Reforming Iraq’s Financial System: A Conversation with the Governor of the Central Bank
- Ali Al-Allaq, Governor of Central Bank of Iraq
- Sinan Mahmoud, Journalists, The National (Moderator)
In this MERI policy debate, between Mr Ali al-Allaq, Governor of the Central Bank of Iraq (CBI), journalist Sanan Mahmoud, the spotlight was placed on Iraq’s financial future and the prospect of structural reforms. The conversation offered a comprehensive overview of the challenges, milestones, and ambitions surrounding Iraq’s monetary policy, fiscal stability, and institutional modernization. In doing so, it shed light not only on technical reforms but also on the evolving philosophy of economic governance in a state historically shaped by volatility, oil dependency, and bureaucratic inertia.
The moderator opened by acknowledging the symbolic and practical importance of such forums, where high-ranking officials are invited to clarify policy direction in an open setting. He highlighted the high expectations that followed 2003, as Iraq emerged from decades of sanctions, war, and mismanagement. There was widespread hope that the Central Bank and Iraq’s financial institutions would spearhead a transformation, one rooted in modern banking laws, institutional independence, and integration with global standards. However, as the political and security situation deteriorated, those hopes were gradually eclipsed. Economic development plans were postponed, the private sector remained stunted, and the state’s reliance on oil became entrenched.
Against this background, the CBI’s role narrowed, becoming largely synonymous in the public eye with the daily foreign currency auctions, a mechanism fraught with controversy. Yet, since Prime Minister Mohammed Shia al-Sudani came to power in late 2022, a new reform narrative has emerged, prioritizing financial and economic overhaul. In this context, the Central Bank was tasked with playing an instrumental role in restoring macroeconomic balance and institutional credibility.
Rebuilding from Crisis: Achievements and Institutional Foundations
Governor Ali al-Allaq began his intervention by cautioning against reducing the Central Bank’s role to its involvement in the currency auction window. Instead, he emphasized that the Bank is a cornerstone of Iraq’s financial and economic stability, tasked not only with monetary policy but with developing the broader financial infrastructure. He traced the Bank’s institutional arc from the post-2003 period, recalling that Iraq’s foreign currency reserves at the time stood at just $900 million, all of which had been seized and removed by regime officials in the final days before the fall of Baghdad. With little more than 4 trillion Iraqi dinars in circulation, Iraq’s monetary base was fragile and dangerously exposed to inflationary shocks.
In contrast, today’s monetary landscape has changed dramatically. Al-Allaq reported that Iraq now has over 100 trillion dinars in circulation and foreign currency reserves exceeding $100 billion. He underscored the significance of this shift, noting that inflation, once in the triple digits, now stands at a modest 3.8%, a figure regarded as globally healthy. He pointed to the current reserve coverage ratio of 140% relative to currency issued, well above international standards, as evidence of a stable and well-managed monetary framework.
Yet, the expansion of the monetary base posed a constant challenge. Managing the exponential increase in money supply without triggering inflation has required deliberate, disciplined intervention. Al-Allaq framed the CBI’s core responsibility as preserving purchasing power, noting that excessive liquidity or contraction can both produce severe distortions. The success of the CBI, he argued, lies in its ability to moderate these extremes.
Digital Transition, Sector Reform, and Institutional Modernization
The Governor identified three core dimensions of the CBI’s current reform agenda: monetary stability, sector modernization, and institutional reform. A key area of progress has been the transition toward a digital payments’ ecosystem. The Central Bank has licensed 16 electronic payment companies, supported the development of digital wallets, and is preparing to launch a national payments company that will handle the country’s electronic transactions infrastructure. In parallel, the Bank is now licensing Iraq’s first fully digital banks, marking a foundational shift toward a more modern, accessible banking system.
The digital transition, however, is only one pillar. Al-Allaq also described two concurrent reform plans aimed at overhauling both state-owned and private banks. Contracts with international consulting firms are currently in place, and the implementation of these plans is expected to begin in earnest in the coming year. Reforms will focus on governance, transparency, capital adequacy, and restructuring ownership models, all benchmarked against international standards.
Perhaps most noteworthy is Iraq’s movement toward developmental central banking. In line with a growing global trend, the CBI is now engaged in direct economic stimulation. Through a portfolio of subsidized lending programs, the Bank has disbursed over 13 trillion dinars in loans, primarily in housing, construction, and industrial investment. In addition, a new development bank, Masraf al-Riyada, is being established to specialize in financing small and micro-enterprises. Al-Allaq described this move as a recognition that economic recovery and employment generation in Iraq depend on empowering local entrepreneurs and diversifying sources of growth.
Monetary Policy Adjustments: Interest Rates and Inflation Control
Turning to monetary policy, the Governor provided a detailed explanation of the recent decision to lower the CBI’s benchmark interest rate from 7.5% to 5.5%. The move was driven by the need to calibrate monetary tightening in response to inflation trends. In 2023, Iraq experienced a spike in inflation to 7.5%, prompted in part by an unprecedented surge in money supply, from 46 trillion dinars in 2020 to over 100 trillion by the end of 2022. The CBI raised interest rates to absorb excess liquidity, successfully stabilizing monetary expansion over a 12-month period. Now that inflation has receded and growth remains a priority, the Bank judged it appropriate to reduce rates, easing the cost of capital while still maintaining monetary discipline.
Al-Allaq stressed that interest rate policy is dynamic and will be continually reviewed in light of inflationary signals. Like central banks worldwide, the CBI will not commit to fixed schedules but will adjust tools responsively. He reiterated that while exchange rates often capture public attention, it is inflation management that truly reflects central bank performance and its impact on household welfare.
Fiscal Risks, Public Debt, and Budget Strategy
In response to questions about public debt, the Governor acknowledged that domestic debt now exceeds 70 trillion dinars and could reach 80 trillion by year’s end. He cautioned that this trajectory is not sustainable, attributing it directly to structural imbalances in Iraq’s public finances, namely, chronic deficits driven by rigid and escalating expenditure, particularly on public sector wages, with insufficient growth in non-oil revenues.
He called for a shift in focus from managing outcomes (i.e., debt levels) to addressing root causes: the persistent mismatch between revenue and spending, the narrow tax base, and the vulnerability of the budget to oil price volatility. Without expanding Iraq’s productive base, especially in agriculture, industry, and services, fiscal space will continue to contract, and investment will remain the first casualty in times of downturn. Al-Allaq emphasized the need for a modernized revenue system, tighter expenditure controls, and medium-term fiscal planning to correct these imbalances.
In this context, he assessed the recent move to adopt a three-year federal budget as a potentially stabilizing step. While implementation delays have affected credibility, the multi-year format allows for improved expenditure planning and greater policy continuity. However, success will depend on the accuracy of underlying data, particularly financial flows, commitments, and oil price estimates. Al-Allaq reiterated the need for a modern financial data system, capable of supporting credible forecasting and risk assessment.
Currency Exchange Reform and the Decommissioning of the Platform
The panel closed with a question about the upcoming transition away from the CBI’s currency platform, which had historically played a central role in foreign currency sales. Al-Allaq responded with reassurance, noting that the transition is already 95% complete. Iraqi banks have now established direct correspondent relationships with international banks, replacing the need for centralized auction mechanisms. He described this as a modernization milestone, one that will ultimately make foreign exchange operations faster, more transparent, and more responsive to global standards.
Conclusion and Forward Outlook
This panel offered a rare, coherent, and deeply informed window into Iraq’s evolving financial governance. Governor Ali al-Allaq’s interventions underscored the Central Bank’s growing institutional maturity and its increasingly strategic role in national economic planning. From inflation control and digital transformation to bank restructuring and developmental lending, the CBI is positioning itself as a key architect of Iraq’s economic rebalancing.
At the same time, structural vulnerabilities persist. Iraq’s narrow revenue base, rigid expenditure profile, and dependence on oil continue to place ceilings on reform. Yet the session made clear that serious efforts are under way to shift course. In Al-Allaq’s words and in the policies, he described, there was a consistent message: stability must be built on sound institutions, and reform must extend beyond slogans to systemic, data-driven transformation.
MERI Forum 2024
Reforming Iraq’s Financial System: The role of the Central Bank