Iraq’s Banking Sector: A Roadmap for Reform Amidst Economic Challenges
The Iraqi economy has faced significant financial and banking challenges since 2003, stemming from a complex array of socio-political conditions that have persisted over the past two decades. Under its 56th Law enacted in 2004, the Central Bank of Iraq bears the critical responsibility of fostering economic stability while navigating the intricacies of the financial system. This includes addressing systemic issues and facilitating the transition from a rentier economy to a productive economy, as well as advancing from a traditional monetary framework to a digital economy.
Phases of Evolution for the Central Bank
The Central Bank has traversed four pivotal stages from 2003 to 2024, each marked by major economic upheaval:
- Controlling rampant inflation in 2003, which exceeded 35%, stabilizing exchange rates, accumulating foreign reserves, and managing the money supply.
- Overcoming economic and security shocks in 2014.
- Addressing the financial crisis during the COVID-19 pandemic in 2020.
- In 2023-2024, gaining control of the exchange rate, regulating foreign trade financing, achieving digital transformation, and enhancing financial inclusion in accordance with international standards.
Pathway to Financial Reform
In collaboration with the government, the Central Bank has made considerable progress toward implementing a financial and banking reform methodology that aligns with its strategic objectives set forth in the 2025 roadmap. A thorough evaluation and analysis of the economic landscape over the past 22 years is essential to identify failures in production sectors and delays in executing economic reform programs previously attempted by successive governments.
Despite these challenges, the reform efforts witnessed in 2023 and 2024 instill a sense of optimism among specialists regarding future achievements, as outlined in the Central Bank’s current strategy, which emphasizes both primary and subsidiary goals.
Comprehensive Banking Reform Initiatives
The Central Bank’s strategy from 2003 to 2024 has been instrumental in addressing the adverse effects of economic shocks, particularly during the tumultuous 2014 period marked by a global decline in oil prices of 75%. The government’s fiscal capabilities were strained, leading to delays in salary disbursement. The Central Bank effectively leveraged its foreign cash reserves, supporting the government with 16 trillion dinars to navigate this adversity.
Commencing in 2015, the Central Bank initiated the development of a detailed banking reform methodology that resulted in its first strategic plan covering 2016-2020. This plan highlighted five main objectives and 140 sub-goals, with a notable achievement rate of 92%, setting foundational structures essential for advancing financial and banking reforms.
The formulation of subsequent strategies, including the second strategy for 2021-2023, aimed to fulfill previously unmet sub-goals, despite the government’s reliance on the Central Bank for an additional 30 trillion dinars, bringing the total government borrowing to 46 trillion dinars. As of 2023, efforts transitioned toward the preparation of the third strategy (2024-2026), aligning with broader economic policies and reforms outlined by the government and rooted in the Central Bank Law of 2004.
Strategic Goals and Initiatives
The third strategy articulates seven primary goals, supplemented by 24 sub-goals and 75 initiatives designed to facilitate significant banking and financial reform:
- Supporting and promoting monetary stability.
- Reinforcing digital transformation, stimulating electronic payments, and enhancing cybersecurity.
- Augmenting financial inclusion.
- Maintaining a robust financial system.
- Developing organizational structures and enhancing human resource capabilities.
- Elevating the Central Bank’s status both domestically and internationally.
- Ensuring compliance of the banking and non-banking sectors with international standards.
Highlighted programs within this framework include the launch of the national banking strategy for Iraq (2024-2029) approved by the Council of Ministers. This initiative aims to revitalize the structural financing framework, facilitate electronic platforms for external banking transactions, and promote monetary and financial stability. Strengthening regulation and oversight within the banking sector and advancing digital transformation efforts are also central to this comprehensive approach.
In summary, a careful assessment of the last 22 years in Iraqi financial reform suggests that the upcoming two years are poised to catalyze a transformation towards radical reform in the banking sector, ultimately enhancing its role in supporting sustainable development.
