Iraqi Central Bank

Key Takeaways

• The Central Bank of Iraq manages monetary policy and supervises the banking system.
• Established in 2004, it was founded after the U.S. invasion of Iraq.
• The bank maintains the Iraqi dinar pegged to the U.S. dollar.
• The CBI manages Iraq's foreign exchange and gold reserves.
• Challenges include ISIS looting and oil price volatility.

What Is the Iraqi Central Bank?

The Iraqi Central Bank is responsible for setting monetary policy, supporting currency stability, issuing the dinar, managing reserves, and supervising banks. It became an independent institution in 2004 after the U.S. invasion and the fall of Saddam Hussein's government. Based in Baghdad with regional branches, it operates amid inflationary pressures, reserve demands, and geopolitical strain.1

Understanding the Operations of the Central Bank of Iraq

The Central Bank of Iraq was created on March 6, 2004, as the country's independent central bank. Its formation was necessitated by the events that led up to and the aftermath of the U.S. invasion of Iraq as well as the fall of former leader Saddam Hussein. The bank was established with 100 billion dinars in capital provided by the state in exchange for 100% of the bank's capital stock.2 The federal government is the sole owner of this stock, which was not transferable.2 Mustafa Ghaleb was appointed governor of the central bank by Prime Minister Mustafa al-Kadhimi in September 2020, according to a report from Reuters.

The CBI's main objectives are to ensure domestic price stability and to develop a stable and competitive market-based financial system—a system that consists of banks, financial companies, stock exchanges, and insurance companies. In fulfilling these objectives, the CBI aims to support sustainable growth and employment in the country.

The CBI undertakes the following main functions in order to meet these objectives:

Implementing Iraq's monetary policy and exchange rate policy

Managing and holding Iraq's gold and foreign exchange reserves

Issuing and managing the national currency of Iraq, the Iraqi dinar (IQD)

Overseeing the payment system along with regulating and supervising the banking sector3

The CBI manages exchange rate policy for the Iraqi dinar, which is pegged to the U.S. dollar. The International Monetary Fund (IMF) describes the peg as a key anchor for the economy—it is partly the USD peg that resulted in sustained low and stable inflation in Iraq, around 2% average for several years.4

Important

If you're interested in investing in Iraq, talk to your financial advisor or broker about bonds, mutual funds, or exchange-traded funds.

Unique Challenges Facing the Central Bank of Iraq

The CBI faces a number of challenges, including the management of its monetary policy. One of the main issues of concern stems from ISIS insurgency in parts of the country. The group is believed to be responsible for a number of severe financial disruptions. According to a Newsweek report, CBI said ISIS looted approximately $800 million from the nation's banks between 2014 and 2017, most of which was denominated in Iraqi dinars. This includes reserves from the Trade Bank of Mosul—the main institution Baghdad uses for trade and financing.

Another key issue for the central bank stems from volatility and fluctuations in oil prices. Oil exports are a primary source of foreign currency for Iraq and, therefore, important to the nation's economy. The decline in oil prices—was a driving force behind the fall in Iraq's foreign reserves—from $54 billion at the end fo 2015 to $45 billion at the close of 2016.4

Global oil prices collapsed in early 2020 putting economic and social conditions in the war-torn country under extreme pressure. Total Iraqi oil revenue fell by almost half from $5.05 billion in February 2020 to $2.99 billion in March.5

Iraq's lack of measures to prevent money-laundering and counter-terrorist financing along with its failure to strengthen anti-corruption legislation also factor into the CBI's challenges. Because of the country's lack of action to move forward on these issues, it was removed from the Financial Action Task Force (FATF), which was created in 1989 as a way for member nations to work together to combat these global problems. Consultations between Iraq and the IMF covered issues like the framework for its fiscal policy as well as the need for laws surrounding anti-corruption and cooperations between different government agencies. As such, Iraq was not brought back into the FATF but remains the subject of monitoring.