FINANCE AND TRADE
BANKING AND FINANCE
When Iraq was part of the Ottoman Empire, a number of European
currencies circulated alongside the Turkish pound. With the establishment
of the British mandate after World War I, Iraq was incorporated into the
Indian monetary system, which was operated by the British, and the rupee
became the principal currency in circulation. In 1931, the Iraq Currency
Board was established in London for note issue and maintenance of reserves
for the new Iraqi dinar (ID--for value of the
dinar*). The currency board pursued a conservative
monetary policy, maintaining very high reserves behind the dinar. The
dinar was further strengthened by its link to the British pound. In 1947
the government-owned National Bank of Iraq was founded, and in 1949 the
London-based currency board was abolished as the new bank assumed
responsibility for the issuing of notes and the maintenance of reserves.
The National Bank of Iraq continued the currency board's conservative
monetary policy, maintaining 100 percent reserves behind outstanding
domestic currency.
Initiated during the last years of Ottoman rule, commercial banking
became a significant factor in foreign trade during the British mandate.
British banks predominated, but traditional money dealers continued to
extend some domestic credit and to offer limited banking services. The
expansion of banking services was hampered by the limited use of money,
the small size of the economy, and the small amount of savings; banks
provided services for foreign trade almost exclusively. In the mid-1930s,
the Iraqi government decided to establish banks in order to make credit
available to other sectors of the economy. In 1936, the government formed
the Agricultural and Industrial Bank. In 1940, this bank was divided into
the Agricultural Bank and the Industrial Bank, each with substantially
increased capital provided by the government. The government established
the Rafidayn Bank in 1941 as both the primary commercial bank and the
central bank, but the National Bank of Iraq became the government's banker
in 1947. The Real Estate Bank was established in 1948, primarily to
finance the purchase of houses by individuals. The Mortgage Bank was
established in 1951, and the Cooperative Bank in 1956. In addition to
these government-owned institutions, branches of foreign banks and private
Iraqi banks were opened as the economy expanded.
In 1956 the National Bank of Iraq became the Central Bank of Iraq. Its
responsibilities included the issuing and the management of currency,
control over foreign exchange transactions, and the regulation and
supervision of the banking system. It kept accounts for the government,
and it handled government loans. Over the years, legislation has
considerably enlarged the Central Bank's authority.
On July 14, 1964, all banks and insurance companies were nationalized,
and, during the next decade, banking was consolidated. By 1987 the banking
system consisted of the Central Bank, the Rafidayn Bank, and the
Agricultural, Industrial, and Real Estate banks.
In the 1980s, the Rafidayn Bank was in the contradictory position of
trying to maintain its reputation as a viable commercial bank while acting
on behalf of the government as an intermediary in securing loans from
private foreign banks. With deposits of more than US$17 billion in 1983,
the Rafidayn was reportedly the largest commercial bank in the Arab world.
It managed to maintain a relatively sound commercial reputation for the
five years of the war, and in 1985 its total assets stood at about ID10.4
billion and its total deposits, at more than ID9.5 billion--both figures
having tripled since the Iran-Iraq War began in 1980. This huge increase
in deposits was attributed to increased saving by the public because of
the scarcity of consumer products. Profits of ID290 million in 1985
represented an increase of nearly 50 percent over 1980 levels. By 1985 the
Ralidayn had established 215 branches in Iraq, 104 of which were in
Baghdad; according to the Iraqi government, it also had seven branches
abroad. In 1986, however, the bank started to delay payment of letters of
credit owed to foreign exporters, and its failure to make installment
payments on a syndicated loan of 500 million Eurodollars, forced
rescheduling of the debt payments. In 1987, with the exception of the
Baghdad office of a Yugoslav bank, the Rafidayn was Iraq's only commercial
bank. In this same year, the government ordered the Rafidayn Bank to
double its capital to ID100 million. This increase was to enable the bank
to improve and to extend its commercial services, so that it could tap the
public for the increased deposits that would enable the bank to offer more
loans. To the extent that new loans could bolster the emerging private
sector, the move appeared consistent with other government efforts to make
state-run operations more fiscally efficient.
The other three banks in Iraq were so-called special banks that
provided short- to long-term credit in their respective markets. Since its
establishment in 1936, the Agricultural Bank had grown to forty-five
branches, of which four were in Baghdad. In 1981, its capital stood at
ID150 million and its loans totaled ID175 million. The Agricultural Bank
had also started a project whose objective was to encourage rural citizens
to establish savings accounts. Meanwhile, the Industrial Bank had grown to
nine branches and offered loans both to private and to public sector
industrial and manufacturing companies. The Real Estate Bank was composed
of twenty-five branches and provided loans for construction of housing and
tourist facilities. The Iraq Life Insurance Company, the Iraq Reinsurance
Company, and the National Life Insurance Company conducted the nation's
insurance business. Post offices maintained savings accounts for small
depositors.
FOREIGN TRADE
The pattern of Iraqi foreign trade in the 1980s was shaped primarily by
the Iran-Iraq War, its resulting deficit and debt problems, and
developments in the petroleum sector. Iranian attacks on petroleum
industry infrastructure reduced oil exports sharply and Iraq incurred a
trade deficit of more than US$10 billion in 1981. The pattern continued in
1982 as the value of Iraqi imports peaked at approximately US$23.5
billion, while exports reached a nadir of US$11.6 billion, leading to a
record trade deficit. In 1983, however, imports were cut roughly by half.
Figures for Iraq's imports and exports from 1984 onward vary widely and
cannot be considered authoritative. Despite the partial recovery of Iraqi
oil exports in 1986, exports were valued at only about US$7.5 billion
because of the plunge in world oil prices. In 1987 imports were expected
to rise to about US$10 billion. Export revenues were also expected to
rise, as Iraq compensated for low oil prices with a higher volume of oil
exports.
Iraq had counted heavily on solving its twin debt and deficit problems
by reestablishing and eventually by augmenting its oil export capacity.
But increases in volume were insufficient to offset lower prices, and
because demand remained low, expanded oil exports served only to glut the
market and further drive down the price of oil. The depressed price of oil
and the low prices of other raw materials that Iraq exported, coupled with
higher prices for the goods it imported, trapped the nation in the classic
dilemma of declining terms of trade. Although Iraq was cutting the volume
of its imports and was increasing the volume of its exports, the relative
values of imports and exports had shifted fundamentally. More than 95
percent of Iraq's exports were raw materials, primarily petroleum. Food
stuffs accounted for most additional exports. Conversely, nearly half of
Iraq's imports were capital goods and consumer durables. According to
Iraqi statistics, 34.4 percent of 1984 imports were capital goods, 30
percent were raw materials, 22.4 percent were foodstuffs, and 12.5 percent
were consumer items.
Iraq's declining imports resulted not so much from belt- tightening or
from import substitution, as from the increasing reluctance of trading
partners to extend credit. Despite its socialist orientation, Iraq had
long traded most heavily with Western Europe. Initially, Iraq's debt
accumulation worked in its favor by creating a hostage effect. Western
creditors, both governments and private companies, continued to supply
Iraq in an effort to sustain the country until it could repay them.
Additionally, the debt helped to secure outlets for Iraqi petroleum in a
tight international market through barter agreements in which oil was
exchanged for a reduction in debt. In 1987 however, as some West European
companies prepared to cut their losses and to withdraw from the Iraqi
market, and as others curtailed sales by limiting credits, other countries
were poised to fill the vacuum by offering goods and services on
concessional terms. Companies from Brazil, South Korea, India, Yugoslavia,
and Turkey, backed by their governments' export credit guarantees, were
winning an increasing share of the Iraqi market. In 1987 the Soviet Union
and East European nations were also offering goods and services on highly
concessional terms. Eventually, Iraq's exports might also be diverted from
the West toward its new trading partners.
Iraq continued to seek Western imports when it could afford them. In
1987 Iraq was forced to ration imports for which payment was due in cash,
although nonessential imports were purchased if the seller offered credit.
Imports contributing to the war effort had top priority. Imports of spare
parts and of management services for the maintenance of large industrial
projects were also deemed vital, as Iraq sought to stave off the extremely
high costs it would incur if facilities were shut down, mothballed, and
then reopened in the future. Consumer goods were given lowest priority.
In 1985 Iraq purchased 14.4 percent of its total imports from Japan.
Iraq bought an array of Japanese products, ranging from transport
equipment, machinery, and electrical appliances to basic materials such as
iron and steel, textiles, and rubber goods. In 1987, as Iraqi debt to
Japan mounted to US$3 billion, the government of Japan curtailed the
export insurance it had offered Japanese companies doing business with
Iraq; nevertheless, Japanese companies continued to trade with Iraq. Iraq
bought 9.2 percent of its imports from West Germany. Neighboring Turkey
provided the third largest source of Iraqi imports, accounting for 8.2
percent of the total. Italy and France each accounted for about 7.5
percent, followed by Brazil with 7 percent and Britain with 6.3 percent.
Kuwait was Iraq's most important Arab trading partner, contributing 4.2
percent of Iraq's imports.
In 1985 Brazil was the main destination of Iraqi exports, accounting
for 17.7 percent of the total. France was second with 13 percent, followed
by Italy with 11 percent, Spain with 10.7 percent, Turkey and Yugoslavia
with about 8 percent each, Japan with about 6 percent, and the United
States with 4.7 percent.
In April 1987, the government attempted to streamline the trade
bureaucracy by eliminating five state trading companies that dealt in
various commodities. Although the state trading companies had been
established in the 1970s to foster increased domestic production, they had
evolved into importing organizations. In view of this orientation, their
operations were incorporated into the Ministry of Trade. Three Ministry of
Trade departments, which had administered trade with socialist, with
African, and with Arab nations, were abolished. The responsibilities of
these disbanded organizations were centralized in a new Ministry of Trade
department named the General Establishment for Import and Export.
The Ministry of Trade implemented a national import policy by
allocating portions of a total budget among imports according to priority.
The import budget varied from year to year, depending on export earnings
and on the amount in loans that had been secured from foreign creditors.
The government's underlying intention was gradually to replace imported
manufactured products with domestic manufactured products and then to
increase export sales. In the mid-1980s, however, the government
recognized that increased domestic production required the import of
intermediate goods. In 1987 state companies were permitted for the first
time to use private agents or middlemen to facilitate limited imports of
necessary goods.
The private sector, which had long been accorded a quota of total
imports, was also deregulated to a limited extent. In 1985 the quota was
increased to 7.5 percent of total imports, and the government gave
consideration to increasing that percentage further. All imports by the
private sector had previously been subject to government licensing. In
1985, Law No. 60 for Major Development Projects exempted the private
sector from the obligation to obtain licenses to import basic construction
materials that would be used in major development projects. In an attempt
to increase remittances from Iraqis abroad, the government also gave
special import licenses to nonresident Iraqis, if the value of the imports
was invested in Iraq and was not transferred outside the country.
In 1987 the rules concerning private sector imports were liberalized
further when private sector manufacturers were granted special licenses
that permitted them to import raw materials, spare parts, packaging,
machinery, and equipment necessary for plant modernization and for
expansion. In some cases no ceiling was placed on such imports, while in
other cases imports were limited to 50 percent of the value of the export
earnings that the manufacturer generated. Such imports were not subject to
quotas or to foreign exchange restrictions. Moreover, the government
announced that it would make no inquiry into the companies' sources of
financing. In a remarkably candid statement in a June 1987 speech, Saddam
Husayn promised that citizens would not be asked where they had acquired
their money, and he admitted that the private sector had not imported any
goods because of its fear of prosecution by the security services for
foreign exchange violations.
While the government permitted more imports by the private sector, it
nevertheless continued to promote exports at the same time. Starting in
1969 it maintained an Export Subsidy Fund, which underwrote the cost of
eligible nonpetroleum exports by up to 25 percent. The Export Subsidy Fund
was financed with a tax of .5 percent levied on imports of capital goods
and .75 percent levied on imports of consumer goods. Most imports were
also charged both duty and a customs surcharge that varied from item to
item. Export licenses were granted freely both to public and to private
sector firms with only a few exceptions. The Board of Regulation of Trade
had the authority to prohibit the export of any commodity when domestic
supplies fell short of demand, and the control over export of certain
items was reserved for the General Organization of Exports. The degree to
which government economic policies would be liberalized in the late 1980s
remained to be seen. The government had taken several steps in that
direction but state controls continued to play a major role in the economy
in 1988.
* dinar (ID)
Currency unit consisting of 1,000 fils or 20 dirhams.
When officially introduced at the end of the British mandate (1932), the
dinar was equal to, and was linked to, the British pound sterling, which
at that time was equal to US$4.86. Iraqi dinar (ID) equaled US$4.86
between 1932 and 1949 and after devaluation in 1949, equaled US$2.80
between 1949 and 1971. Iraq officially uncoupled the dinar from the
pound sterling as a gesture of independence in 1959, but the dinar
remained at parity with the pound until the British unit of currency was
again devalued in 1967. One Iraqi dinar remained equal to US$2.80 until
December 1971, when major realignments of world currencies began. Upon
the devaluation of the United States dollar in 1973, the Iraqi dinar
appreciated to US$3.39. It remained at this level until the outbreak of
the Iran-Iraq War in 1980. In 1982 Iraq devalued the dinar by 5 percent,
to a value equal to US$3.22, and sustained this official exchange rate
without additional devaluation despite mounting debt. In early 1988, the
official dinar-dollar exchange rate was still ID1 to US$3.22; however,
with estimates of the nation's inflation rate ranging from 25 percent to
50 percent per year in 1985 and 1986, the dinar's real transaction
value, or black market exchange rate, was far lower-- only about half
the 1986 official rate.
