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Prospects for Iraq's Economy
The Monetary Environment.
For a war economy, Iraq’s monetary environment is solid. This is demonstrated through relatively low and stable inflation and interest rates. This is a function of dollar denominated revenues, which have accumulated sufficient level of foreign currency reserves providing a comfortable cushion for the Iraqi dinar. The acceleration of oil production meant that foreign currency revenues were continuously exceeding foreign expenditure, which consisted of imports and to a lesser extent foreign obligations.
Inflation was therefore kept at bay with a currency that is effectively pegged to the dollar. Interest rates in Iraq are low for a post war country. However, an important consideration when assessing the monetary environment in Iraq is that interest rates are not necessary used as an indicator or a monetary tool in Iraq for a number of reasons. First, and typical of a frontier economy Iraq is predominantly cash based. According to the Central Bank, only 12% of money issued goes through the banking system. Banking penetration in Iraq is exceptionally low. Total banking credit to GDP is at 14% while loans to deposit ratio is 20%.
The banking sector, where interest rates are used as an effective tool, do not operate as a proper conduit for the economy in Iraq. The consolidated balance sheet of commercial banks is small compared to the size of the economy, let alone its potential size once economic capacity utilisation reach normal levels. This is partly self-inflicted but is also a function of the general security and economic conditions.
With sufficient foreign reserves, the Iraqi dinar was stable throughout the year, despite the decline in foreign revenues and a corresponding increase in foreign expenditure. This is partly attributed to a slowdown of non-military exports. A stable monetary environment was also reflected in the size of the Central Bank of Iraq (CBI) daily currency auction, which did not witness an increase. It is not unlikely that the Iraqi dinar sees some depreciation in 2015 with a prolonged military conflict and depressed oil prices. And these two factors remain key for the outlook on the currency and every other aspect of the Iraqi economy.
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The Monetary Environment.
For a war economy, Iraq’s monetary environment is solid. This is demonstrated through relatively low and stable inflation and interest rates. This is a function of dollar denominated revenues, which have accumulated sufficient level of foreign currency reserves providing a comfortable cushion for the Iraqi dinar. The acceleration of oil production meant that foreign currency revenues were continuously exceeding foreign expenditure, which consisted of imports and to a lesser extent foreign obligations.
Inflation was therefore kept at bay with a currency that is effectively pegged to the dollar. Interest rates in Iraq are low for a post war country. However, an important consideration when assessing the monetary environment in Iraq is that interest rates are not necessary used as an indicator or a monetary tool in Iraq for a number of reasons. First, and typical of a frontier economy Iraq is predominantly cash based. According to the Central Bank, only 12% of money issued goes through the banking system. Banking penetration in Iraq is exceptionally low. Total banking credit to GDP is at 14% while loans to deposit ratio is 20%.
The banking sector, where interest rates are used as an effective tool, do not operate as a proper conduit for the economy in Iraq. The consolidated balance sheet of commercial banks is small compared to the size of the economy, let alone its potential size once economic capacity utilisation reach normal levels. This is partly self-inflicted but is also a function of the general security and economic conditions.
With sufficient foreign reserves, the Iraqi dinar was stable throughout the year, despite the decline in foreign revenues and a corresponding increase in foreign expenditure. This is partly attributed to a slowdown of non-military exports. A stable monetary environment was also reflected in the size of the Central Bank of Iraq (CBI) daily currency auction, which did not witness an increase. It is not unlikely that the Iraqi dinar sees some depreciation in 2015 with a prolonged military conflict and depressed oil prices. And these two factors remain key for the outlook on the currency and every other aspect of the Iraqi economy.
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