Iraq’s Banking Initiatives: Foundation for Prosperity
and Iraq’s Economic Future

Remarks by Dr. Sinan Shabibi
Governor, Central Bank of Iraq
Before the Financial Services Roundtable
Washington, DC
April 26, 2004

Our economic vision for Iraq is simple to state: strong economic growth based on sound and sustainable policies, the rebuilding and modernization of Iraq’s economic and financial institutions, and, most importantly, employment opportunities and significant rise in the living standards of all Iraqis as rapidly as possible.

We are moving forward with this agenda, step-by-step, under some of the most difficult circumstances any country has ever faced. I want to highlight today the good news on the Iraq economy and financial sector that all too often gets lost in the daily reporting by the media of the latest security incidents. The reality of progress in the economy is being underreported. We are making marked progress on the economy because of the hard work and courage of the overwhelming majority of Iraqis who share a common goal to rebuild our economy based on a number of key principles:
• Openness and transparency of Iraq’s economic institutions,
• A coherent and comprehensive economic policy framework,
• Creation of strong incentives for private sector economic development based on market principles,
• A financial system that is dynamic and supportive of a growing economy,
• A social safety net that addresses the needs of all Iraqis,
• Implementation of international standards and best practices, and
• Close economic and financial integration with the international community.

Macroeconomic Achievement in Iraq
Let me bring to your attention some of the important achievements from a macroeconomic point of view:
• Strong commercial activity in Iraq has resumed. Oil production has also now returned to pre-war levels. Consumer demand is robust. Key areas of infrastructure, although requiring substantial upgrade because of thirty years of degradation and neglect, have returned to pre-war levels. This is the case in electricity, water resources and transportation. Various independent analyses forecast economic growth in 2004 to be in the range of 20-30 percent.
• Inflationary pressures during the middle of last year have moderated significantly. Over the past several quarters, according to official figures Iraq has experienced a significant drop in the rate of inflation and in the past several months (January/February) official CPI numbers show a slight decline in prices. It is clear is that Iraq has avoided the kind of hyperinflation that besets many post-conflict countries.
• On the employment front, Iraq has experienced a significant decline in the number of unemployed. Last summer unemployment appears to have been in the 70% range. Official figures now show that during the first quarter of 2004 unemployment was in the 25-30% range—still too high, but a large improvement, and I believe that in many part of the country the percentage is even lower.
• As to Iraq’s currency—the new Iraqi dinar—introduced last October, it appreciated in the early months and has remained relatively stable the past two and a half months.
As I move around Baghdad and other parts of the country, I see many tangible, everyday signs the economy is moving forward. One cannot miss the huge influx of automobiles into the country, the recent installation of satellite TV dishes on most building in Baghdad, the widespread use of cellular telephones, and the markets and streets stacked high with consumer goods and the presence of shoppers. This is the world we see on the ground in Iraq—which is missed on the nightly global television broadcasts.
Accomplishment in the Banking Sector
Thirty years ago Iraq enjoyed a leadership position in banking in the Middle East. Our intention is to regain that position. Over the past eleven months officials at the Central Bank have made substantial progress in that direction and in supporting economic growth.
• Last September a new Banking Law was approved, bringing our legal framework for banking in line with international standards.
• In March, the new Central Bank law was enacted, providing the Central Bank of Iraq with full legal independence to pursue monetary policy. I am dedicated to maintaining this independence.
• The Central Bank is seeking to develop a coherent monetary policy framework. The Central Bank law establishes price stability as a primary objective of monetary policy and authorizes a range of monetary instruments to achieve that goal. The Central Bank is pursuing the development of the instruments of monetary policy. We now have in place a functioning foreign exchange auction, and a T-bill market is being developed.
• In January we completed the exchange of old “Saddam” dinars for new Iraqi dinars. To give you a sense of the magnitude of this effort, we used twenty seven jumbo 747 flights to transport the new bills from printers in seven foreign countries including the United Kingdom and Spain to Iraq. You may recall that prior to the currency exchange Iraq used ”Saddam” dinars in the central and southern parts of Iraq and “Swiss” dinars in the north, with two different exchange rates. With the completion of the currency exchange, we now have one unified currency serving all of Iraq.
• Also in March, interest rates on all domestic financial instruments – loans, deposits, and securities – were fully liberalized. This is an important step in creating a modern, efficient financial sector, allowing interest rates to be set by open market forces instead of top-down directives issued by the Central Bank.
• As to commercial banks, we also have a vigorous and growing group of private Iraqi banks. In the past two weeks two new private banks opened their doors. Many applications to establish additional private domestic banks have been received by the Central Bank.
• The public is also gaining confidence in the banking system as reflected in the rapid growth in private sector deposits. Since last summer these deposits have doubled.
• In December, the Trade Bank of Iraq opened its doors. The purpose of this bank is to facilitate Iraq’s trade with other nations. Working closely with a consortium of thirteen international banks led by JP Morgan Chase Bank and with strong support from Standard Chartered Bank of the U.K, in the past four months the Trade Bank has opened 198 letters of credit totaling more than $756 million, financing imports from twenty four countries. Lines of credit have been extended to the Trade Bank by Export Credit Agencies from sixteen countries.
• Finally, I want to recognize the progress that has been made with respect to forging international agreement to reduce Iraq’s external debt. Most all major sovereign creditors have agreed to a substantial reduction in Iraq’s external debt. Iraq is engaged in intensive preparation for discussions with our bilateral creditors. I want to express appreciation to the international community, especially to the United States and Special Presidential Envoy James Baker, for recognizing the vital importance of substantial debt reduction to Iraq’s economic future.

The International Dimension of Iraq’s Banking Sector: New Initiatives
Before this audience today, I wish to focus most of my remaining remarks on the international dimension of Iraq’s banking sector. I wish to highlight today a number of steps we are taking to enhance foreign participation in the banking sector in Iraq. These steps respond to two of our key principles--the implementation of international standards and best practices, and close economic and financial integration with the international community.

International banks play an important role in every major market around the world. They will also make an important contribution in Iraq, helping Iraq to achieve its economic and financial potential. Specifically, foreign banks will bring added capital to this market; they will provide an important source of competition; they will help to introduce modern banking systems and technology and a wide range of banking products into our country; they will employ young Iraqi professionals and they will provide important training opportunities for our bankers in modern banking techniques and management. They will also provide an important link between Iraq and foreign capital markets. Because of their wide network of activities, they will also help to attract new investors to Iraq.

Therefore, today, I wish to announce five significant initiatives pertaining to the international dimension of Iraq’s banking sector:
First, I am recommending certain changes to the Banking Law that will clarify the regulatory and enforcement capacity of the Central Bank as well as strengthen and expand the bank licensing process. In this regard, the limit on foreign banks entering Iraq will be removed. The law currently limits foreign banks to six licenses through December 31, 2008. Given the strong expression of interest received from foreign banks for an Iraqi banking license, removing the cap will accelerate the entrance of foreign banks into this market. The accelerated introduction of foreign banks will result in the implementation of new lending programs and other banking services that will help speed the formation of new Iraqi businesses and help create new Iraqi jobs.

Second, an essential element of every successful financial system around the world is a strong, professional supervisory function. The Central Bank will also shortly issue banking supervision and licensing regulations to fully implement the Banking Law of September 2003. These regulations will include guidance for bankers on how to incorporate international standards into daily banking operations. Also, the Central Bank with a team of international advisors have completed a review of our supervisory and licensing program and we are conducting training programs to build the skills of Central Bank employees to bring our regulatory function in line with international principles and best practices.

Third, the Central Bank has worked with the international community to draft anti-money laundering legislation. This proposed legislation is close to completion and I intend to recommend it shortly. When approved, this legislation will provide a sound framework to combat money laundering and criminal and terrorist financing.

Fourth, today I am pleased to announce the results of the first round invitation for foreign banks to receive licenses and permits to operate in Iraq. The Central Bank has issued banking licenses to HSBC and the National Bank of Kuwait, enabling them to open subsidiaries in Iraq this year. Also, a banking permit has been extended to Standard Chartered Bank which plans to open its first branch later this year.

Fifth, I have also approved extending a second round invitation to foreign banks to apply for approval to open a subsidiary, acquire a majority position in a private bank or open a branch in Iraq. The strong response from the international banking community to the first round invitation for licenses reflects the growing optimism among international investors for Iraq. This second invitation will be publicly distributed today. We expect this initiative will be completed by early June and will result in the approval of additional banking licenses for foreign banks.

In closing, Iraq has been through an exceedingly difficult and traumatic two to three decades—the systemic decay in the economy from the Saddam regime and three costly wars. However, Iraq has the natural and human resources to recover. With the hard work and dedication of the Iraqi people and the support of the international community, we are moving forward to rebuild our economy and banking system. The positive transformation that is occurring in the economy and the banking system will in time yield a secure and dynamic Iraq—one that will contribute immensely to peace and prosperity in the Gulf region and beyond.