchange reserves -- under arrangements dictated by the International Monetary Fund -- was from oil sales, support from the government and returns on investments, he added.

'The reserves have been very important to decide the exchange rate and its stability because they make intervention possible,' Shabibi added.

Shabibi said currency stability also helped bring inflation down to 20 per cent-25 per cent compared with 40 per cent -50 per cent last year with the bank improving management of money supply by introducing more varied monetary instruments.

Shabibi said interest rate liberalisation, various deposit facilities and a secondary treasury bill market were all in place as part of postwar monetary reforms.

'We enjoy more flexibility now. The Central Bank leaves foreign currency dealings to market forces but intervenes to prevent fluctuations,' he said.

Shabibi said a foreign exchange auction in operation for a year and a six-month old treasury auction were effective.

'In the auction buyers ask for dollars and the central bank satisfies this demand generally with the goal of ensuring the stability of the exchange rate,' Shabibi added.

'The treasury auction has been meeting the government's financing needs plus determining interest rate levels in the market,' Shabibi said.

The central bank's enhanced autonomy had helped it deal with the political upheavals of postwar Iraq, he said.

'Now the independence of the central bank is not violated and is strengthening day by day. We decide for example the exchange rate not the government.'

The structural monetary reforms have extended to cover the banking system as a whole, he said.

Foreign banks, allowed to enter Iraq in 2003 for the first time in decades, are opting to buy stakes or enter partnerships rather than set up subsidiaries in the present unstable security climate, Shabibi said.

Among the banks with licences are HSBC, Standard Chartered and National Bank of Kuwait .

'They are opting for a different arrangement which is partnership. We don't mind especially if the banks that enter into joint ventures are solid,' Shabibi said.

Regional bankers say Jordan-based Arab Bank and Lebanon's leading Audi Bank are also actively seeking a foothold in Iraqi market.

'We gave a licence to Arab Bank and it's not clear whether it is waiting or wants to do a partnership with others. There could be developments very soon,' Shabibi said.

Joint ventures helped raise the capital base of the country's local banks and bring much needed technology, management upgrades and exposure, he added.

Iraq's 30 private banks, mainly small deposit banks, had to develop their lending if they were to progress, Shabibi said.

'The balance sheets of banks need much development as far as lending but not on the deposit side. They have a lot of liquidity but their problem is their lending policies,' he added.