By Omar al-Shaher for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

According to experts, the hard-currency auction governed by the Central Bank of Iraq (CBI) — the authority in charge of implementing monetary policy in the country — has ushered in the formation of financial groups, in which board members of Iraqi private banks are investing.

Every day since 2004, the CBI has held an auction through which hard currency is sold to banks, companies and traders in exchange for evidence of import and transaction receipts. The auctions aim to prevent market speculation and stabilize the exchange rate of Iraqi dinars to the US dollar. The CBI — which does not deal with individuals — sells $1 for 1,118 Iraqi dinars.

The exchange rate has been fluctuating following an arrest warrant issued against the former governor of the CBI, Sinan al-Shabibi, at the end of last year. During his term, Shabibi tightened the auctions as information leaked about smuggling money from Iraq to Iran to meet the latter’s needs for hard currency amid international sanctions.

As a way of dealing with the accusations, the CBI prohibited any bank or company with capital of less than $400,000 from taking part in the currency auction. Additionally, all participants had to submit their participations to the criminal division in the Ministry of Interior, the economic crime unit and the money-laundering division of the CBI for approval.

By Mark DeWeaver.

On October 16, Prime Minister Maliki removed the head of the central bank, Sinan al-Shabibi, accusing him of mismanagement and currency manipulation. (There’s more on this story here, here, and here.) This move was widely seen as a power grab by the prime minister and a grave threat to the CBI’s independence. Nevertheless, his removal may actually prove to be a positive development for the listed banks.

In recent years, the CBI has implemented two prudential supervision policies that seem to me to have been entirely misguided—(1) requiring all private-sector banks to meet arbitrary capital targets and (2) imposing an impossibly burdensome anti-money laundering (AML) regime.

While capital adequacy is normally measured as a ratio of capital to risk-weighted assets, the CBI has instead imposed absolute levels of capital (IQD 150 billion by the middle of 2012, IQD 250 billion by the middle of 2013) regardless of the size of the banks’ loan books. Given that most of the banks have more cash than loans, there is really no justification for this on prudential grounds. The policy is rather an attempt to force the banks to lend more and to coerce the smaller banks into merging with one another. It is, in other words, an attempt to replace market forces with central planning.

In some cases the CBI’s insistence on capital increases also appears to have led to increases in the quantity of capital at the expense of its quality. Some majority shareholders are said to have used personal lines of credit from their banks to pay for their own rights shares. The problem with this, of course, is that if those shareholders are unable to repay their loans the banks will take a loss and the new capital will have to be written off.

Similarly, the CBI’s AML policy, introduced last February, had numerous unintended consequences. Rather than blocking illicit currency flows, the new rules instead produced a market for Iraqi government-certified manifests, which anyone who needed dollars could use to prove that he was engaged in a legitimate transaction. Instead of stopping dollar sales to Iran and Syria, the CBI did little more than create an opportunity for officials with access to the right government seals to make a quick profit stamping phony documents. In the end the CBI had no choice but to issue new instructions (at the beginning of October) reinstating the original regulations.

Don’t get me wrong. I happen to think, as do most outside observers, that Shabibi is entirely innocent. But prudential supervision during his tenure has been unduly strict, even to the point, in the case of the AML regulations, of being downright Quixotic.

The interesting question for the commercial banks at this point is thus whether or not the next CBI head might take a more lenient line. Will we get a kinder, gentler central bank or more of the same?

Perhaps the biggest story of recent days was the shock dismissal of the Governor of the Central Bank of Iraq (CBI), Sinan al-Shabibi, and the issuing of arrest warrants for him and many of his staff.

The nature of the allegations against Mr Shabibi are not entirely clear, but appear to center around manipulation of the exchange rate between the Iraqi dinar (IQD) and the US dollar.

Considering the fact that the exchange rate has been managed within a relatively tight range for quite some time, this accusation looks a little strange.

But there has been tension between the Central Bank and the government for years. In January of last year, Nouri al-Maliki secured a court ruling placing the Central Bank under the control of the cabinet, rather than the parliament, much to the displeasure of al-Shabibi.

The latest charges have been brought by Iraq’s Commission on Integrity, whose former head resigned last year, alleging political interference in his inquiries.

Suspicions abound that the Central Bank affair is an attempt by al-Maliki to increase his control of the bank. While we wait for more details to emerge, the international business community will be watching developments closely.

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Iraq’s cabinet has named an interim replacement as governor of the country’s central bank.

Prime Minister Nouri al-Maliki’s spokesman Ali Mussawi said, “the cabinet decided to authorise Abdelbassit Turki, the head of the Board of Supreme Audit, to run the central bank indefinitely”.

The former head of the Central Bank of Iraq (CBI), Sinan al-Shabibi, was suspended from his post by the country’s anti-corruption watchdog, the Commission on Integrity, as part of an inquiry into alleged currency manipulation.

(Source: Naharnet)

By John Lee.

Iraq’s core inflation rate rose to 5.2 percent year-on-year in September, up from 5 percent year-on-year in August.

Speaking to Reuters on Tuesday, Mudher Kasim [Mudher Saleh], deputy governor of the Central Bank of Iraq (CBI), blamed the increase on higher food prices and the start of the school year.

Core inflation strips out fuel prices.

(Source: Reuters)

By John Lee.

Investigators in Iraq have opened an inquiry into alleged manipulation of the exchange rate between the Iraqi dinar (IQD) and the US dollar, and arrest warrants have reportedly been issued for several officials including the head of the Central Bank of Iraq (CBI).

Hassan Karim Aati, spokesman for the Commission on Integrity, said on Tuesday that the Commission is looking into the matter, and studying documents from a parliamentary committee investigating the corruption allegations.

The investigation focusses around 16 officials in the CBI.

While it’s understood that no charges have been brought, Baha al-Araji, the chairman of parliament’s integrity committee, said 30 arrest warrants had been issued, including for CBI governor Sinan al-Shabibi (pictured) and his deputy Mudher Saleh [Mudher Kasim, Mudher Saleh Kasim].

The Central Bank of Iraq (CBI) has ruled out deleting the three zeros from the Iraqi currency in 2013 because it needs time and a new fiscal year.

The Deputy Chairman of the CBI, Mudhir Mohamed Salih, told AIN on Wednesday:

“The project of crossing out zeros from the Iraqi currency takes time … The Council of Ministers has instructed to take extra time to consider this project.”

According to AIN, Salih denied “The reports over a malfunction that took place while implementing this project in the exchange rate of the Iraqi Dinar against the foreign currencies.”

The report also said that the Council of Ministers decided during its session on 10th April to postpone the deletion of zeros from the Iraqi currency until further notice.

(Source: AIN)

Last week the Central Bank of Iraq (CBI) announced that it was authorizing the two largest state-owned banks, Rafidain Bank and Rashid Bank, to sell US dollars at auction. The CBI’s goal is to reduce the spread between its own auction rate and the unofficial “street” exchange rate, which has recently been as wide as seven percent. The CBI expects the spread to narrow to four percent initially and eventually to reach two percent as the unofficial rate strengthens. (See this story from Alsumaria and the “Economics” section of last week’s Rabee Securities Weekly Bulletin.)

A five percent strengthening in the street rate might not sound like much. But the CBI is doing more than just narrowing the spread. It is also eliminating uncertainty about the future direction of the dinar by signaling that no further deprecation will be tolerated.

This move is positive for Iraqi stocks because a stronger currency will increase the expected value of the IQD-denominated earnings of the listed companies relative to the return on USD assets. The increased supply of US dollars may also push up earnings at the listed banks by allowing them to expand their offerings of USD products such as letters of credit.

While you’d never guess it from the market’s tepid reaction to the news, the CBI has given investors yet another reason to be long the ISX.