Reforming Iraq’s Financial System: The Role of the Government and the Private Sector

Reforming Iraq’s Financial System: The Role of the Government and the Private Sector

Summary Report & Session Video

  • Jamal Kocher, Member of the Finance Committee, CoR, Iraq
  • Mohammed Al-Handhal, Iraqi Private Banks League
  • Shwan Ibrahim Taha, CEO, Rabee Securities, Iraq
  • Ava Nadir, Iraqi Communication and Media Commission (Moderator)

This panel of MERI Forum 2022, debated the role of both the government and private sector in the reform of the Iraqi financial sector. Ava Nader, from the Iraqi Communications and Media Commission, moderated the session and noted that the ongoing instability, popular protests and security challenges in Iraq are closely linked to the ongoing financial and economic crises that the country has been suffering from for decades(click here for video of the session in full). Policy and decision makers in Iraq need to address structural weaknesses that hinder the economic system. She pointed out that international studies, including those conducted by the World Bank, identified these weaknesses and provided roadmaps for the recovery of the Iraqi economy. All underscore the urgent need for radical reform from the bottom up. However, despite all these efforts and support from international institutions, there are real barriers for progress in the financial and private sectors and the economic sector in general.

Mohammed Al-Handal, from the Iraqi Private Banks League, offered an assessment of the economic situation in general, and the financial and banking situation in Iraq in particular, and pointed to the latest report of the International Monetory Fund, which indicates a growth rate of 9.3% in the Iraqi economy, which is considered the top in the Arab World. This is positive indicator for reforming the Iraqi economy, but it is due to the rise in oil prices. He wondered whether the Iraqi public sector could cover its expenditures, given that the salaries of employees and the operating budget take more than 50% of Iraq’s budget. The answer is yes, if there are real reforms and plans to activate the role of young people and urge them to open their own projects and not rely on the government for appointment. With regard to the financial system, Al-Handal explained that the Central Bank of Iraq has taken important steps in the past years to build a stable, strong and sound financial system because of its very large role in achieving financial and economic stability.

The programme adopted by the Central Bank of Iraq and applied by Iraqi private banks is focused on working under a sound legislative, regulatory and legal umbrella. This is in addition to the dissemination of governance concepts and international standards in relation to the subject of information technology and administrative enhancements.

Al-Handal pointed out that the Iraqi banking sector faces great challenges: “One of the first priorities of the Central Bank and private banks was to have a strong and modern infrastructure.” There was a technical gap in the information revolution. One of the first priorities was for the bank to have a strong financial and economic technical system that can be transformed into electronic systems and prepare cadres to use these technologies.” Another question raised was the difficulty of financial inclusion in a country where cash is hoarded at home. In his opinion, banks should shift from traditional paper work to electronic payment methods. Today, Iraqi banks cannot be present throughout the country if there are tools to spread electronic culture. This helps in the application of global standards related to anti-money laundering because banks today have communication with foreign banks. Finally, Mr. Al-Handal pointed out the importance of the role of social security for the private sector. The government should amend the Social Security Law so that young people do not resort to the public sector despite low salaries, but rather gravitate towards the private sector, which provides more income with a pension.

Jamal Kocher, a member of the Finance Committee in the current Iraqi Council of Representatives, stressed the role of the Council of Representatives as a supervisory authority in light of all these challenges in Iraq, “but if we debate the oversight role in the Iraqi state, we say frankly, unfortunately, that there is no significant role, for a number of reasons.” Among these reasons: the absence of the opposition and the effective supervisory role due to the formation of governments on the sectarian based quotas (Muhasasa), and the allocation of ministries among political blocs without a clear separation of powers and in the absence of the rule of law. Under quotas, each minister has a political and parliamentary bloc that defends him instead of defending the monitary institution. Then the mechanisms of financial control management are still paper-based, not electronic, and date back to the fifties of the last century.

Kocher commented that the multiplicity of mechanisms to detect corruption, such as the large number of committees, the complexity of these committees and the overlap of their powers, constitute another obstacle to the weakness of the oversight role of the competent institutions. Kocher believed that we must start with real reform by joining hands between the main institutions: the judiciary, the executive branch, and the monitory apparatus with the bodies responsible for following up on corruption files. Now, the system as a whole, including the government and Parliament, lacks “a clear or specific vision among the political blocs represented by the Parliament on Iraqi fiscal policy. When the economic direction of the country is not clear, the compass of the economy is not clear, so reforms are complex and difficult”

Regarding the change of legislation to support the private sector and free it from the authority of the government or parties, Jamal Koger stressed that if there is a tendency for the government to pay attention to the private sector and give a large space to the investment budget in the public budget, there will be a recovery of the private sector.  We need to reformulate the structure of the Ministry of Finance in particular، and the Iraqi economy in general، so that it is free and has a clear direction. Kocher suggested that there be a special seat for those who represent the private sector in the cabinet.

On the issue of the private sector’s engagement with government institutions, Shawan Ibrahim Taha, founder and chairman of Rabie Securities, commented that engagment is unhealthy and does not inspire optimism. “The title of the forum is Iraq working for everyone, but my address is simply Iraq that doesn’t work.  It could mean that structurally Iraq does not function as a state. Iraq politically does not work, Iraq economically does not work, or simply, the people of Iraq do not work.” Referring to the role of the Iraqi economy, he said, “Let’s look beyond 2003. We have done everything we can as a government to keep the private sector small and uncompetitive. All the countries around us have changed their strategies in the last twenty years to encourage private enterprise, encourage foreign investment, and truly encourage young people.”

Shwan Taha referred to Winston Churchill’s quote after World War II when he said: ” Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon.”  “The new government will not be able to save Iraq. Young people, entrepreneurs, that generation, not mine, will save Iraq. But please let them work.” Regarding the laws and legislation that Iraq needs to attract foreign investments and revive internal investments, Taha pointed out, “All investment laws exist. The problem is in their application.” The law does not allow foreign investors to own more than 49% of Iraqi companies. We now cannot attract foreign investment. If this ratio changes, it will encourage inward investment.

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