|Being the Governor of the Central Bank of Iraq is quite possibly the single most challenging job for a Central Banker anywhere in the world. To reduce inflation and keep a currency stable, while operating in one of the most violent wars in modern times, is a phenomenal feat of economic, and possibly psychological, prowess. In an exclusive interview in Baghdad, Dr Sinan Al-Shibibi told Mike Gallagher what it takes to turn a ruined economy around, while living with the daily death and destruction which nearly brought Iraq to its knees|
Dr Shibibi walked into a shell of a Central Bank which technically only existed on paper because it had been comprehensively looted, first by members of Saddam Hussein’s government in what is widely considered to be the world’s biggest ever armed robbery when the regime’s members absconded with an estimated $1 billion, and latterly when it was again looted and then razed in subsequent bombings by insurgents.
Dr Shibibi began his career as Head of the Importation and Marketing section of Iraq’s Ministry of Oil in 1975, before moving to the Ministry of Planning as Chief of the Plan Preparation and Co-ordination Division two years later. In 1980 he moved to Geneva to join the United Nations Conference on Trade and Development (UNCTAD), and he remained there until his retirement as a Senior Economist in 2001, when he left to become a consultant on trade, debt and finance.
During his time at UNCTAD in Geneva, Dr Shibibi managed projects on the implementation of policy, analytical and the institutional aspects of debt management, including the implementation of UNCTAD’s Debt Management and Financial Analysis System (DMFAS) in several Arab countries. Dr Shibibi has also undertaken extensive research on financial flows, the economics of disarmament, balance of payments, external debt, globalisation, and the Iraqi economy.
He graduated from the University of Bristol, England, with a Ph.D. in Economics and has published several research papers on a number of subjects, including ‘Globalisation of Finance: Implications for macroeconomic policies and debt management’ in 2001 and prophetically, a paper titled, ‘Prospects for the Iraqi Economy: Facing the new reality’ in 1997. The paper was published in a book with the same title in November 1997 and reprinted by the UNCTAD secretariat. It dealt with the effects of sanctions, debt, and war reparations on the then future prospects of the Iraqi economy.
The security situation in Iraq has improved dramatically and investors are showing renewed interest in the oil-rich country, while the brain drain is showing signs of a reverse. Iraq is open for business and a number of Middle Eastern banks, such as NBK, Ahli United Bank and Burgan Bank have already gained a foothold there.
Are you going to start offering banking licences?
There have been applications for banking licences and we have been considering their merits. The banking sector in Iraq still faces a lot of challenges and there needs to be a lot of improvement in Iraq’s banking sector. There needs to be consolidation. There also needs to be a change in the structure of the banking environment because there are a lot of family-owned banks around. Iraq’s banks need to be more ambitious and that means they will need to take chances and it will require a greater willingness on their part to compete with other local and international banks. The banks will need some sort of deliberate encouragement from the public sector, as well as from the government, such as allowing them to issue letters of credit for state-owned enterprises.
Many people were thinking that, because of our policy of combating inflation, the Central Bank of Iraq was offering high interest rates for banks to get them to come and leave their funds there, instead of going out into the market and looking for better deals. Some would say that they were acting in this manner because of the security situation, although it is something I do not believe.
If a foreign bank was interested in entering Iraq, what would it have to do? What would the Central Bank of Iraq be offering by way of guidance or advice? What would you say to them?
By law there can only be six banks with majority foreign ownership in Iraq, although that article is due to expire on 31 December 2008. What they are facing after that is a requirement that they put up a minimum of IQD 50 billion ($43 million) in paid-in capital, so they really have to put their money upfront. They have to prove that they are serious about being banks and not just coming to Iraq to be investment houses.
Is there more room for banks in Iraq?
I would think so. We would welcome foreign banks if they came to Iraq, but they would have to come with the intention of offering something concrete for the banking system in Iraq. We can’t have foreign banks operating by remote control. We can’t have remote-controlled ownership. They need to have an active presence on the ground and work with the people, face to face and try to offer them something realistic by way of banking services and products. They need to open a branch and be competitive with other banks in what they are offering customers. Of course security is a problem, but we will cooperate with them in suggesting security arrangements. The real economy is going to develop and there are going to be enormous opportunities, so I think it is vital that they come early and establish a presence and cooperate with the private sector by offering them competitive products and services.
What about Islamic finance?
We have a few banks which have been founded on Islamic principles, but we are still in the process of developing the regulation in that respect. I don’t want to hide the fact that potential demand is high, and probably more so after the credit crisis, because some people are beginning to think that Islamic finance will not be as affected by the global downturn as conventional finance because it relates to the real economy. We will have to see if that is the case, but we have a few banks and they are working. We have a regulatory framework in place, but I think it still needs to be made clearer.
What do you see being the challenges in 2009 for banking in Iraq?
We still have plenty of challenges ahead of us. We are hoping to increase our dealings with banks from outside Iraq and we will need to re-examine our programmes with international financial organisations like the International Monetary Fund (IMF). We have been working under an IMF programme which is going to conclude at the end of the year, whereby we will have completed the 80 per cent of debt reduction that was agreed under the plan. We will probably have to establish new relationships with local banks.
I do not want to foresee any new arrangements with the IMF because this is something that still needs to be debated, but we are definitely going to have increased dealings with institutes like the Bank of International Settlements and we already have a lot of regional cooperation. The most important thing is going to be getting some help in our efforts to provide the local banks with information about how the credit crisis might impact upon them. I know we are not affected directly by the credit crisis, nor do we want to be affected by it.
I really want to concentrate on getting the banks to be more ambitious. I will make a special effort on that and it will be part of what we will be looking at when we evaluate the performance of the banking sector.
Will 2009 be the year when Iraq’s banks show their true potential?
One thing that stands out about banks in Iraq is that their loan portfolios do not exceed their aggregate capital and from a regulatory standpoint, without other legal infrastructure that mitigates risk, this kind of conservative banking is not a bad thing. The total assets of the private banks have grown by 90 per cent since 1 January 2007, which is a strong sign of the confidence that the public places in local banks. Deposits have grown by 70 per cent, but the loans and capital have each only grown by 60 per cent during the same period and they continue to remain at that level. It means that every single loan in the banking system could fail and they would still have assets to cover the depositors.
I want the banks to move more into the productive sector and contribute to the real banking environment, rather than continually come to the Central Bank to deposit their funds and try to make money off the interest. That is why I think 2009 is going to be very important – it is going to be the year of financial intermediation. The banks are going to have to do something with the deposits that they take. If they take deposits, then they have to be prepared to lend to customers and this is the issue. I think there should be some deliberate policy to encourage them to get their hands on some of the business from both the private and public sector.
Right now, although it is not a legal requirement, state-owned enterprises and private businesses tend to use Trade Bank of Iraq for any letters of credit. State-owned enterprises should be free to do business with private banks. This is a policy which we explicitly advocate, even through letters and circulars, that communication between government enterprises and private banks should be direct.
What were the biggest challenges you faced when you took up your post as the Governor of the Central Bank of Iraq in 2003?
Well, first off, there was no functioning Central Bank building because it had been destroyed and looted before and shortly after the invasion. Given that the economy was largely cash-based, getting a currency exchange up and running was an important undertaking and something we quickly went to work on setting up. We had a brief period of grace shortly after the fall of the government of Saddam Hussein and before the violence began to escalate in the spring of 2004, which we used to our advantage to get things up and running. Getting that done was vital because it helped to restore confidence in the monetary system at a time when confidence was fragile.
The immediate introduction of a new Central Bank law by the then governing Coalition Provisional Authority was helpful because it was geared towards market-based reforms. It was very different from what we used to have and we needed not only the staff to go with that, but what was equally important was having the right mentality at a political level to go with such dramatic changes to the banking system. Pulling that off required a lot of coordination between the likes of the Central Bank and the Ministry of Finance and other parts of the government, especially because it meant having such laws included in the draft of the new constitution for Iraq which was being drawn up at the time.
Was the establishment of a functional banking framework the first major challenge?
Opening up is not easy, but we knew that in order to get things done, we had to be prepared to talk to a lot of organisations and banks about new ideas and skillsets. However, the deteriorating security situation scared off a lot of international banks and financial institutions. Getting them to come to Iraq was obviously very difficult. Despite that, we have managed to establish and maintain those relationships which helped to establish what might be called the bank’s framework. Managing to integrate with the rest of the world, especially at an economic level went very well. The staff of the Central Bank of Iraq are incredibly hard workers. They frequently came in on weekends and regularly worked late into the night, despite the security situation over the past few years.
What would you say were the early successes?
Creating a functioning system for the foreign currency auction was one notable success, as was managing to restructure the obligations of the Ministry of Finance towards the Central Bank. The reserve requirement is now prudently regulated. We managed to not only develop monetary policy, but also managed to begin executing it and enforcing it. We also had to explain to the government what the Central Bank was and what it did. Now we have a Central Bank which is respected for doing what it is supposed to do, such as maintaining price stability. In five years, the Central Bank of Iraq has gone from being the arm of a totalitarian regime (under Saddam Hussein) to one that is respected by all the major global financial institutions.
Sorting out the debt reduction with the IMF and managing to reduce it by 80 per cent was another major achievement and we should have reduced the final tranche by the end of 2008. This was something which we negotiated in, I think, November 2004, and in which Adil Abdul Mahdi, the Vice-President of Iraq, was a key figure. Thanks to his leadership, we managed to get a debt reduction of 80 per cent and I think it is the biggest debt reduction of its kind for a middle income developing country.
Is the independence of the Central Bank of Iraq a key aspect of this success?
We have worked hard to coordinate with the government and to explain to them the benefits of having an independent Central Bank. This independence is, I would say, good for the government itself, although I would prefer to refrain from using the word ‘independence,’ it does allow us to maintain price stability and that is good for the government. We achieve stability, but it is also an achievement for the government.
The important point is that the Central Bank is always in discussion with the government. Before this it would have been the government which would have been making all the decisions and the Central Bank would have had to follow on from there. There is discussion - it is not one-sided. The government comes to us with any questions they have, not just on monetary policy, but also economic factors, such as the availability of the dollar and auction and exchange rates. They don’t just take decisions without coordinating with the Central Bank.
Given the amount of change that banking in the Middle East is undergoing, what kinds of discussions are you having with other Middle Eastern Central Banks?
I am in regular discussion with my counterparts throughout the region. We always meet through the Arab Monetary Fund and we are always talking on the phone, especially these days, to discuss a lot of things which are going on in the region and beyond.
I think the Central Banks of the Middle East definitely have some challenges now because they are more open than Iraq to the world economy due to the instruments which they employ, which are more related to the kinds of instruments the West uses. Iraq is of course open, but we still do not have things like derivatives and so on.
So, yes, we are always in discussion with them, for instance when a bank bailout takes place, but they are doing well so far. We have been discussing the implications of things like bank bailouts. I regularly meet†Arab governors and other governors during the sessions†of the Arab Monetary Fund.
Inflation has been a problem throughout the Middle East in the past few years. What has the Central Bank of Iraq been doing in this respect?
Core inflation is currently 13.6 per cent and it has stayed within a steady band for quite some time, particularly over the past three months. Inflation has definitely been a challenge over the past year. The issue here is that we are more or less basing our monetary policy on our ability and achievements in combating inflation. Through a programme with various intra governmental organisations, we managed to reduce headline inflation from 64.8 per cent to a headline rate of seven per cent. We actually had minus figures for a while.
Was monetary policy the tool you used to check inflation?
I wouldn’t say it is exclusively monetary policy that has brought inflation down; it is a combination of measures. A lot of economists do not believe that monetary policy in this particular situation made a big difference, and instead preferred to look at developments in the real economy. Nevertheless, I believe monetary policy was quite effective.
I and a lot of my colleagues who worked in Iraq in the 1960s used to believe that inflation was a natural outcome of development. It is not unusual to have inflation during the development process and people even now think the same. What they do not understand is that inflation destroys any development achievement.
There has been a lot of speculation that the Iraqi dinar might be revalued at some point as the economy becomes stronger as a result of increased oil revenue. Is there going to be a revaluation of dinar in the near future?
I always refrain from making any comments on the subject of revaluation. I refrain because everybody will always believe a Central Banker over anyone else on this matter, so I am not going to say anything.