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One part of the Iraq story that gets little attention is what the ruling Coalition Provisional Authority has accomplished in re-building the country, including its financial sector.
The financial architecture for Iraq centers on establishing an independent central bank. What's remarkable is the scope and detail the coalition brought to the task of establishing that institution. In March, the CPA published the Central Bank of Iraq Law, which is far more than a law -- it's a primer on central banking.
The law's 74 articles and 42 densely written pages cover every topic imaginable on how to run a central bank, including: the bank's capital stock, its board of directors, its relationship with the rest of the government, management of its foreign reserves, monetary policy and open market operations, reserve requirements, issuance of currency, supervision of the banking system, the national payments system, compilation of official statistics, audits, criminal offenses and the establishment of a financial services tribunal.
The coalition maintains the ``goals of the new law are to achieve long-term growth and prosperity through measures designed to maintain domestic price stability and foster a stable and competitive market-based financial system.''
Floating Dinar
The coalition appears satisfied with its decision to float the Iraqi dinar. Since October, the government has been conducting auctions for buying and selling dinars. On Tuesday, the Central Bank reported that the dinar was trading at 1,460 to the dollar. That was the best level for the dinar since it hit 1,350 on Jan. 15 when the old regime was toppled.
The central bank formulates and implements monetary policy, including exchange-rate policy. The question it will have to answer is whether a floating exchange rate is the best solution for Iraq at this juncture. In the long run, it would be.
And in the short run, what, if any, guarantee will the Iraqi people have that the new government post-June 30 will not run wild printing fresh money for the government to spend?
Respecting the Law
Will the central bank respect Article 3 of the bank law? ``The primary objectives of the CBI (Central Bank of Iraq) shall be to achieve and maintain domestic price stability and to foster and maintain a stable and competitive market-based financial system.''
Price stability is job No. 1, meaning don't inflate away the value of money in circulation.
The next sentence in Article 3 is also interesting: ``Subject to those objectives, the CBI shall also promote sustainable growth, employment, and prosperity in Iraq.'' This means no fine-tuning of business cycles unless inflation is under control.
Meantime, the insurrection in Iraq is taking its toll on plans to create a modern financial and banking system.
The coalition said on its Web site that ``understanding that foreign banks will help strengthen our banking sector and accelerate Iraq's integration into the international financial community, the Central Bank conducted a Request For Application (RFA) for foreign bank licenses.''
Seeking Banks
To date, the central bank has extended licenses to three foreign banks to operate domestically: HSBC Holdings Plc, National Bank of Kuwait and Standard Chartered Plc.
These were the first such licenses to operate in Iraq in 40 years; foreign banks were expelled in 1964.
The central bank hopes other banks will apply for licenses, but the news this week doesn't bode well for the project. HSBC and Standard Chartered say they may have to delay the start of operations in Iraq until the security situation improves. Given how bloody April was, this isn't a surprise.
If the insurgents can keep the foreign banks out, then the chance of having a real financial sector in Iraq is nil. All this fine planning will go down the drain and the case history of the Iraqi Central Bank will go into a vault to await the attention of future historians and nobody else.
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The financial architecture for Iraq centers on establishing an independent central bank. What's remarkable is the scope and detail the coalition brought to the task of establishing that institution. In March, the CPA published the Central Bank of Iraq Law, which is far more than a law -- it's a primer on central banking.
The law's 74 articles and 42 densely written pages cover every topic imaginable on how to run a central bank, including: the bank's capital stock, its board of directors, its relationship with the rest of the government, management of its foreign reserves, monetary policy and open market operations, reserve requirements, issuance of currency, supervision of the banking system, the national payments system, compilation of official statistics, audits, criminal offenses and the establishment of a financial services tribunal.
The coalition maintains the ``goals of the new law are to achieve long-term growth and prosperity through measures designed to maintain domestic price stability and foster a stable and competitive market-based financial system.''
Floating Dinar
The coalition appears satisfied with its decision to float the Iraqi dinar. Since October, the government has been conducting auctions for buying and selling dinars. On Tuesday, the Central Bank reported that the dinar was trading at 1,460 to the dollar. That was the best level for the dinar since it hit 1,350 on Jan. 15 when the old regime was toppled.
The central bank formulates and implements monetary policy, including exchange-rate policy. The question it will have to answer is whether a floating exchange rate is the best solution for Iraq at this juncture. In the long run, it would be.
And in the short run, what, if any, guarantee will the Iraqi people have that the new government post-June 30 will not run wild printing fresh money for the government to spend?
Respecting the Law
Will the central bank respect Article 3 of the bank law? ``The primary objectives of the CBI (Central Bank of Iraq) shall be to achieve and maintain domestic price stability and to foster and maintain a stable and competitive market-based financial system.''
Price stability is job No. 1, meaning don't inflate away the value of money in circulation.
The next sentence in Article 3 is also interesting: ``Subject to those objectives, the CBI shall also promote sustainable growth, employment, and prosperity in Iraq.'' This means no fine-tuning of business cycles unless inflation is under control.
Meantime, the insurrection in Iraq is taking its toll on plans to create a modern financial and banking system.
The coalition said on its Web site that ``understanding that foreign banks will help strengthen our banking sector and accelerate Iraq's integration into the international financial community, the Central Bank conducted a Request For Application (RFA) for foreign bank licenses.''
Seeking Banks
To date, the central bank has extended licenses to three foreign banks to operate domestically: HSBC Holdings Plc, National Bank of Kuwait and Standard Chartered Plc.
These were the first such licenses to operate in Iraq in 40 years; foreign banks were expelled in 1964.
The central bank hopes other banks will apply for licenses, but the news this week doesn't bode well for the project. HSBC and Standard Chartered say they may have to delay the start of operations in Iraq until the security situation improves. Given how bloody April was, this isn't a surprise.
If the insurgents can keep the foreign banks out, then the chance of having a real financial sector in Iraq is nil. All this fine planning will go down the drain and the case history of the Iraqi Central Bank will go into a vault to await the attention of future historians and nobody else.
[You must be registered and logged in to see this link.]
