Opening Remarks by Sinan Al-Shabibi, Governor, Central Bank of Iraq
February 6, 2004
I welcome this opportunity, on the occasion of the winter meeting of the G-7 finance ministers, to share my thoughts on the progress we have made in reconstructing the Iraqi monetary and financial system and the challenges that lie ahead.
To appreciate the nature of our task, it is important to keep in mind the state of our financial system under the Saddam regime. Policies in the financial and monetary area, like other economic policies, were directed toward meeting the self-serving military goals of the regime, and much needed improvements were neglected. Indeed, the monetary and financial system degenerated over the dozen years prior to the conflict last spring, undermined by the corrosive effects of rapid inflation resulting from monetary financing of the regimeís agenda. At the same time, the regimeís reckless military activities depleted the nationís assets and plunged the country into a hopeless debt burden.
In the ten short months since the end of the conflict, we have made considerable progress in the monetary and financial sector, which has tended to be overshadowed by other stories coming out of Iraq. These achievements have been guided by the need to build the proper foundation for a stable, strong, open, competitive, and transparent monetary and financial system to most fully support a vibrant economic reconstruction powered by market principles and large, ongoing productivity gains.
I would like to highlight some of the accomplishments. The new central bank law, which establishes price stability as the principal objective of the central bank and is based on international best practices, has been approved by the Financial Committee of the Governing Council. To complement this development, I announced last Saturday that all domestic interest rates will be liberalized on March 1 of this year. This will provide greater scope for lenders and borrowers to make their own decisions, which will facilitate an efficient allocation of capital. In addition, we have given preliminary approval to three foreign banks to begin banking operations in Iraq, and other banks will be considered in the future. This will bring in much-needed capital to the banking sector and be an important step in modernizing the Iraqi banking system.
Beyond these very recent accomplishments, I would like to mention the introduction of new banknotes that now serve all of Iraq, which was accomplished on schedule under very difficult conditions. These notes are high quality, safe, and less vulnerable to counterfeiting, and have been widely and enthusiastically embraced by our people. To face the challenge of managing this new currency and preserving public confidence, we have been working with the international community to establish a sound monetary framework. A daily currency auction, begun last fall, has given us an instrument to conduct policy within this framework, and plans are progressing to create a market for so-called T-bills which will give us the opportunity to conduct open market operations in much the same way as major central banks.
In the banking sector, I would also like to underscore the new commercial banking law, enacted last September, which provides the basis for our banking system moving to international standards. The new Trade Bank of Iraq, which facilitates the financing of international trade, is another significant achievement.
Looking ahead, we realize that there are numerous challenges before us. However, we have a clear agenda and are steadily building our capacity within our central bank to address this agenda and meet the challenges. Meanwhile, we will continue to value and seek assistance from the international community to move the Iraqi economy forward on a path to rapid, sustainable growth built on ongoing improvements in productivity.
Thank you. Minister Gailani and I will be happy to address your questions now.