Iraq: Monetary Policy Challenges and Monetary Stability Opportunities


Monetary Policy Challenges and Monetary Stability Opportunities (analytical study)

Articles  Samir Al-Nusairi*  an introduction

Monetary policy applications face great challenges for many reasons related to the effects and repercussions of the economic reality that Iraq has experienced since 2003 and is still going on and during the previous years and since the issuance of the Central Bank Law No.

To achieve monetary stability, especially during the economic, financial and security crises that Iraq experienced due to the instability of oil prices, which is the main resource for the general budget, the outbreak of the Corona pandemic and the war on terrorism, and the Central Bank is still making clear efforts on this path.

The central bank during its course of the previous years and is still continuing in the same pace and approach to achieve the goal of monetary stability. I reviewed the Central Bank’s procedures since the issuance of a law in 2004 and reviewed some of the selected studies and research that it previously issued and documented its procedures, policies and programs in the applications of monetary policy and linking all of this to the economic reality through coexistence, follow-up and monitoring.

The Central Bank of Iraq .. Jobs and the path of achievements (1)

The Central Bank of Iraq is a solid, sovereign, economic and financial institution founded in 1947 of the last century. It is specialized in drawing up the paths and policies of monetary policy applications, supervision and control of the banking sector, and is considered the financial advisor to the government.

And the Central Bank of Iraq had a key role in managing the economic process in Iraq after the change in 2003 according to its new law 56 of 2004 and through its management of monetary policy and the achievement of its objectives. Building the introductions to the transition from the philosophy and strategies of the central economic system in managing the economy to the philosophy, strategies and mechanisms of a market economy.


Achievement Walk (1)

However, the Central Bank of Iraq and the banking sector have taken great development steps towards moving from banking activity to real and developmental activity, especially during recent years. Since the issuance of laws regulating banking work in 2004, great achievements have been made in the field of:

* Reducing the hyperinflation that Iraq was suffering from and bringing it to good rates, amounting to less than 2 percent, as indicated by data and financial indicators..

* And that the Central Bank of Iraq was able to maintain for several years the exchange rate of the Iraqi dinar against the US dollar in a balanced manner, despite the fluctuation and variation upwards And down according to the difficult economic conditions and the financial and economic crises due to the drop in oil prices, the war on terrorism and the speculations that occur in the markets.

* Issuing instructions, controls, memoranda, and regulatory and guiding regulations that are consistent with international standards and requirements of compliance regulations and rules, combating money laundering and terrorist financing, and issuing a law regulating this in 2015 and liquidating 700 notes diagnosed by the Financial Action Group (FATF), which moved Iraq from the gray area to the regular follow-up Every two years

* Controlling the violations that occur by reviewing, evaluating and classifying banks for the purposes of comprehensive evaluation according to the (camels) system and for the purposes of the foreign currency sale window, with the aim of controlling the movement of foreign currency and limiting its disposal other than the specific economic goals of monetary policy applications.

As dealing with the sale of foreign currency is one of the largest open market operations in controlling the levels of local liquidity and putting the cash surplus in its proper tracks, which is a good economic indicator that the exchange rate will be stable despite the difficult economic conditions that Iraq went through after 2014.


* The Central Bank of Iraq was able to maintain a good foreign cash reserve despite the conditions of economic stagnation, yet it formed a safe cover for the Iraqi dinar and to cover trade within a period of more than six months, which is an internationally approved standard rate.

* He clearly contributed to covering the deficit in public budgets according to what was planned by re-discounting treasury bonds issued by the Ministry of Finance and issuing international treasury bonds, in addition to the praise of the Bank and the International Monetary Fund for the economic and financial reform programs adopted by the Central Bank in accordance with its five-year strategy.

* Forming a joint committee between it and the finance department to coordinate between the fiscal and monetary policies, and many coordination measures were achieved because of this. In Baghdad and abroad, it is well in line with oil prices and developments on the local and regional arena.

* The calculated and bold economic and financial measures carried out by the Central Bank and its successful experience in providing continuous support to the Iraqi economy, in addition to its initiative to revitalize the economic cycle, launch and follow-up the implementation of its multiple initiatives to finance small, medium, housing and investment projects in the housing, agriculture, industry and services sectors, support banks’ liquidity and achieve two economic and social goals at the same time .

* Taking other important measures by establishing the Deposit Insurance Company, which began its tasks for the purpose of restoring confidence in the banking sector and increasing the savings rate for the monetary mass in banks at the expense of the hoarding ratio.

* All of this was accompanied by structural and structural developmental developments in all the specialized and qualitative departments of the bank, focusing on total quality management, institutional development, adoption of international standards, risk management, banking awareness, technical developments in payment systems, electronic payment and information technology, which contributed to the transition of the Central Bank’s work policies and procedures to an advanced stage on the Steps to achieve monetary stability.

Therefore, the Central Bank of Iraq is responsible for the monetary policy in Iraq and its applications, and for the developmental role that it must play as a solid sovereign institution in formulating and implementing monetary policy in conditions of intertwined plans and policies. But then monetary policy had clear features, directions, and strategies.

The functions of the Central Bank of Iraq are to achieve the above objectives as follows:

First – Formulation and implementation of monetary policy, including the exchange rate policy.

Maintaining and managing all foreign reserves.


Secondly, managing the government’s gold reserves.

Third – Issuing and managing the Iraqi currency.

Fourth – Monitor and enhance the safety and efficiency of payment systems.

Fifth – Issuing licenses or licenses for banks, regulating and controlling banks as specified in Banking Law No. 94 of 2004.

Monetary Policy Tools

The most important monetary policy tools that have been achieved during the past years can be identified as follows:

First: The Relative Stability Of The Exchange Rate Rates

The current structure of exchange rate stability, despite the rise and fall to the current rates several times during the past three years, has given the Iraqi economy an opportunity to rebuild and grow its relative, although prices have not fully stabilized, and the matter is partly due to instability The nature of the security and political conditions, the drop in global oil prices, and the weakness of economic planning.

Second: Tight Monetary Policy

The strict monetary policy adopted by the Central Bank of Iraq within the framework of its strategy aimed at achieving the goal of stability, and its release of freedom of external transfer according to the principles and controls that have been modified several times, but the monetary trading market has not been fully controlled due to speculation in the parallel market and the weakness of The mechanisms and policies adopted in activating and stimulating the macro economy and the loss of coordination between the relevant economic circles and agencies.


Third: Reducing The Inflationary Phenomenon

The gradual decline in the inflationary phenomenon reflects the positive effects of the policy of the Central Bank of Iraq in strengthening the exchange rate of the Iraqi dinar, which has had strong effects on the stability of the prices of exchangeable goods, as this policy led to a reduction in annual inflation rates during the years 2018-2019.

It requires the Central Bank of Iraq to adopt a policy aimed at reducing inflation and addressing its trends and causes after changing the new exchange rate for subjective and objective reasons, which were embodied in its new measures and initiatives to revitalize the economic cycle and stimulate the economy, although the other concerned sectors and ministries did not show cooperation and coordination with the Central Bank in implementing what was done.

Agreement on it before changing the exchange rate, which was clearly indicated by the Central Bank statement in December / 2020, which announced the new exchange rate for the dinar to the Ministry of Finance, banks and the public (attached to the study). In a manner that provides broader monetary stability in a way that accelerates the balance and stability of the financial market and overall stability in the country.

Fourth: Controlling And Managing Liquidity Levels.

Based on the rules of economic stability, monetary policy works by analyzing the money supply in its narrow and broad sense, the situation of liquidity, and determining the money supply and its components in the broad concept (cash liquidity). Hence, the lack of control over the liquidity rates at their minimum and upper limits and within the criteria specified by the Central Bank of Iraq.

Fifth: Stimulating Banks To Head Towards The Market.

In implementation of the approved monetary policy and in a manner that serves to expand the scope of credit and achieve the goals of economic development, the bank has used this tool with the intention of controlling the cash liquidity through the banks’ orientation towards the market and contributing to achieving economic stability by granting cash credit to finance the economic sectors in agriculture, industry, services, trade and housing, but the conditions of Iraq’s economic, security and political failure to give a key role to the private banking sector has led to the weakness of the private sector’s leadership in the market.

Monetary Policy, Monetary Stability, Independence And Foreign Currency Window

Monetary policy was and still constitutes a fundamental theme in the economic process in the country. It is a reflection of the state’s general performance and the extent of its seriousness in avoiding difficulties, dilemmas and crises and making it consistent with the set goals.


In light of the economic changes after 2003, the need arose for radical reform of the Central Bank and a new law was issued, which confirmed its independence and established its primary role in protecting the country’s resources.

His tasks were identified as facing money laundering and attempts to finance terrorism, which stand at the forefront of the challenges facing the Central Bank of Iraq. Also, ensuring the safety of monetary operations through the foreign currency sale window is also essential to the bank’s performance and to establish the principles and rules of legitimate dealing in a sound atmosphere of control and supervision.

As well as maintaining the independence of the bank and enabling it to perform its mission without government interference and making it an effective institution and a guarantor of the interests of society as a whole. In addition to its control over the stability of the exchange rate and the management of the money supply.

The process of selling foreign currency needs a deep understanding in light of the major accusations against the bank without evidence to prove the existence of suspicions of corruption, money laundering or currency smuggling. And the proposition that says that selling currency is a waste of public money, this description is not relevant to economic science and that there are many countries practicing this process and it is one of the main functions of central banks in the world.

The Central Bank of Iraq exercises multi-dimensional functions. It is concerned with financial stability, managing the payments system, managing foreign reserves, licensing and monitoring banks and financial institutions, and setting preventive controls, in addition to other tasks related to cash issuance and dissemination of data, indicators and economic forecasts.

Among the main tasks carried out by the Central Bank is the management of monetary policy, which aims to control inflation, stimulate the economy, make full use of it, balance the balance of payments and achieve monetary stability.

The achievement of monetary policy goals depends mainly on the independence of the central bank, and the independence here is in the ability of the central bank to control and control the size of the monetary mass, and despite what is stipulated in the laws of central banks in most countries of the world, this independence from a realistic and practical point of view is subject to other influences and challenges , to varying degrees affect that independence.

Monetary stability represents the starting point towards economic stability, and this requires monetary stability, which is the ability of the monetary authority to achieve price stability at target levels.

Challenges and Opportunities (2)

Monetary Policy Faces (Many Challenges, The Most Important Of Which Are:


First – the rentier economy, which leads to rentier behavior, in which resources are wasted through consumer spending, waste, slack, inefficiency and an increase in rentier spending with the inflexibility and lack of diversity of the local production system, import increases, import increases, and foreign currency conversion into dinars increases in favor of The government by the central bank, which constitutes amplifying pressure and pressure on the balance of payments

Second – Fiscal Policy:

The nature of public revenues (dollars at 95%) and it constitutes the monetary basis of the Central Bank, and government spending is the determinant of the expansion of the money supply, and here the phenomenon emerges Which represents a challenge to monetary policy, including:

1- Covering local expenditures from local revenues does not exceed 5%, which leads to the replacement of the foreign currency (derived from oil revenues) with the local currency (the dinar) through the Central Bank, which affects the money supply broadly.

2- It weakens the flexibility of expenditures and revenues, which are often governed by wills and political influences that cause expenditures that are difficult to reduce, such as salaries, subsidies, and others. Instead of adjusting expenditures according to revenues or increasing non-oil revenues.

3- Government spending did not aim to expand local production capacities, create conditions and support the private sector, and there was no increase in the productivity of public sector companies. Rather, they continued to receive public budget support despite their large and accumulated losses.

Third: Financing The Public Budget Deficit:

The deficit in the state’s general budget represents the biggest challenge to monetary policy, and it is inversely proportional to the independence of the Central Bank when this deficit is financed by the bank’s purchase of treasury transfers.

The Central Bank has deducted treasury transfers during the period from the end of 2015, until the present time, for the purpose of paying salaries and dues to contractors and farmers.

Fourth – The Phenomenon Of Dealing With Cash:


The monetary mass that is circulated outside the banking sector and its channels represents a large amount exceeding 65 trillion dinars.

Fifthly – The Weakness Of The Financial Depth.

The financial markets (stock and bond markets, capital markets, money markets) are limited, which misses the opportunities for employing local savings, reducing the phenomenon of hoarding and withdrawing liquidity to be used in real sectors.

Sixth – Weakness Of The Banking System:

The banking system represents a cornerstone of the economy and the main link in it and an important arm of the central bank in achieving monetary stability and an important factor in helping to manage the monetary mass through the tools of the central bank that it performs through the banking system through interest rates and mandatory reserves

Buying and selling securities and the exchange rate market.. However, this sector suffers from many challenges, including:

1- Limited banking products and services qualitatively and geographically.

2- The dominance of government banks over the sector by more than 80%.

3- Bad debts and credit concentration.

4- Weak institutional governance.


5- Receiving financial shocks due to the decrease in the real sector activity and the failure of the government to pay the dues of contractors, suppliers and others.

Seventh – Decrease In Domestic Investment And Increase In Foreign Savings:

Due to the security, political, legislative and regulatory environment conditions, a large proportion of savings go to investment outside Iraq, and with the weakness of foreign currency imports from export sources, all of this leads to the central bank becoming the party that monopolizes the currency supply. The foreign exchange market is completely ie, it is de facto the only source that covers the demand for foreign currency.

Eighth – Weak Coordination Between Fiscal And Monetary Policy:

The fiscal and monetary policies constitute the pillars of economic policy, and since fiscal policy plays an important role in managing public expenditures and revenues, which directly affect GDP, money supply, aggregate demand and employment, coordination between it and monetary policy is important without it. Monetary policy is receiving great pressures and challenges, and with the absence of this coordination, monetary policy has been a continuous source of waves of increasing spending, weak domestic revenues and weak investment spending.

* Financial advisor and banker of


(1) Al-Nusairi Samir, the Central Bank of Iraq in the face of the challenges of the economic and financial crisis (2015-2017)

(2) Selected studies and research issued by the Central Bank and published on its website.

Views 45 Date Added 08/21/2021

Source: Dinar Recaps


If you wish to contact the author of any reader submitted guest post, you can give us an email at and we’ll forward your request to the author.

All articles, videos, and images posted on Dinar Chronicles were submitted by readers and/or handpicked by the site itself for informational and/or entertainment purposes.

Dinar Chronicles is not a registered investment adviser, broker dealer, banker or currency dealer and as such, no information on the website should be construed as investment advice. We do not support, represent or guarantee the completeness, truthfulness, accuracy, or reliability of any content or communications posted on this site. Information posted on this site may or may not be fictitious. We do not intend to and are not providing financial, legal, tax, political or any other advice to readers of this website.

Copyright © 2022 Dinar Chronicles



Please enter your comment!
Please enter your name here