As the military actions for Iraq concluded, a new fight began over the best way to rebuild the Iraqi financial sector. On the one side are those who consider that, by establishing appropriate institutions and rules, the Iraqis will be able to rebuild their own financial sector without an extended period of outside oversight and massive financial help. Another side sees the need of considerable infusions of foreign assistance and technical support over an comprehensive period of time. While differing to some extent on ends and means, no doubt all sides would be in agreement that any recovery of the Iraqi financial institutions will entail successfully addressing a intimidating set of tasks: - Repairing a neglected and wrecked banking system that now has at least three currencies in circulation: "Saad am" dinars, "Swiss" dinars," and now U. S. dollars.
- Beginning restructuring and servicing of the country's massive national debt. - Resurrecting a whole range of decrepit industries. - Propelling an financial system based largely on cash, barter and international support into the 21 st century. - Diversifying an financial system that currently depends upon a single commodity, oil.
- Replacing splice and corruption with a streamlined administration that can collect taxes and enforce contracts. - Commencing privatizing of unproductive public enterprises. Although forging the country's financial recovery will be a intimidating task, a number of lessons are clear from the experiences of former-Soviet-block states, as well as the improvement programs of many of the formerly inward-oriented Latin American financial systems. Over the last twenty years, more than a dozen countries, ranging from Poland to Chile, have gone through a change from stagnant socialist to vibrant free-market self-governing economies. Although each of these countries is exclusive in many regards, there are enough similarities to offer a rough considerate of what works and what doesn't. Topmost is the establishment of the rule of law, an honest court system, and safety of private property.
Those formerly communist countries that continued to have a dishonest and uncertain judicial system have had poor financial performance despite considerable economic reform. If private property rights are not sheltered, few will put in (Economist, "Rebuilding Iraq" April 17, 2003). Another trouble area is the country's whole financial system. Baghdad's financial area is a mass of burned-out buildings, blown-out vaults, and broken glass. All nine floors of the Iraqi Central Bank have been destroyed entirely. Twenty years ago, Iraq's financial system was one of the region's most developed; its pool of well-educated technocrats helped other Middle Eastern states, such as Jordan, found their central banks.
Unluckily, the system was run into the ground by Saddam Hussein. Under Hussein, the Bank lost its self-governing power to regulate interest rates and exchange rates. Before the hostilities, there were a small number of private banks, but the system was ruled by four state-run lenders. Baath Party loyalists received special loans from these banks. However, few Iraqis had bank deposits because of fear of attack (Greimel, 2003).
In short, an entire new financial system will have to be formed as part of the early rebuilding effort. A country of Iraq's financial system size will finally grow to the point where a more flexible system would give a better tool for financial management of the home economy. Still, the board would provide the Iraqi establishment with some breathing space until a new central bank had gathered the knowledge and expertise to set up a more flexible, complex exchange rate system. At that point the country could go to a fixed exchange rate, linking the Iraqi dinar to the dollar / euro or pound.
To keep away from possible Dutch Disease effects and overvaluation of the dinar (Ebrahim-Za deh, 2003), the country should at the same time have a fiscal policy built around an oil stabilization account (Barnett and Ossowski, 2003). In turn, the fund would be intended to smooth out as much as possible fluctuations in oil revenues. Over time, successful organization of the fund could contribute to the constancy of the exchange rate and thus the country's conclusion of the reconstruction and reform of its financial system. Bibliography: "Rebuilding Iraq" The Economist April 17, 2003 Barnett, Steven, and Rolando Ossowski, "What Goes Up Why Oil Producing States Must Husband their Resources" Finance & Development March 2003.
Ebrahim-zadej. Christine "Dutch Disease: Too Much Wealth Managed Unwisely" Finance & Development, March 2003. Greimel, Hans, "Iraq's Dire Banking Blues: With the Country's Entire Financial System in Tatters, a New Central Bank is Seen as a Top Priority" Ottawa Citizen (April 22, 2003). Warner, Jeremy, "Iraq's Dollar ization" The Independent (London), April 18, 2003.