Addressing the problems of the Iraqi financial system

KTFA:

Clare: Addressing the problems of the Iraqi financial system

7/20/2024  Written by: Zahraa Haider Abdul Jabbar Al-Batat

The financial system in Iraq consists of a group of institutions and structures that manage the financial and economic affairs of the country. Here are the components of this system in detail: 

1. Central Bank of Iraq:

- Role: It is considered the body responsible for implementing monetary policy, issuing currency, and managing cash reserves.

- Objectives: price stability, exchange rate stability, and encouraging economic growth. 

2. Commercial banks:

- Its types: include government banks such as Rafidain Bank and Rashid Bank, in addition to local and foreign private banks.

- Services: Providing loans, opening accounts, making money transfers, and financing projects.

 3. Specialized banks:

Examples: Real Estate Bank, Agricultural Bank.

- Focus: Providing financial services to specific sectors such as agriculture and real estate. 

4. Stock market:

- Iraq Stock Exchange (ISX): is the place where stocks and bonds are traded.

- Objective: To promote investment and develop financial markets.

5. Ministry of Finance:

- Role: Preparing and implementing the state’s financial policy, managing government revenues and expenditures.

- Responsibilities: Preparing the general budget, managing public debt. 

6. Securities Commission:

- Function: Regulating and monitoring the stock market, ensuring compliance with financial laws and standards.

- Objectives: Protect investors, ensure market transparency. 

7. Investment companies:

- Role: Investment management, providing financial advisory services, managing investment portfolios.

- Objectives: Achieving investment returns for clients, enhancing local and foreign investments. 

Main challenges: 

1. Corruption: It hinders economic development and affects confidence in the financial system.

2. Political and security unrest: harm investments and hinder financial operations.

3. Rentier economy: It depends heavily on oil, which makes it vulnerable to oil price fluctuations.

4. Bureaucracy: It hinders efficiency and increases administrative complexities.

5. Weakness of the banking system: Lack of efficiency and development affects performance.

6. Inflation: affects purchasing power and financial stability.

7. Weak financial infrastructure: Lack of technological development affects efficiency.

8. Laws and regulations: may be insufficient or outdated.

9. The informal sector: It poses a challenge in collecting taxes and organizing the economy. 

These challenges require structural reforms and policy development to enhance financial stability and economic growth in Iraq. 

Reforming the financial system in Iraq according to the following mechanism: 

Applying the following mechanism to the Iraqi financial system requires adapting policies and procedures to the economic, social and political conditions specific to Iraq.

Here are some possible steps to achieve this: 

1. Updating financial institutions:

- Strengthening the role of the Ministry of Finance and the Central Bank of Iraq in managing financial and monetary policies.

- Developing the financial infrastructure to increase efficiency and transparency. 

2. Reforming the tax system:

- Improve tax collection and reduce tax evasion.

- Simplify the tax system to make it more transparent and fair. 

3. Strengthening monetary policies:

- Strengthening the independence of the Central Bank to ensure price stability and control inflation.

- Using monetary tools such as setting interest rates and regulating the money supply effectively. 

4. Public debt management:

- Develop strategies to manage public debt and reduce dependence on external loans.

- Issuing local government bonds to attract domestic investment. 

5. Strengthening control and regulation:

- Improving the control systems over banks and financial institutions to ensure the stability of the financial system.

- Enhancing financial laws and regulations to comply with international standards. 

6. Encouraging investment:

- Creating an attractive investment environment by improving infrastructure and reducing bureaucracy.

- Providing incentives to foreign and local investors. 

7. Enhancing transparency and accountability:

- Ensuring transparency of financial operations by publishing financial reports regularly.

- Strengthening accountability and combating corruption at all levels of financial management. 

By implementing these steps, the Iraqi financial system can benefit from global financial experiences, taking into account the fundamental differences between systems. 

Also, to implement these reforms effectively, close cooperation is required between the Iraqi government, international financial institutions, and the private sector to achieve financial stability and sustainable development in Iraq. 

Implementing each paragraph requires specific, practical steps, including: 

1. Updating financial institutions:

- Strengthening the role of the Ministry of Finance and the Central Bank.

- Training and professional development: Providing intensive training programs for employees to improve their competencies and knowledge of modern financial policies.

- Digital transformation: adopting advanced technological systems to improve the efficiency of financial and administrative operations.

- International cooperation: Benefiting from international expertise through partnerships and cooperation with global financial institutions. 

2. Reforming the tax system:

- Improving tax collection:

- Develop technological systems for collecting and analyzing data to increase the effectiveness of tax collection.

- Increase control and inspection of economic activities to reduce tax evasion.

- Simplifying the tax system:

- Restructuring tax brackets to be clearer and fairer.

- Providing facilities to taxpayers such as electronic services. 

3. Strengthening monetary policies:

- Strengthening the independence of the Central Bank:

- Issuing laws that guarantee the independence of the Central Bank from political influences.

- Use effective monetary tools:

- Determining interest rates based on economic conditions.

- Managing the money supply through open market operations and reserve policies. 

4. Public debt management:

- Developing debt management strategies:

- Analyze the debt structure and determine repayment priorities.

- Developing the bond market to attract local investors.

- Reducing dependence on external loans:

- Encouraging domestic investment and developing the financial infrastructure to attract local capital. 

5. Strengthening control and regulation:

- Improving control systems:

- Develop technology-based control mechanisms to improve monitoring of financial operations.

- Enhancing transparency in financial reporting.

- Strengthening laws and regulations:

- Updating financial laws to comply with international standards.

- Activating penalties for financial violations. 

6. Encouraging investment:

- Creating an attractive investment environment:

- Improving infrastructure including roads, bridges, electricity and communications.

- Reducing bureaucracy by simplifying government procedures.

- Providing incentives to investors:

- Tax exemptions for investment projects.

- Credit facilities to finance projects. 

7. Enhancing transparency and accountability:

- Ensuring transparency of financial operations:

- Publish financial reports periodically and in detail.

- Application of international standards in preparing financial reports.

- Promoting accountability and combating corruption:

- Establishing independent oversight bodies to combat corruption.

- Encouraging reporting of corruption by providing protection for whistleblowers. 

Implementing these steps requires strong government commitment and cooperation between the public and private sectors to achieve a stable and effective financial system.  LINK