Actual financial reform in Iraq

I’ve been pretty hard on the CPA as of late, so it’s only fair to highlight an area where they played a clearly positive role. The Economist reports on the state of reform in the banking sector:

During the looting that followed the fall of Baghdad in April last year, the ten-storey headquarters of the Central Bank of Iraq (CBI) was burgled and torched before it collapsed into a pile of soot-stained rubble. Fourteen months later, the charred ruins have been cleared, and the CBI’s staff work on American-provided computers in a building nearby…. Despite the unpromising conditions, the CPA, which will be dissolved next week to make way for an interim government run by Iraqis, has made some headway. It has drawn up a framework of laws and rules for the new banking system. A law that came into effect in March established the CBI’s independence and laid down its procedures for everything from the management of foreign reserves to bank supervision. A new commercial-bank law governs the functioning of Iraq’s 17 private banks, which were legalised by Mr Hussein in the early 1990s in response to a cash crunch following UN sanctions. A huge training effort has been going on. Advisers from America’s Treasury and bank regulators have given classes on subjects ranging from the use of Microsoft Word to the basics of Basel 2, a new treaty on bank supervision. “It is a big challenge, a new way of thinking,” says one American adviser. “Banking based on risk and judgment is radically different from bank decisions based on Saddam’s say-so.” A basic currency reform was also necessary. Under Mr Hussein, there were two lots of dinars: one in the Kurdish north, another elsewhere. Because there were only two or three denominations, worth up to at most $5 or so, even basic purchases required thick wads of notes. So the CPA set to work designing a new, unified currency with several denominations. After frenzied printing in factories from Germany to Kenya, 27 Boeing 747s crammed with bank notes flew to Baghdad. Armed convoys delivered the cash to 240 bank branches across Iraq and officials distributed, in all, two billion pieces of paper. The exchange was completed by January this year with virtually no hitches, a remarkable feat given the insurgency already in progress. The creation of a single currency has permitted the CBI to carry out a basic monetary policy. The central bank carries out daily currency auctions, receiving about a dozen bids a day according to the CPA. The new dinar has appreciated by 25% or so since its launch, and has traded steadily at around 1,450 to the dollar since January. Inflation has been kept in check, no small thing given that hyperinflation often occurs during and after wars…. Some observers worry that once the guiding hands of American advisers have gone, the CBI will become politicised and print money to pay off state debts. It is also possible that the new bank laws will one day be overturned altogether, because of nationalistic bias against foreign ownership or their lack of reference to Islamic teaching. And important as the state of the banking system might be, Iraq’s economic health is sure to rest, in the final analysis, on political stability. The future, in other words, is still in the balance.

Of course, that last paragraph is kind of important — and that goes back to the CPA’s mistakes. Bill Powell and Aparism Ghosh are the latest to dissect Paul Bremer’s errors in Time.