Iraq’s Banking Initiatives: Foundation for
and Iraq’s Economic Future
Remarks by Dr. Sinan Shabibi
Governor, Central Bank of Iraq
Before the Financial Services Roundtable
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
• 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
• 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
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
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
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.