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Banking sector faces problems of funny money and uncertainty over which currency will be used
By: Hussain Kubba (Bulletin Economics Editor)
Published date: 24/6/2003
Three of the top US banks, including J.P. Morgan, Citigroup and Bank of America, have set their eyes on the lucrative banking business in Iraq, according to a recent report in The Wall Street Journal. These banks and several others have conferred with Treasury Department officials in recent weeks. They are said to be interested in helping the Iraqis build a modern retail banking system as well as with trade finance, payments systems and foreign currency exchange. Meanwhile, at the doorsteps of Rafidain and Rashid banks all over Baghdad, exhausted Iraqis form long queues in the heat in the vain hope of getting hold of cash denominated in the "scarce" ID 250 bill note that carries the picture of none other then Saddam Hussain. Despite Central Bank proclamations to the contrary, the ID 250 bill now trades at 33 percent higher value then its big sister, the ID10,000 bill.The latter bill note, which was put in circulation by the Central Bank of Iraq in 2002, is said to have been stolen in large quantities by happy robbers in the wake of Iraq's "liberation" by the allied forces. The ID 10,000 bill is worth about US $5. Large amounts of this bill with issue numbers starting with two are said to have been stolen from the mints of the central bank before being officially put into circulation. Traders, shop minders, ordinary people and even state-owned petrol stations continue to refuse the ID10,000 as means of payment. The banks on the other hand, short of ID 250 bills, insist on only honoring cash withdrawals with ID10,000 bill notes. Those lucky civil servants to be paid by the Americans also received their salaries in these unwanted bills. In effect, they are being paid 33 percent less then the face value of their wages. Persons with access to a steady supply of ID250 bills are happily and effortlessly making a nice 33 percent profit on their mysterious source of steady supply. This makes the ID 250 even more scarce and more in demand.
Up to March 19, the government of Iraq controlled all financial transactions. The Central Bank of Iraq acted for the government in issuing and managing currency, establishing banking controls and disposing of foreign currency. With no Iraqi government in place, transitional or otherwise, it is reported that an American 'Minister', Jeff Jacoff now handles top decisions at the Central Bank. George Mullinax, also an American, advises him. The ex-governor of the Central Bank, Usam Mullha Hawish has simply become part of the oblivion of the past, but some old figures like Hajji Falih, a respectable technocrat at the Bank, can still be found around. Whoever is in charge at the Central Bank has tough decisions to make. Besides the American dollar and bills depicting Saddam Hussain, old Swiss-printed notes in ID 5 and ID 10 denominations are also circulating, especially in the north of the country.
They are worth ID 8000 to ID 1000 of the Saddam Hussain currency. To resolve this bewildering mess requires some ingenious solution. When and how to dispense with Saddam's currency remains a question of speculation.
Foreign exchange currency dealings have become more hazardous and expensive then before. "Light trade" is the preoccupation of small makeshift money dealers now found literally at every major corner in town. They exchange small amounts of foreign currency up to several hundred American dollars. Their casual customer is a potential victim of theft and fraud using counterfeit Iraqi currency. They invariably charge upwards of 3 percent in commission.
"Heavy trade" is conducted in the alleys of Kifah Street downtown, where hundreds of thousands of dollars exchange hands daily. The forces of supply and demand in this market determine a fragile national dollar exchange rate. The forces of organized crime with arms used at free will also have their indirect influence on the dollar rate.
The Central Bank of Iraq, as always, remains a missing player. The role of the banks in trade finance is still null. Likewise is their role in cross-border transfers. The dollar is being exchanged at the time of writing at ID 1500 using ID 250 bills and at ID 2000 using the ID 10,000 bill. The exchange rate is very volatile, from ID 2500 just before the war, down to ID 1000 several weeks back, then up to ID 1650 a few days back. Traders are now speculating on the next round of government payroll. The dollar value of local currency will go up or down depending on whether salaries are paid in dollars or dinars. Demand for dollars, however, is steadily increasing as more and more imports find their way into de-facto free trade Iraq. Dollar earnings from oil exports have yet to find their steady way into the market. The state-owned banks, Rafidain and Rashid, as before, do not sell any foreign exchange to the public. Many businessmen continue to complain that sharp fluctuation in the dollar rate is hurting their business. Stabilization of the Iraqi currency is another thorny item in the agenda of the Central Bank.
Banking controls are still coming out of the Central Bank, including some peculiar ones. According to some reports, the retail banks have instructions from the Central Bank to stop all overdraft facilities to their customers. They are urging their customers to pay up their red accounts. Customers, who balance their accounts now, will nevertheless lose the overdraft facility. Many businessmen say that this provides them with little incentive to do so at a time when they are in dire need for working cash capital. Interest structure remains at the Central Bank rate, which is pegged at a staggering 17 percent per annum. Debtors who want to escape this crippling interest on their overdraft accounts can only do so if they are prepared to loose their overdraft facilities.
Internal trade has also been severely hampered by the failure of the Central Bank to reactivate its interbank reconciliation system. Banks are still refusing to honor checks issued against accounts in other banks. Whatever little confidence may remain in the banking system is quickly being eroded in favour of a cash economy.
Published date: 24/6/2003
Author: Hussain Kubba (Bulletin Economics Editor)
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