Iraq Economic News and Points To Ponder Thursday Afternoon 1-15-26
Iraq Central Bank Monetary policy
Monetary policy in Iraq, through its underlying philosophy, relies on what are known as information-based or signal-driven rules to generate stability in the banking and financial market, in line with local and global economic developments. This approach serves as an alternative to direct intervention in the market and the potential for undesirable divisions and distortions that could negatively impact the effectiveness of financial intermediation. These signal-driven and information-driven methods are based on the Central Bank of Iraq's interest rate, also known as the policy rate .
The Concept
The set of procedures and decisions taken by the Central Bank of Iraq within the framework of achieving its intermediate operational goals, which are to maximize the purchasing power of the Iraqi dinar and to counter inflationary expectations, thereby enhancing the overall performance of the macroeconomy and reflecting this on improving the standard of living in particular.
Goals
The Central Bank of Iraq’s main objectives include achieving stability in domestic prices and working to maintain a stable financial system based on market competition. In line with the aforementioned objectives, the Central Bank works to promote sustainable development, provide job opportunities, and achieve prosperity in Iraq.
Tasks
The Tasks Of The Central Bank Of Iraq Include The Following:
Formulating and implementing monetary policy in Iraq, including foreign exchange rate policy.
Possession and management of all of Iraq's official foreign reserves.
Possession of gold and management of the state's gold reserves.
Providing advisory and financial services to the government.
Providing liquidity services to banks.
Issuance and management of the Iraqi currency.
Compiling and publishing data related to the banking and financial system and data related to the economy.
Establish, supervise, and promote effective and sound payment systems.
Issuing licenses and permits to banks, regulating their operations, and supervising them.
Combating money laundering and terrorist financing.
Regulations and decisions related to monetary policy operations
These regulations and instructions cover various aspects of banking and financial operations, including guidelines on liquidity management to ensure the stability of the financial system. To manage liquidity and ensure financial system stability, the Central Bank of Iraq issues specific instructions and guidelines to banks and financial institutions. These instructions include:
Determining the required reserve ratio: A specific percentage of bank deposits must be held as a cash reserve at the central bank. This helps control the amount of liquidity available to banks and limits excessive lending.
Open market operations: The central bank conducts purchases and sales of government bonds to increase or decrease liquidity in the market. These operations are used to control the amount of money in circulation and thus influence interest rates and inflation.
Interest rate management: Setting interest rates on loans and deposits affects the demand for money. A high interest rate reduces borrowing and limits liquidity, while a low interest rate increases borrowing and increases liquidity.
The Following Are The Most Important Instructions Regarding Monetary Policy:
1. Monetary Policy Instructions:
Interest Rate Management: Regulations pertaining to the setting and review of interest rates that affect the financial system. The interest rate set by the Central Bank of Iraq is currently 5.5%. This decision was made as part of the Central Bank's policies to control inflation and support financial stability in the country. This interest rate is consistent with the Central Bank's ongoing efforts to guide monetary policy in line with domestic and international economic developments.
Open market operations: These are instructions relating to how the central bank carries out purchases and sales of government bonds to control liquidity.
The mechanism by which the Central Bank of Iraq conducts purchases and sales of government bonds aims to regulate liquidity in the financial system and control inflation. This mechanism includes the following:
Selling government bonds: The central bank sells government bonds to commercial banks and investors to absorb excess liquidity from the market. When investors buy these bonds, the funds are transferred from their accounts at the central bank to the government's account, thus reducing the amount of money in circulation.
Purchasing government bonds: When the economy needs increased liquidity, the central bank buys government bonds from the market. This process injects funds back into the banking system, increasing the amount of money available for circulation.
Interest rates: Interest rates play a crucial role in these transactions. The set interest rate influences investors' willingness to buy or sell bonds. For example, if the central bank raises interest rates, demand for bonds may increase because the yields become more attractive.
These operations help the central bank achieve its monetary objectives, such as price stability and supporting the national economy, by controlling the liquidity available in the financial system.
2- Reserves Management Regulations:
Mandatory reserve ratio: Determining the percentage that banks must hold as a cash reserve. It is determined by the Central Bank of Iraq and is currently 18% of current deposits. This ratio means that commercial banks are obligated to hold 18% of their deposits as a cash reserve with the Central Bank, and this reserve cannot be used for lending or investment purposes.
The required reserve ratio is a monetary policy tool used by the central bank to control the amount of money in circulation and to control inflation, as increasing the required reserve ratio reduces the ability of banks to lend, which reduces the amount of money in circulation in the economy, and vice versa.
Additional reserve measures: In some cases, the central bank may require banks to hold additional reserves as a precautionary measure during times of financial crisis or economic instability.
Assessing the solvency and liquidity of banks: The central bank continuously monitors the solvency and liquidity of banks to ensure that they have sufficient capital to withstand potential crises.
Emergency interventions: In cases of instability or financial crises, the central bank may intervene by providing additional facilities to banks to ensure sufficient liquidity is available to support the financial system and prevent its collapse.
These tools help to achieve financial stability, control inflation, and support economic growth in Iraq.
3. Foreign Exchange Regulations:
- Exchange Rate: Instructions relating to the Central Bank's policies for managing the exchange rate of the Iraqi dinar against foreign currencies, which include several key instructions, including :
Official Exchange Rate: The Central Bank sets the official exchange rate of the Iraqi dinar against foreign currencies. This rate can change based on economic and political conditions .
Market intervention: The central bank can intervene in the foreign exchange market to buy or sell foreign currencies with the aim of stabilizing the exchange rate. This intervention usually occurs during times of high market volatility .
Foreign exchange reserve management: The Central Bank works to manage its foreign exchange reserves to ensure that there are sufficient reserves to support the Iraqi dinar in economic or financial emergencies .
Issuing monetary policy: This includes adjusting interest rates and issuing other monetary policy tools to influence the supply and demand for the Iraqi dinar and foreign currencies .
Exchange market control: The central bank oversees foreign exchange operations to ensure that financial and economic institutions comply with applicable laws and regulations .
Promoting Transparency: The central bank seeks to enhance transparency in the foreign exchange market by publishing information and reports related to the exchange rate and policies implemented . These policies change over time based on local and international economic and political conditions .
- Exchange Operations: Rules Regulating The Buying And Selling Of Foreign Currencies By Financial Institutions.
The regulations governing foreign exchange transactions by financial institutions encompass several key aspects to ensure transparency and market stability. These regulations include :
Licenses and registration: Financial institutions must obtain the necessary licenses from the central bank or the relevant regulatory authority to conduct the activity of buying and selling foreign currencies .
Compliance with standards: Financial institutions must comply with the standards set by the central bank or regulatory authority, including rules against money laundering and terrorist financing .
Oversight and inspection: Regulatory bodies conduct periodic audits and inspections to ensure that organizations comply with relevant laws and regulations. This oversight may include reviewing financial operations and internal procedures .
Reporting and Disclosure: Financial institutions are required to submit periodic reports to the central bank or regulatory authority, and provide the required disclosures regarding their activities and transactions in foreign currencies .
Limits and restrictions: Regulatory authorities may impose limits on the size of operations or on certain types of transactions to ensure market stability and protect the national economy .
Settlement procedures: Financial institutions must follow the specified settlement procedures to ensure that foreign exchange buying and selling transactions are executed accurately and quickly .
Risk management: Financial institutions must develop strategies to manage the risks associated with exchange rate volatility, including the use of hedging instruments when appropriate .
Customer relations: Financial institutions must provide customers with clear and transparent information regarding exchange rates, fees, and terms related to buying and selling foreign currencies . All these rules aim to ensure the market operates efficiently and fairly, and to protect the economy from potential risks associated with foreign exchange trading .
Tools
In light of the rapid and ever-changing monetary and financial developments worldwide, driven by market needs, the Central Bank of Iraq pursues a monetary policy that keeps pace with these developments. This policy aims to control excess liquidity in banks to manage the money supply and, consequently, curb inflation. The Central Bank relies on two main sets of tools to implement this monetary policy:
Group 1: Traditional Tools
First: Policy Price
The bank adopted the new monetary policy rate since mid-2023 to be (5.5%) instead of the prevailing rate of previous years, which is based on a set of indicators that keep pace with global developments and financial risks surrounding the country.
Second: Open Market Operations
The Open Market Operations Office was established at this bank in 2023 (previously operating as a department within the Financial Operations and Debt Management Division). It undertakes several key tasks within the framework of monetary policy, including studying domestic liquidity and determining the market's need for new securities.
As part of its monetary policy work, this office studies and determines the liquidity level in the Iraqi banking sector by analyzing deposits, available cash, and credit extended, as well as the lending and borrowing interest rates used by banks. This is done on a weekly basis to gain a comprehensive picture of the monetary situation, the banks' need for securities, and their liquidity requirements to cover short-term obligations.
Furthermore, it identifies the types of securities needed by the market based on the conclusions drawn from these studies. These conclusions, in turn, inform the long-term strategies that the bank aims to implement to achieve price stability . The Central Bank issues the following instruments as part of this process:
A- Issuance of securities by the Central Bank of Iraq
These are central bank transfers and Islamic certificates of deposit, targeting the banking sector (governmental, commercial, and Islamic) as well as individuals with accounts at these banks and government institutions wishing to invest in securities. These securities are issued through auctions conducted by the bank via an approved system, and applications to purchase them are submitted according to the terms and conditions set by the bank. The primary purpose of issuing these securities is:
Withdrawing excess liquidity from banks.
Reducing private bank lending operations, as securities provide an alternative investment opportunity.
Reducing the money supply by applying the two paragraphs above.
Reducing inflation rates by directing investment towards holding balances with the central bank.
Providing additional liquidity to the bank by reducing its obligations to banks, thus enabling the bank to reinvest it in other instruments.
Increasing financial depth by providing securities that can be resold or liquidated at any time banks need liquidity to facilitate their financial transactions.
Activating the interbank market for liquidity management involves using securities as a tool for sale within this market or as a guarantee of the liquidity needed by banks. The issuance of securities by the central bank is the first step in activating this market.
The repurchase agreement and the reverse repurchase agreement ( REPO) , because these instruments are considered a starting point for activating the new monetary policy tools.
b) Issuing bonds on behalf of the Ministry of Finance
The Central Bank of Iraq, acting as the financial agent for the government, issues bonds for the Iraqi Ministry of Finance. The primary purpose of issuing these bonds is to finance the state's general budget deficit. The needs are determined according to the Iraqi budget law. The bank announces and promotes these bonds, which target the public and banks. The bank collects the proceeds from the sale of the bonds and transfers them to the account of the Iraqi Ministry of Finance for use within the specified needs of public finance. The bank also undertakes the process of monitoring the repayment of the bond's principal and interest.
c) Rediscount rate (discounting securities in favor of banks)
The office handles the discounting of securities on behalf of banks if they wish to discount the securities issued in favor of the Ministry of Finance in order to provide liquidity to the bank if it needs it.
d- Existing facilities
The need for loan-and-deposit facilities for banks arises when financial systems are underdeveloped, leading to the use of such instruments, which include:
Overnight investment.
The primary credit of banks, which is at a rate higher than the approved monetary policy rate by adding (2%) to the monetary policy rate, may reach (20%) of the bank's capital.
Secondary credit, which is for a longer period and at a higher price than primary credit, becomes the policy price added to it (3%), and it may be guaranteed by securities issued by the Ministry of Finance.
The last resort for lending, which allows banks suffering from a financial crisis under exceptional circumstances to grant a loan in accordance with the Central Bank of Iraq Law, at a rate of (3.5%) in addition to the monetary policy rate, and in accordance with guarantees determined by this bank after the approval of the Minister of Finance, provided that the period does not exceed three months, and the Central Bank may renew the period.
The existing facilities at the Central Bank of Iraq, whether for deposits or lending, are completely suspended due to the existence of securities within the open market operations, as well as the securities of the Ministry of Finance, which provide a current opportunity for banks to manage their liquidity without the need for existing facilities.
Third: Mandatory Reserve Requirements
This is a percentage imposed on deposits in the banking sector, meaning that the Central Bank of Iraq imposes a percentage on deposits according to their type within the sector, including current and current-natured deposits, fixed deposits, savings in dinars and dollars, and the private and government sectors, which have been determined according to the percentages below:
Current deposits of the private sector are (22%) in Iraqi dinars and (18%) in US dollars.
Time deposits in the private sector for all licensed banks (13%) based on the decision of the Board of Directors of this bank No. (63) of 2024.
Government deposits, both current and time deposits, shall be (22%) in Iraqi dinars.
The mandatory reserve is one of the most important monetary policy tools, which works to limit the bank’s ability to grant loans by imposing the above ratios. It is used by the central bank according to the direction of monetary policy. In addition, the mandatory reserve requirements act as a guarantee tool for bank deposits (they are used to pay part of the depositors’ money in the event of a crisis and the bank’s inability to pay).
Group Two: Unconventional Tools
First: Foreign Currency Trading Platform
The Central Bank of Iraq considered the foreign currency sale platform (window) as a means to ensure and stabilize the exchange rate, which contributed significantly to maintaining the stability of the Iraqi dinar exchange rate and providing foreign currency to cover the private sector’s imports of goods and services, as well as the needs of citizens for travel and medical treatment.
The Central Bank of Iraq has established an electronic platform for selling dollars in coordination with international bodies in order to control and regulate the operations of the foreign currency sales window and ensure effective oversight of it.
An international company specializing in building it was commissioned to link banks with the Central Bank through it, with the aim of reducing fraud and terrorism financing and raising the level of performance of the banking sector, which is welcomed by all regulatory and supervisory authorities in the world as it enjoys a high degree of compliance with international requirements and knowledge of the true beneficiary.
Second: Central Bank initiatives (quantitative easing)
Through its mandate to support development and stimulate the growth of the Iraqi economy, the Central Bank of Iraq seeks to bolster the liquidity of specialized banks with financial initiatives that enable them to provide industrial, agricultural, and housing loans, thereby supporting economic activity and creating job opportunities.
The bank also provides financial initiatives to private commercial banks to finance small and medium-sized enterprises (SMEs). The bank has taken several steps and offered various facilitations, including the following:
Banking facilities through the rescheduling of bank loans to the private sector, especially those owed by small and medium-sized enterprises, as well as increasing the repayment period for existing and future loans.
Continuing to support real activities through the lending policy adopted by the Central Bank and in cooperation with banks operating in Iraq to drive the development process.