The objectives of the government are clear. The Central Bank has become "very cooperative" with the government's financial policy. The Bank’s law contradicts such cooperation in order to safeguard and preserve the strength of the Iraqi economy on the one hand, and not to bear any government failure in managing the financial policy on the other hand. This is a context known to successive governments, and because the central bank adopts monetary policies that are independent of the government's financial policies. We all remember the dispute that arose between the government of Nuri al-Maliki and the governor of the Central Bank, Sinan al-Shabibi, in 2012, with the former ending up accusing the latter of corruption and issuing judicial orders for his arrest while he was in the Japanese capital Tokyo on an official visit. Subsequently he was put on trial in absentia and sentenced to seven years in prison in 2014 and removed from his post.
The Role of CBI
The CBI is an institution financially and administratively independent from the government according to Article 103 of the Iraqi constitution. It is responsible for setting monetary policy, issuing and managing the national currency and foreign reserves, and setting up regulations, procedures and controls for the work of local banks in the country and monitoring and auditing their work. It is the official body that represents Iraq in the international financial and monetary institutions such as the International Monetary Fund, the World Bank, and others. Among its tasks is also determining the supply and demand for money by setting interest rates. CBI is also responsible for receiving deposits from oil sales and keeping the state’s cash reserves, and it maintains the value of the national currency. This means that the independence of the CBI from government financial policies is very important to preserve the public funds deposited within the bank.
What the Minister of Finance announced in his aforementioned statement is a dangerous precedent for inserting the CBI into the core of the government's financial policy, and making it a tool to implement this policy. This was clearly demonstrated by what was included in the White Paper of financing the budget deficit and considering CBI reserves as the only source to fill the deficit, and here lies the real danger.
The White Paper on page 37 referred to the danger of using the CBI as a source of financing, they believe it "will lead to severe pressure on the CBI’s reserves and the resulting unsustainable future consequences." This view was further confirmed by the group of experts writing the White Paper on page 42, stating that "indirect monetary financing by the CBI is the only remaining source... The need for this reserve to finance imports of goods and services means its will drop dangerously to low levels within nine months, which will ultimately lead to a real crisis in value of the Iraqi dinar, accompanied by the possibility of a collapse in its value."
It is worth mentioning that the CBI reserves are under threat from three different sources:
First: Using the CBI reserves to finance the government's fiscal deficit. This is done in two ways, the first is to "buy goods and services" using hard currency, and the second way is by “indirect borrowing” using the central bank to devalue the dinar against the dollar in order to "pay the monthly benefits from salaries."
Second: The continuation of the notorious currency auction, which is a reservoir of corruption and a source of wealth for influential people in the world of politics, money and business. The sale of hard currency in the auction exceeds state revenues in most cases, and this means withdrawal from the Bank reserves and further reducing its levels.
Third: The increasing pressure from the state’s creditors, especially Iran, to finance its economy with hard currency after the US administration listed 18 Iranian banks under sanctions on October 8. Therefore, the CBI and Iraqi banks became the only outlet for Iran for hard currency. The visit of the Governor of the Central Bank of Iran to Iraq on October 12 was for this purpose.
The Central Bank governors kept quiet regarding the government statement to clarify its position. We also did not hear from the new governor. What is his vision for managing the bank’s affairs? What is his monetary policy? How can he preserve the cash reserve? Amid the worsening current economic crisis, it is imperative for the new governor to clarify to the Iraqi people the Central Bank’s policies and its position on the crisis facing the country.
The easiest of solutions is not a solution
According to informed sources, the team of experts is still busy working on the White Paper and adding details and appendices to the road map. The team pointed out the danger of borrowing from the CBI, or using devaluation as a means to match the public budget deficit. They warned that this "will later lead to an increase in the cost of living, and thus reduce the ability of the majority of individuals to meet their requirements, as the country depends entirely on imports to meet consumption." It is clear that the majority of the people will suffer and pay the price as a result of this shift in the adopted fiscal policy.
A financial expert, who did not want to reveal his identity, confirms that "the shortest and easiest solution is to resort to the CBI reserves and move towards printing the dinar, but taking this path is not a solution, rather it is suicide." The real fear is that the government and political leadership will resort to this solution instead of starting real radical reforms, which require executive decisions issued by the government and other legislatively supported decisions by Parliament.
The national duty here makes it imperative for all political forces and all their leaders not to stand idly by. They must actively participate in adopting practical, even if difficult, solutions that the government team will present through the White Paper and its annexes, in addition to what is presented by other experts outside this team from Parliament, economic research centers and monetary policy experts.
Keeping the doors of corruption wide open in most state institutions, reluctance to curb the corruption of the ruling parties themselves, and not abolishing their economic offices to limit their control over ministries, institutions and vital sectors, will ensure the continued exacerbation of crises and runs risks to the current financial situation, leading the way to a real collapse in a time frame of a few months. The financial and economic collapse will be followed by the collapse of the state of Iraq, and then chaos will prevail. At that juncture no one will be able to restore and control the situation again, except by a miracle that will be difficult to come by.
Iraq is multi-cultural, multi-factional society with different loyalties, each supported by armed groups. Chaos will mean loss of control and stability, which is difficult to sustain in normal circumstances, let alone in the circumstances of bankruptcy, political strife, scarcity of resources and the loss of people's livelihood.
Iraq is staring at its last opportunity, and the political parties must take it without fail, be brave and make courageous and responsible decisions to remedy the situation, otherwise they will be witnessing the worst possible catastrophic scenarios we have ever seen.
Farhad Alaaldin is the Chairman of the Iraqi Advisory Council. He was the political adviser to former Iraqi President Fuad Masum, the former chief of staff to the KRG prime minister from 2009 to 2011, and former senior adviser to the KRG prime minister from 2011 to 2012.
