Since the Iraqi dinar is low right now, many investors have purchased significant amounts of it, eagerly awaiting the day when it revalues so that their currency will be worth more. The Central Bank of Iraq’s revalue of the Iraq currency is based on efforts to revise the country’s monetary policy and supervise its financial system.
Let’s take a closer look at what impact the Central Bank of Iraq (CBI) has on the Iraqi dinar and what the bank’s next moves might be.
10 WAYS THE CENTRAL BANK OF IRAQ AFFECTS DINAR REVALUATION
- Establishes Price Stability, Arrests Inflation, and Strengthens Iraq’s Currency
- Stabilizes the Dinars Exchange Rate
- Audits Banking Reserves to Correct IMF’s Estimates
- Aligns with Best International Banking Practices
- Reduces Systemic Banking Risks
- Protects the Banking System from Credit Risk
- Strengthens the Governance of the Banking Sector
- Reduces Customer Risk with Financial Transactions
- Guarantees Deposits
- Rebuilds the Financial Markets
In 2003, Saddam Hussein’s regime collapsed after the United States-led coalition invasion. One of the first things that needed to be addressed in the reconstruction of Iraq was the establishment of a central bank.
The Central Bank of Iraq, the country’s independent central bank, was established on March 6, 2004, with a capital of 100 billion dinars. The bank’s entire capital stock was legally mandated to be held by the state. The head office was established in Baghdad and branch offices in Basrah, Mosul, Erbil, and Sulaimaniyah.
In order to appreciate what role Iraq’s Central Bank plays in the revaluation of the Iraqi dinar, we need to understand its purpose and functions. The primary purpose of the CBI is to ensure sustainable economic growth by stabilizing domestic prices and ensure a free-market based financial system.
The Central Bank of Iraq works to meet these national goals through the following primary functions:
- Creates and implements Iraq’s monetary policy
- Determines Iraq’s exchange rate policy
- Manages and holds Iraq’s gold reserves
- Holds Iraq’s foreign exchange reserves
- Issues the Iraqi dinar (IQD), which is the country’s national currency
- Oversees Iraq’s payment system, working to establish an efficient system of payments
- Regulates the banking sector, issuing licenses to banks and supervising them based on banking laws
Since the revaluation of the Iraq dinar (IQD) is based on the country’s financial stability, here are 10 structural measures that the CBI has taken to stabilize the Iraqi currency so that revaluation is a realistic possibility.
HOW THE CENTRAL BANK OF IRAQ AFFECTS DINAR REVALUATION
1. Establishes Price Stability, Arrests Inflation, and Strengthens Iraq’s Currency
The CBI works to encourage private banks to assist the market by providing banking finance to corporations that may reduce unemployment and economic stagnation. Price signals alert the Central Bank when there are signs of inflation. The goal is to create a structure which promotes economic growth.
These measures have proved so successful that inflation is now below 2%, which is the lowest it has been in years. As a result, prices have stabilized. What makes this achievement even more impressive is that these gains were made under the most trying political, social, and economic circumstances.
2. Stabilizes the Dinar Exchange Rate
The Central Bank of Iraq stabilizes the exchange rate to stimulate economic growth in the country’s various industrial sectors. This success in monetary policy resulted in a measurable increase in national income, improved the growth of the gross domestic product (GDP), furthered industrial production, and enhanced the flow of money into the market. Investment rates increased after unstable sectors achieved economic stability.
The dinar exchange rate remained fixed even when there was a noticeable decline in revenue from oil sources. The official exchange rate and the global market did not show any gaps.
3. Audits Banking Reserves to Correct IMF’s Estimates
Iraq’s Central Bank takes steps to correct any discrepancies between the estimated reserves and the CBI’s actual reserves compared to International Monetary Fund (IMF) financial records. Besides setting good accounting standards, auditing is necessary to control the sale of the dollar, sustain the exchange rate, and comply with regulations that restricted loopholes to finance terrorists and launder money.
To keep everything above board, an international auditing firm was hired. It turned out that the IMF estimates were conservative, and Iraq’s actual reserves were far larger. At the end of 2015, the IMF estimated that the reserves were 40 billion dollars, but the actual reserves turned out to be 53.7 billion dollars. At the end of 2016, the IMF estimated that the reserves were 29 billion dollars, but the actual reserves turned out to be 45.3 billion dollars. And at the end of 2016, the IMF estimated that the reserves were 20.6 billion dollars, but the actual reserves turned out to be 46.5 billion dollars.
4. Aligns with Best International Banking Practices
The Central Bank of Iraq works to improve the performance of the banking sector. From 2015 to 2016 it expanded its services, bearing financial intermediation risks and implementing a settlement operation for payments. In other words, the CBI takes active steps to improve communication between banks, improve the banking environment, and improve a wide range of policies, functions, duties, and systems considered necessary for monetary and economic stability. In fact, the Financial Action Organization (FATF), an international organization, praised and supported these new regulations and procedures to strengthen the efficacy of the banking system in Iraq.
5. Reduces Systemic Banking Risks
The Iraqi Central Bank works to reduce the threat of systemic risk, creating support for early warning systems in the event of a sudden financial crisis. Mathematical models were adopted to overhaul any weaknesses in the financial system. Today, stress tests are periodically implemented to establish financial stability and to manage risk.
6. Protects the Banking System from Credit Risk
Since the Central Bank of Iraq currency must be protected, an integrated database was created to allow all banks to make sound loan decisions. The CBI took the necessary steps to create an infrastructure for banks to inquire about a borrower’s ability to pay back loans. The credit risk system is based on a financial supervision model created by the Basel Committee, a model that identified the best practices necessary to maintain international banking standards.
7. Strengthens the Governance of the Banking Sector
Corporate governance in any banking system is based on concepts, principles, and rules of sound governance. The Iraqi Central Bank takes steps to protect shareholders, establishing clear guidelines to ensure control, transparency, and disclosure. It is also necessary to enforce a clear separation between the ownership of a private bank and the management of its banking affairs.
8. Reduces Customer Risk with Financial Transactions
Naturally, the banking system only works if customers are guaranteed all financial transactions go smoothly. To ensure safety for all customers, the Iraqi Central Bank has developed a comprehensive framework of policies to regulate, supervise, and legislate all financial transactions.
9. Guarantees Deposits
The Central Bank of Iraq has passed regulatory and legal measures aimed to guarantee customers that their deposits will be safe. This move by the Central Bank to win back public confidence attracted public funds and a greatly renewed faith in Iraq’s banking system.
10. Rebuilds the Financial Markets
CBI Iraq officials work tirelessly to create more financial depth in a country mired by conflict and confusion. Central Bank of Iraq announced that they are taking the following actions to restore order out of chaos, and rebuild the financial markets in the public and in the private sector:
- Develop effective procedures for settling trades in the financial market through proper payment systems
- Implement an effective purchase and sales process for paper securities
- Guarantee the central depository and strengthen the settlement systems
- Reconcile securities trading with a transparent payment system
How the Iraqi Government and Banking System Is Working to Address Controversies and Setbacks
Iraq’s post-invasion government and Central Bank have a long list of accomplishments, although it’s not clear when exactly the Iraqi revaluation will occur. Admittedly, political controversies have caused a few setbacks. If you’re still wondering if you should buy Iraqi dinar, you have to remember that all CBI’s achievements were made in the thick of a chaotic environment.
Iraq’s economic success was hampered before the war by numerous setbacks, including looting by Saddam Hussein, by his family, and by government officials. After the invasion by the US-led coalition, beginning in 2003, Central Bank of Iraq robbery occurred in more subtle forms, primarily through terrorist funding and money laundering.
These continuous waves of crisis– from the time of Hussein’s regime to the decade of insurgents opposing the occupying forces and the new Iraqi government– have made it difficult for the CBI to effectively manage policy as quickly and as ably as it would have liked. In 2014, the country was impacted by the ISIS insurgency in various regions of the country.
Although it is quite clear who owns Central Bank of Iraq—the state—numerous entitled parties like to claim a share of its reserves. ISIS, for instance, looted about $800 million worth of Iraqi dinars from major banks– including the Trade Bank of Mosul, a primary financial institution for trade and financial transactions. Between 2014 and 2016, the country lost revenue due to declining oil prices, which depleted a significant amount of the country’s foreign reserves.
The Central Bank of Iraq money value is based on sound banking principles. The CBI has already made significant moves to make the revaluation of the dinar a reality.
It is almost impossible to determine when revaluation will occur as there are still many things to resolve when it comes to the rule of law and economic stability. Central Bank of Iraq dinars will revalue– we just don’t know when. Additionally, it is often difficult to discern what is happening behind the scenes as the Central Bank of Iraq website is slow to update investors on Central Bank of Iraq news.
All we know so far are three things:
1. The Central Bank of Iraq has taken numerous constructive moves to stabilize the Dinar currency and will continue to do so. A stable economy is necessary before there can be any talk of an Iraqi dinar revalue.
2. The Iraqi government is taking strong measures to protect monetary policy violations through money laundering and terrorism financing. Iraq’s currency board is doing all it can to end corruption both in the CBI itself and in private banks.
3. The Iraqi economy is making a rapid recovery through the reconstruction of the oil industry, as well as taking other actions to rebuild the country. All these efforts will eventually create a stronger Iraqi dinar currency.
For these three reasons, the best investment strategy is to buy and hold on to the Iraqi dinar.
Investors are buying dinars at this time because the Iraqi dinar exchange rate favors the dollar. They do their best to keep up with dinar developments but are prepared to play the long game. Investors understand that many diverse elements need to coalesce in the country itself and in the foreign exchange currency rates before a Dinar RV.
It’s important to be patient if Iraqi dinar news does not discuss an IQD RV in the near future. Central Bank of Iraq Dinar news suggests that government initiatives, monetary policies, and upticks in the Iraqi Dinar value are all moving in the right direction.