12 December 2018
In an interview with “The New Arab”, Muhsin al-Alaq, Acting Governor of the Central Bank of Iraq , talks about a difficult monetary and financial stage that has passed through his country, with the security situation deteriorating and oil revenues falling, as well as the repercussions of sanctions on Iran.
To the text of the dialogue:
What has the Iraqi Central Bank achieved after the stability of the security situation in the country during the recent period?
We have passed an important and dangerous stage at the security and financial level in previous years, and the central bank has accompanied the difficult stage in fighting of another kind, represented by trying to maintain economic, financial and monetary stability.
The legacy of the past years of destruction, destruction and decline in services and infrastructure has led us to think about strengthening the development orientation of our work. Of course, the Central Bank of Iraq has a role in this matter, considering that the banking sector can mobilize the resources necessary to develop the development process, in addition to the initiatives carried out by the Central.
From here we launched financing initiatives amounting to $ 6 billion in the industrial, agricultural and housing sectors, which are perhaps the largest in the history of Iraq.
I mentioned earlier that during the fall in oil prices oil revenues fell 70%, what did the Central Bank in the light of this crisis?
There was a big challenge and a difficult situation, and the Ministry of Finance announced in early 2016 its inability to pay the salaries of employees. Here, we immediately announced that things can be arranged, fearing the collapse of the general situation.
The central bank law allows him to buy treasury funds (a borrowing instrument) belonging to the government, and both the Rafidain and Rashid banks have joined them, so it became indirect financing, and of course there were no options.
إn addition, Iraq received some funding from the Bank and the International Monetary Fund, but the amounts were small relative to those provided by the Central Bank, we have put a high interest on remittances equivalent to those in force in the market, so that the Ministry of Finance is keen to pay, We released a portion of the reserves of banks to buy treasury transfers, and these amounts amounted to about 20 trillion dinars within two years, or about 18 billion dollars.
We see the stability of inflation at 2%, while in Iraq there is a decline in purchasing power and a rise in the rates of poverty and unemployment, how to explain this paradox?
On the one hand, there is government spending, which is mostly consumption, so there is a recovery in the commercial sector, but this activity does not generate jobs. In contrast, the productive sector is still lagging behind in this framework, while it is the job-generating field.
Therefore marginal activities are still dominant, leaving large numbers of unemployed, especially among graduates who do not find jobs suited to their specialties. There is also a weakness in investments and projects, which accumulates unemployment rates, so the central bank as the closest sensor to the economy is trying to stimulate productive sectors.
Is the independence of the central bank in any country essential to be able to control the economic indicators, to what extent this condition is available in Iraq? Are we critical of the impact of negative fiscal policies on the monetary sector, while the Central Bank is a financial adviser to the government?
اThe truth is that there is no direct impact or intervention, but there are indirect effects, and lead to significant implications for monetary policy. In terms of financial policy subject to security and political conditions and changes more than subject to the standards of fiscal discipline that are consistent with monetary policies.
Even the Ministry of Finance, although it takes a lot of pressure into consideration, but the budget prepared by subject again to the political review in the House of Representatives (Parliament) and many of its items, so the nature of expenditure and income and deficit and type of monetary policy.
What about the high levels of corruption linked to the coverage of the central bank funding gaps left behind?
Corruption affects everything, including the economy, investment, the work environment and others. The central bank, which works better when economic and investment performance is sound, is affected. When the administrative and institutional system is effective, it eases pressure on the central bank and makes resource mobilization and movement transparent, clear and geared towards the right goals. Therefore, corruption is certainly a source of threat and impact on the overall economic situation, and therefore on the central bank, which aims to achieve economic stability.
How does the central bank deal with expanding US sanctions on Iran, especially as there are deals that need payments in dollars, specifically in terms of gas and electricity?
As for the central bank, it has a situation of adjustment to the sanctions. The dollar deal with Iran has been suspended since 2012. In practice, such transfers can not be made, since any payments in this currency will continue in the US financial system and will stop. Therefore, Iraq used to pay in currencies Other.
With the expansion of the embargo and the reservations of States, options have become limited even in settling payments in currencies other than the dollar. At the same time, there are essentialities linking Iraq with Iran, including gas and electricity.
Currently, there is an understanding with the US side to try to sort it out or get some exceptions. The talks have gone a long way and this issue may be resolved soon, probably within days.
How does Iraq approach the AML / CFT standards?
This issue is new to Iraq, as a new phenomenon and as a procedure. There have been no private entities involved in this area in the past. Since we assumed the task of managing the Central Bank, we have given great attention to this issue, through the formation of an independent department to combat money laundering and the financing of terrorism and supported by the necessary administrative, financial and even independent capacities.
At the same time, we have been working on a new law, with about 70% of the gaps in this area due to the lack of legislation. Therefore, we focused on this issue and issued the law in 2015, and prepared according to the best international standards in partnership with the relevant international organizations on this file.
Following this law, several measures have been taken in terms of issuing regulations and regulatory and regulatory rules, since this file concerns many sectors. When we started in the gray zone and during this year we came out of the last phase, the continuous follow-up phase, and we are like other countries in the application of international standards.
Is the Central Bank able to control the banks operating in all of Iraq, in terms of money laundering and terrorist financing? Do the banks really adhere to the generalizations of “Central”?
The CBI has strict control over banks and strict application of the principle of “Know Your Customer”. Frankly there is great progress in implementation, because the central bank’s procedures are strong and strict, and we have office and field control.
On the other hand, this issue is of international concern, and if the bank fails to comply with the criteria, it will therefore fail to deal with its external transactions.Today any bank that does not have foreign transactions will become a local shop.
Therefore, there is a commitment by banks and cooperation in providing technical support, capacity building, training and others. There are also tests for workers in these sectors, in conjunction with the establishment of anti-money-laundering units in each bank and compliance units.
We note that there is a problem of confidence in the Iraqi banks by the citizens, coupled with the failure of Mali to take over a number of banks in the past years, does the Central Bank intervene to impose an increase in the capital of banks on the one hand, and compensate the depositors on the other hand?
When we take the number of troubled banks to the total banks operating in Iraq, the ratio becomes normal. There are fewer than 5 banks now out of 70 working banks.
Banks face challenges with existing general conditions, and on the other hand there are many problems associated with citizens’ commitment to banks. When there are circumstances associated with security, political and other disintegration, there is an excess of law and a lack of commitment to pay. Most banks are new and when there are many borrowers who do not pay their installments, there is a default. There are more than 6 trillion dinars ($ 5 billion) of non-performing loans, out of 37 trillion dinars.
During the financial crisis experienced by Iraq, we had alarming indicators linked to about 10 banks, and we entered the line and put some procedures and amendments and we were able to address a number of problems and left only 3 to 4 banks need some treatments.
Was there a cash subsidy for troubled banks, or was it used for the reserve set by banks at the Central Bank to compensate the depositors?
So far we have not offered any direct monetary support, but we have paid for actions within troubled banks, and we have pressed to reduce some expenses or liquidate some assets from real estate and others, so far there has been no bankruptcy in the sector, and we avoid this move. Most of the depositors are new and “boasted” in recent years, and we do not want to hurt them.
For example, there was a bank that was the worst among troubled banks, Dar es Salaam. We applied the idea of a “bank bank”, a bank directly to the Central Bank of Iraq, which is operated for two to three years, enabling it to become ready for sale. Within this project, we turned the depositors into shareholders in the bank, which keeps their money.