07 September 2004
Iraq Achieves Stable Currency, Sound Fiscal Policy with U.S. Help
Treasury's Taylor said U.S. works closely with Iraq's Central Bank
U.S. Treasury Under Secretary John Taylor said the United States has helped Iraq introduce a new unified and stable currency to replace the two separate currencies used before the toppling of former dictator Saddam Hussein.
"Iraqi citizens have welcomed their new currency," Taylor said in a speech to the Central Reserve Bank of Peru in Lima September 7.
Before the fall of Saddam, the Kurdish region in the north of Iraq used "Swiss" dinars while the rest of the country used "Saddam" dinars, Taylor said.
Taylor said the exchange rate of the new dinar appreciated about 25 percent in the months following its introduction in late 2003, while prices have been stable and inflation low.
"This stability is providing the basis for much-needed public confidence in the management of its currency," Taylor said.
The under secretary said at the time that the new dinar was introduced, the Central Bank of Iraq was made independent of the Finance Ministry, which had been under the control of the Baathist Party.
Taylor said major challenges lie ahead for the Central Bank of Iraq, which are exacerbated by a very difficult security environment.
"We are continuing to provide assistance to the CBI to help it put in place a sound monetary policy," Taylor said.
Following is an excerpt from Taylor's speech containing his comments about Iraq's monetary issues:
(begin excerpt)
The Introduction of a New Currency For Iraq In 2003 And 2004
When the decades-long Baathist domination of Iraq ended in the spring of last year, the country had a fragmented monetary system, a central bank under the control of the Ministry of Finance, and a legacy of monetary mismanagement and inflation. Two separate currencies existed, old Iraqi (or "Swiss") dinars in the Kurdish region and "Saddam" dinars in the rest of the country.
The stock of Swiss dinars had not increased since the embargo of the early 1990s, while the stock of Saddam dinars had soared as Saddam's Baathist regime issued money in volume to finance its budget. Excess bill printing led to a sharp depreciation of the Saddam dinar relative to the Swiss dinar. To compound the problem, only two denominations of the Saddam dinar (250 and 10,000 dinar notes) and three denominations of Swiss dinars (one, five, and ten dinar notes) were in circulation. The absence of many security features and very low quality of Saddam dinar notes made them ripe for counterfeiting.
It was clear to us as early as December 2002 that a new unified, stable currency would be needed in Iraq, and we therefore developed a contingency plan. After the fall of regime, the difficult job of economic reconstruction in Iraq began. The situation was complex because the recognized governing authority of Iraq was the transitional Coalition Provisional Authority (CPA). While the CPA could issue an order establishing a new currency, the currency conversion process demanded Iraqi input and buy-in throughout and required that the Iraqi public embrace the new currency.
After an enormous amount of policy analysis, options memos, and diplomacy by U.S. Treasury staff, I flew to Baghdad in June 2003 to review the currency situation with the CPA officials and our Treasury staff. Shortly thereafter, the CPA announced, in early July 2003, that a new currency would be introduced. The new currency would have six denominations and would be based on designs that had been used historically for the old Iraqi dinar, in a more glorious era when Iraq was seen as an advanced nation in the Middle East. The currency conversion period was to last three months, from mid-October 2003 through mid-January 2004.
At the same time as the new currency was announced, the CPA issued an order making the Central Bank of Iraq (CBI) independent of the Ministry of Finance. The CBI had suffered from a long period of domination by the Baathist regime and isolation from the international community, and needed much assistance to rebuild. The CBI's monetary policy function required special attention. It lacked a modern statute to facilitate monetary stability, a coherent framework for conducting monetary policy aimed at achieving price stability, and corresponding instruments for implementing monetary policy.
The CPA and other coalition governments responded by assessing the needs of the CBI and providing technical assistance. Treasury sent a large team of experts to Iraq and provided reach back through a newly created Task Force in Washington. The Treasury team worked with the CBI to develop: (1) a monetary framework that emphasized growth of the monetary base; (2) systems for producing necessary monetary data; and (3) new monetary instruments. The consumer price index (CPI), produced by the Ministry of Planning, also has a major role in assessing price movements, but has serious weaknesses. As a result, Treasury advisors helped the CBI interpret price trends and recommended improvements in CPI methodology.
Just ahead of the currency conversion, in early October 2003, the CBI began holding daily currency auctions. Meanwhile, a new central bank law, based on international best practices, was completed. The law established price stability as the primary objective of monetary policy and authorized a wide array of policy instruments to achieve that goal.
The printing of the new Iraqi dinar in the time frame announced by the CPA was an enormous and unprecedented undertaking, involving printing facilities in seven countries. Indeed, the original order of 2 billion notes filled more than twenty-five 747 airplanes.
With the currency printing completed on schedule, the conversion to the new Iraqi dinar went remarkably well, especially considering the tenuous security situation. This largely owed to careful planning and diligent project management, again with significant input from the Treasury team.
Iraqi citizens have welcomed their new currency, and the exchange value of the dinar appreciated about twenty-five percent over the fall and early winter, even as growth in the new currency was brisk. The exchange value of the dinar has been quite stable over recent months, despite further growth in quantity. The earlier strength in the dinar helped hold down prices over the first several months of this year, and it seems quite likely that inflation will end up low this year, especially compared to the double-digit or higher rates that had characterized the Saddam era. This stability is providing the basis for much-needed public confidence in the management of its currency.
Still, major challenges lie ahead for the CBI. It is now the independent central bank of a sovereign Iraq. It has a new governing board that has a daunting agenda in the months ahead, and must build on the gains made to date. To foster its monetary policy mission, it needs to implement a number of new policy instruments to complement the daily currency auction, like the capacity to conduct regular open market operations in Iraqi government securities. And all of this needs to be done in the context of a very difficult security environment. We are continuing to provide assistance to the CBI to help it put in place a sound monetary policy.
(end excerpt)
(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
This page printed from: http://usinfo.state.gov/xarchives/display.html?p=washfile-english&y=2004&m=September&x=20040907181701cpataruk1.260012e-02&t=livefeeds/wf-latest.html
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