Iraq’s central bank has decided to cut commercial banks’ reserve requirement to 15 percent from 20 percent, in order to spur bank lending as core inflation continues to slow, Reuters reported on Tuesday, citing a Central Bank of Iraq official.
Mudher Kasim, a senior advisor in the bank, said the central bank made the move to enhance investment in Iraq, where economic development has been slow to materialise despite a sharp fall in the violence unleashed after the 2003 U.S.-led invasion.
“The CBI decided to decrease the required reserve of banks to 15 percent, rather than 20 percent, starting from Sept. 1 2010,” Kasim said in an e-mail.
Core inflation in Iraq — defined by the central bank as excluding expenditure on fuel — slowed to 2.7 percent in June from 3 percent in May. The central bank also cut its key interest rate by 100 basis points to 6 percent in April due to subdued inflation.
“Inflation indicators have started to fall … therefore the Central Bank of Iraq follows a less strict policy in the direction of providing liquidity to banks,” Kasim told Reuters.
The move to cut the banks’ reserve requirement was the second this year. The central bank dropped the required reserves level to 20 percent from 25 percent in April.
Iraq’s economy is still largely disconnected from the global financial system and relies heavily on oil reserves, the third-biggest in the world.
Private sector credit is very limited and investment outside the oil sector, which dominates the economy, is seen as crucial to rebuilding the country after decades of war, sanctions and economic contraction.