Iraq May Sanction More Banks For Smuggling Dollars

The new Trump administration is renewing its anti-Iran policy and focusing upon Iraq’s ties to Tehran. There are reports that several Iraqi banks may be sanctioned for smuggling dollars to Iran.

US Continues To Push Iraq To Better Regulate Dollar Auctions To No Avail

(Al Sharqiya)

The United States continues to push the Iraqi government to better regulate its dollar auctions but it is a losing battle. At the start of February Baghdad banned 8 banks from the Central Bank of Iraq’s (CBI) currency sales to try to stop money laundering. This came after a visit by a delegation from the U.S. Treasury. In July 2023 another 14 banks were banned. A Treasury official said that Iraq needed to do more against pro-Iran groups abusing the financial system to raise funds.

US Pressure Leads To New Rules On Using Dollars In Iraq But Will They Work?

(Iraqi News)

The US government is constantly telling Baghdad it has to tighten up its control of American dollars to fight money laundering and sanctions busting. In September a delegation from Washington arrived in Iraq to meet with Central Bank of Iraq officials who issued new regulations afterwards. The problem is the banking system is controlled by the elite who want to manipulate the system to make money and support its friends in Tehran so whatever rules are created will never work.

EU Puts Iraq On List of Money Laundering-Terrorist Financing Countries

(Currency Return)

The European Union Commission placed Iraq on a list of high risk countries for money laundering and terrorist funding. That means financial transactions between Iraq and the EU will have to go through extra regulations, taking more time, raising costs, and there will be restrictions on investment. Other countries on the EU’s list are Afghanistan, Pakistan, Syria, Yemen, Iran and North Korea. Iraq’s Foreign Ministry immediately protested. Iraq’s Anti-Money Laundering and Combating the Financing of Terrorism Office said the country had made progress on those issues and this would be resolved soon. This all centers around the Central Bank of Iraq’s dollar auctions that have been manipulated by the country’s ruling parties, foreign governments, criminals and the Islamic State for years.

Central Bank Of Iraq Tries To Deal With Fraud In Dollar Exchanges

In November 2015 the Central Bank of Iraq began handing out fines to private banks that were fraudulently buying dollars. Since 2012 there have been stories of all kinds of illegal and questionable activities going on with the country’s currency exchanges ranging from Iran and Syria using the auctions to get around international sanctions, to gangs and private banks using them to make money, to the Islamic State financing itself via them. The Central Bank’s move appeared to come after warnings by the United States. At the same time, due to the interference by politicians and the rampant corruption within the country these punishments are unlikely to stop these practices.

The Central Bank of Iraq recently started going after private banks that had manipulated currency exchanges. 27 banks were accused of using fake and incomplete documents to send $45 billion out of the country from 2013-2014. That came just days after parliament’s finance committee said that billions of dollars had been smuggled out of Iraq by banks and financial companies since 2006. Ahmed Chalabi, the head of the committee who recently passed away, was said to be investigating this matter and had evidence against 29 fake companies accusing them of taking $4.2 billion out of Iraq. The committee asked the Trade Ministry to look into 32 trading companies as well. For the last several years there have been repeated warnings from domestic and foreign sources that Iraq’s dollar exchanges were being used for a number of nefarious means.

The United States for example was one country that warned the Central Bank about its auctions. The Federal Reserve and Treasury Department, which are responsible for sending U.S. dollars to the country told the Central Bank at the end of 2014 that currency was being bought by Iranian banks that were under sanctions and by the Islamic State. These concerns led the U.S. to stop delivering dollars to Iraq in the summer of 2015 to push the Central Bank to revise its practices.  This was not the first time the Americans brought up these issues either. In 2012 Washington asked Baghdad to tighten its currency sales because it thought Iran and Syria were using them to get around international restrictions. In response, the Bank issued rule changes twice that year on buying dollars. Since Iraq is dependent upon the United States for the majority of its hard currency it could not ignore this prodding, and probably helped lead to the fines being issued. The question is whether the recent crackdown will make much of a difference because the 2012 moves were not effective.

One reason why tougher regulations on the currency auctions have not worked is because of political interference. The former deputy head of the Central Bank for example, recently told the Wall Street Journal that political parties tried to remove officials at the bank and put their loyalists in office. In 2013 parliament found evidence that Iraqi politicians were interfering with dollar auctions. The year before, Prime Minister Nouri al-Maliki had the governor of the Central Bank Sinan Shabibi removed on corruption charges. (1) Shabibi had tried to remove three senior Bank officials with connections to Maliki’s Dawa Party for money laundering, but the premier blocked him, and the charges against Shabibi were made by Maliki loyalists in parliament in what many saw as a power grab. Given the weak state of institutions in Iraq, ones like the Bank are always open to pressure by the ruling elite with the removal of Shabibi being the most blatant. Politicians and their allies were also accused of profiting from the auctions, which gave them added incentive to make sure that nothing substantively changed with them.

There are many reasons why Iraq’s dollar auctions have exploded in recent years. At the start of 2012 Shabibi reported that there was a 40-50% increase in demand for dollars. That continued to go up with the U.S. sending $3.85 billion to Iraq in 2012 and then $13.66 billion by 2014. One major reason why more dollars were being bought was that businesses use them to buy imports. In 2012 the economy was growing with a rise in oil prices, driving up the requirements for hard currency to buy more foreign goods to meet demand. A second reason was that in 2012-2013 companies were said to be afraid that the dinar was losing value and so began investing in dollars instead. Third, Iraqi banks do not carry out many traditional banking activities like giving loans or letters of credit. What they began to do in 2012 was buy dollars at government auctions and then resell them for a profit. Fourth, Iraq is rife with organized crime syndicates who were believed to be doing the same thing, buying up dollars and selling them using fake documents. The manager of Rafidain Bank, one of Iraq’s two main state run institutions was quoted in Al Hayat in 2012 that international criminal rings were coming to Iraq for its dollar exchanges because it was so easy to manipulate the system with the help of private banks. (2) Gangs (3) and the Islamic State (4) were accused of using counterfeit Iraqi dinars to buy dollars. Iran was also believed to be using fake dinars in Iraqi auctions to acquire hard currency since it was under sanction. All of these actors showed just how lucrative Iraq’s exchanges had become by 2012. It also highlighted how weak Iraq’s regulators and the Central Bank were to stop the nation from losing a huge amount of dollars each month.

Baghdad will be under added pressure to crackdown on its exchanges and those who manipulate them, but the political situation may undermine that effort. With the decline in oil prices Iraq is not bringing in as many dollars as it used to, which means it cannot afford to have so many flow out of its coffers in auctions. At the same time, because Iraqi politicians use corruption to rule and see the state’s money as theirs for the taking their continued interference may stop any effective regime being established. Previous attempts to set up new rules for the auctions did not have any noticeable effect and the recent fines may not do anything either. That’s because those that are in charge of implementing them are always open to pressure by the ruling parties or threats and bribes from them or other actors like gangs and insurgents. That means business will likely continue as usual in Iraq’s exchanges.

FOOTNOTES

1. Sowell, Kirk, “Inside Iraqi Politics No. 49,” 10/31/12

2. Al-Hassoun, Nassir, “Iraqi Central Bank Fighting Money-Laundering Problems,” Dar al-Hayat, 6/11/12

3. Khallat, Khudr, “Battle against counterfeit gangs before change in currency,” AK News, 4/9/12

4. Al-Summary, Yazn, “Counterfeit currency is leaving traders and customers out of pocket,” AK News, 2/22/12

SOURCES

Al-Ansary, Khalid and Razzouk, Nayla, “Iraq Deplores ‘Currency Attack’ as Dollars Flow to Syria, Iran,” Bloomberg, 1/12/12

Al Arabiya, “’Billions of dollars’ smuggled out of Iraq during Maliki’s rule,” 11/9/15

Brosk, Raman, “Iraqi Central Bank accuses banks of “fraud” over hard currency sales,” AK News, 5/17/12

Glazer, Emily, Malas, Nour and Hilsenrath, Jon, “U.S. Cut Cash to Iraq on Iran, ISIS Fears,” Wall Street Journal, 11/3/15

Habib, Mustafa, “dinar woes: iraqi currency traders break Syria, iran sanctions,” Niqash, 5/17/12

- “dodgy dinar: fake passports in bogus banking, currency crisis,” Niqash, 5/30/13

Harissi, Mohamad Ali, “Iraqi dinar casualty of Iran, Syria sanctions,” Agence France Presse, 4/12/12

Al-Hassoun, Nassir, “Iraqi Central Bank Fighting Money-Laundering Problems,” Dar al-Hayat, 6/11/12

Iraqi News Network, “Central Bank only fined banks that ran away with billions,” 11/11/15

Al-Jabbouri, Mahmoud, “Counterfeit currency threatens Diyala and the nation,” AK News, 2/21/12

Kami, Aseel and Chaudhry, Serena, “Iraq dinar hit by fallout from sanctions next door,” Reuters, 4/15/12

Khallat, Khudr, “Battle against counterfeit gangs before change in currency,” AK News, 4/9/12

Al Mada, “Al Mada exclusive to publish documents prepared by Chalabi before his departure,” 11/9/15

Mustafa, Karim, “Iraq’s current monetary crisis: bubbles or fleeting appearance of a deeper economic crisis?” Al Mowaten, 5/13/12

Peel, Michael, “Iraq bank moves to allay laundering fears,” Financial Times, 4/2/12

Sabah, Mohammad, “Former official of the Central Bank trial with 30 employees on charges of not being investigated,” Al-Mada, 6/18/13

Sami, Zeena, “Central Bank fails to stem Iraqi dinar’s weakening vis-à-vis the dollar,” Azzaman, 4/17/12

Al-Shaher, Omar, “Iraq’s Central Bank a Political Battleground,” Al-Monitor, 1/2/13

- “Questions About Practices Of Private Iraqi Banks,” Al-Monitor, 1/17/13

Shattab, Ali, “Iraqi politicians accused of meddling in Central Bank auctions,” Azzaman, 5/6/13

Sowell, Kirk, “Inside Iraqi Politics No. 49,” 10/31/12

Al-Summary, Yazn, “Counterfeit currency is leaving traders and customers out of pocket,” AK News, 2/22/12

Promise and Peril of Investing In Iraq, Interview with MENA Capitals’ Ali Albazzaz

 

Ali Albazzaz is a finance specialist focused on doing business in Iraq. He is a consultant working with MENA Capital, an investment company that focuses on the Middle East and North Africa, including Iraq.  That country has huge potential with its vast energy wealth along with huge needs after decades of wars and sanctions. This has attracted a wide variety of companies interested in developing its oil and gas sector along with rebuilding the nation in general. Unfortunately the rebirth of the insurgency might scare off foreign money. To discuss the promise and peril of Iraq is Ali Albazzaz.

1. Most of the talk about Iraq focuses upon the oil sector, but the country needs so much in terms of services and infrastructure that there are plenty of other opportunities. Outside of petroleum and gas what other sectors of the economy have attracted investment?

Housing and construction have received some foreign private investment, especially in the Kurdish region which has seen a plethora of housing developments, high-rise 5-star hotels, shopping malls and now Emaar's Downtown Erbil project. Unfortunately the picture in the rest of the country is not as rosy. There has been investment in hotels, some high profile housing projects have been signed or broken ground, and you can see visible signs of construction activity in Baghdad, where a few malls have now opened, but foreign investment is still limited in spite of Iraq's estimated 3 million housing unit shortfall.

The electricity sector has and will continue to receive a lot of investment. Whilst most of that has been from the Iraqi government, for engineering, procurement and construction contracts ($4.7bn for electricity projects in the 2014 budget), independent power producer projects (IPP) have been executed in the Kurdish region, and these are starting to be used in other parts of Iraq. The IEA estimated in 2012 that Iraq will need to build an additional 70 GW of generation capacity by 2035, so once IPP projects become entrenched outside the Kurdish region these will be a catalyst for further foreign investment of more substantial scale.

The shrine cities of Karbala and Najaf, which see millions of pilgrims per year, have seen a lot of investment in tourism related infrastructure, such as hotels, markets, shopping malls etc.

There has been some limited investment in industry (for example in building materials, steel), some investment in the telecoms sector (such as the three mobile operators that are largely owned by foreign telecommunications), and some investment in ports and logistics infrastructure.

2. Plenty of companies from the region such as Turkey and the Gulf states have gone into Iraq. Have there been as many companies from Europe, the U.S., and Asia doing business there?

There is a very significant presence of Asian companies. The Chinese, South Koreans, and to a lesser extent the Japanese, are active in the Oil and Gas, Construction, and Electricity sectors, among others. Iranian businesses are involved across a range of sectors, and like Turkey and the Gulf, are big exporters to Iraq. European and American firms are present, but nowhere near to the same extent as the countries above.

3. What issues do foreign companies face with Iraq’s banking sector and insurance?

Iraq's banking sector is still rudimentary but slowly improving. Foreign companies are able to use the better private banks to manage payments and payroll and for local foreign exchange operations. They do also provide Letters of Credit and Letters of Guarantee etc. The service levels of the state banks are so poor as to be effectively unusable, Trade Bank of Iraq being an exception. The biggest issue is the state of development of the banking sector. The balance sheets of most private banks are too small and they don’t have the skill set or appetite to participate in a meaningful way in anything beyond small projects. The entry of Standard Chartered Bank and Citibank is therefore much anticipated.

On the Insurance front foreign companies are able to get coverage but purchase it from outside of Iraq as the local market is not developed enough and does not have the depth even if it were [developed enough].

4. Iraq’s bureaucracy and corruption are rather infamous. What kinds of advice do you give to firms in dealing with those two issues?

With regard to bureaucracy, I recommend that firms work with the best local professional advisors, ideally those that operate in partnership with an international firm, and to choose an experienced, effective, and respected local partner. I also counsel them to set their expectations accordingly from the start of the process, and to be patient.

Corruption is rampant but firms do find ways of managing it in countries with similar levels of corruption and firms are able to conduct business in Iraq without resorting to it.

Some ministries and some local governments are better than others, so it’s important for firms and investors to be judicious about which counterparties they enter into agreements with. Firms can minimize the likelihood of rent-seeking behavior by enlisting the support of their national governments and engaging with Iraqi stakeholders (tribes, religious, civic groups) that may be of help.

With regard to internal graft and other illegal practices, firms need to put a lot of care in the recruitment and training of local management and staff, and be very clear about acceptable behavior. The major international audit firms are now operating in Iraq and are able to provide internal audit and assurance.

5. From 2003-2007 there was very little direct investment in Iraq. Then things took off in 2008 when the civil war ended. Now that the insurgency has been reborn and violence is taking off again in Iraq have you seen any change in foreign interest in the country?

The violence has dampened investor interest for projects in central, western, and northern Iraq - however some firms and investors are pushing ahead regardless, whilst many others have slowed down or suspended their plans (as opposed to cancelling them altogether).

It is not only the spike in violence that is of concern but also the governance issues and nature of Iraqi politics. The elections at the end of this month are unlikely to provide a quick resolution to these issues and there will probably be another protracted government formation period with increased violence in the interim, hence many firms are also waiting to see how the elections play out and what the repercussions are.

6. Kurdistan and southern Iraq are largely untouched by the current surge in violence. Do you think those areas will continue to see foreign businesses going there or will the fighting scare off companies in general from Iraq?

The Kurdish Region is not only unaffected but may be benefiting from further reinforcement of its stability and security compared to the rest of Iraq. I think businesses and investment will definitely keep going to that region, and will do so at an increasing rate.

Southern Iraq is being affected by the recent violence, but to a far lesser degree than the rest of the country. Foreign businesses will continue to be attracted, particularly because of the scale of ongoing investment in the oil and gas sector, the increase in provincial revenues and local incomes, its relative safety, and proximity to the Gulf.

Karbala and Najaf are also relatively more secure and have their own economic momentum which has not been greatly impacted.

Iraq Improves On World Bank Ranking Of Doing Business

 

For the last several years the World Bank has released its Doing Business report on laws rules, and taxes that regulate business around the globe. Iraq has done poorly on these reports since it has yet to shake off the yoke of years of socialist state-run economic planning from the Saddam years. As the United States Agency for International Development pointed out, Baghdad gives lip service to loosening the role of the government over the economy, while doing little in practice. Despite that Iraq did slightly better in 2013 than 2012 according to the World Bank due to some less cumbersome rules for operating an enterprise.

In December 2013 the World Bank’s “Doing Business 2014, Understanding Regulations for Small and Medium-Size Enterprises” came out. The latest issue included 189 countries, up from 183 in 2012. Each nation is ranked according to eleven areas that affect establishing and running a business. These include regulations, legal protections on property, and taxes. This year Iraq ranked 151. That was an improvement from previous reports when it was 176 in 2012, 164 in 2011, 166 in 201, and 153 in 2009. That was due to the shortening of the time it took to complete key practices from the previous year. For example, Iraq went from 176 to 169 in starting a business because there was one less procedure to follow to complete that task. That led to a dramatic decrease in the time necessary to get through the regulations from 77 days in 2012 to just 29 in 2013. The number of procedures to get construction permits also went from 13 to 10 resulting in a drop from 187 to 139 days to get complete them. For the other categories however Iraq did the same. Its rank for getting electricity improved from 46 to 39, but the procedures, 5, and time, 47 days, did not change. Similarly registering property still took 5 procedures and 51 days. More troubling was the lack of credit and legal system for business. Its credit rank decreased from 174 in 2012 to 180, while its score on legal rights stayed at 3 out of 10. That’s largely because Iraq’s banks barely offer loans, and largely operate to finance and manage the government’s accounts. Finally Iraq scored poorly on protecting investors, trade, enforcing contracts, and resolving insolvency. For example, it took over 80 days to import or export goods, 520 days to enforce a contract, and there were no procedures for insolvent businesses. Like many developing countries Iraq largely relied upon the state to lead its development. That increased under the Baathist regime, which had a socialist ideology. Baghdad now says that it is diversifying its economy, and developing the private sector, but that’s mostly in words with little action being taken. Many of the country’s politicians do not understand economics either, and think short-term about their own political benefit, which undermines proper planning and legislation. These are the major impediments to the improvement of Iraq’s business environment. That was the reason why Iraq was only one of seven countries in 2013 that did not carry out any reforms in the areas that the World Bank monitors.

Iraq’s 2013 Rankings On World Bank Doing Business Report

Overall Rank 151

Starting a business rank 169

Number of procedures 10

Time to complete 29 days

Dealing with construction permits

Number of procedures 10

Time to complete 138 days

Getting electricity rank 39

Procedures 5

Time to complete 47 days

Registration of property rank 108

Procedures 5

Time to complete 51 days

Getting credit rank 180

Strength of legal rights index 3 out of 10

Depth of credit information 0 out of 10

Public registry coverage 0

Private bureau coverage 0

Protecting investors rank 128

Extent of disclosure index 4 out of 10

Extent of director liability index 5 out of 10

Ease of shareholder suits index 4 out of 10

Strength of investor protection index 4.3 out of 10

Paying taxes rank 63

Payments 13 per year

Time to complete 312 hours per year

Trading across borders rank 179

Documents to export 10

Time to export 80 days

Cost to export per container $3,550

Documents to import 10

Time to import 82

Cost to import per container $3,650

Enforcing contracts rank 142

Procedures 51

Time to complete 520 days

Resolving insolvency rank 189

Time to complete No practice

Cost No practice

Recovery rate 0

Iraq looks to be slowly improving its business regulations, but the pace is not as fast as it could be. The country needs massive rebuilding and has huge untapped potential. The lack of business knowledge, and the fact that almost all of Iraq’s elite grew up in state-run economies is hampering the process of reform that would speed up development. Still some progress is being made as the World Bank report showed. Only through cutting back on the massive red tape can the country hope to begin to emerge from the years of wars and sanctions that have set it back so much.

SOURCES

Al-Shaher, Omar, “Questions About Practices Of Private Iraqi Banks,” Al-Monitor, 1/17/13

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

World Bank, “Doing Business 2014, Understanding Regulations for Small and Medium-Size Enterprises,” December 2013

MARCOPOLIS VIDEO: Banking System In Iraq And Iraqi Kurdistan

Iraq’s Economy At A Crossroads, Interview With USAID’s Vladimir Halama and Thomas Doherty

The Tijara Provincial Economic Growth Program is run by the United States Agency for International Development (USAID). Its goal is to help Iraq develop a market economy. At the end of 2012, it released a report, “Assessment of Current and Anticipated Economic Priority In Iraq.” The paper went over Iraq’s National Development Plan, and the difficulties it is facing in diversifying its economy. The report claimed that Iraq was at a crossroads over whether it would be able to escape the oil curse and its state-led economy. Below is an interview with Thomas Doherty and Vladimir Halama who helped put the document together.

Vladimir Halama, an Australian economist with experience in working in transitional economies, has worked in Iraq from 2005 until February 2013 in a number of advisory assignments, most of which involved working with Iraqi government bodies. From September 2011 until November 2012 he led a team of specialists in putting together “An Assessment of Current and Anticipated Economic Priorities in Iraq” for the USAID-Tijara project.  

Thomas Doherty is a U.S. lawyer who has worked on a number of assignments in Iraq at various times since October 2003, including with the Coalition Provisional Authority, the State Department, and USAID. Until December 2012, he was the regulatory advisor of the Business and Investment Enabling Environment Component of USAID-Tijara project.        

USAID said that Iraq is at a “crossroads” over whether it will be able to escape the resource curse and its state-run economy (AP)

1. The Tijara report said that Iraq was at a crossroads between its past of being a state-run system and its future of developing a market economy. Can you explain what role the government plays in employment?

Vladimir Halama: The government is the main employer as well as the employer of choice for most Iraqis. Of those employed for 40 hours per week or more, an estimated 60% are on the payroll of the government, the security forces or state owned enterprises. They enjoy security of tenure, generous pension provisions, and other advantages such as grants of land or loans on favorable terms. This distorts motivation on the supply side of the labor market. Much effort and bribery is expended in trying to get onto the government payroll, and resignations are unheard of. Employment in the private sector is less sought after. In, for example, construction and services, some employers resort to employing workers from Turkey or South East Asia.

Thomas Doherty: I agree, and add that often times the main purpose of government in Iraq seems to be to provide perquisites for government workers. For example, recently the Ministry of Housing and Construction announced a new housing development in Wasit province only for employees of the Ministry of Housing and Construction. The reservation of state-owned land for largesse to workers in government and state-owned enterprises also makes it more difficult for private investors to obtain land for housing, industrial, and retail developments.

2. How about the state-run banks?

Vladimir Halama: Lending by state banks is under the direction of the government, and is mostly at concessional interest rates. Even the repayments of the principal are often waived, for example in the case of loans to the agricultural sector. As can be expected under such circumstances, the loans usually go to those with lobbying power. State banks have been directed to make loans covering the payroll costs of many state-run enterprises where revenues fail to cover operating costs. The backlog of unrecoverable loans in state banks is large, and the banks are de facto bankrupt. However, Iraqis still place their savings with them, as they are confident that the government will keep these banks operational.  

Thomas Doherty: The concessionary terms given out by the state banks crowd out private sector banking. In this regard, the recent enactment by the Council of Representatives to establish a state-run Islamic bank is troubling, as it will probably make it more difficult for the private Islamic banks now operating in Iraq to grow. There have been orders from the Council of Ministers directing Iraqi government agencies to only do their banking at the state banks, so this is another drag on the private sector.

3. Can you talk more about what’s happening with the state-run enterprises (SOEs)?

Vladimir Halama: Many of them are barely making ends meet, despite receiving hidden subsidies through low energy costs and through being the supplier-of-choice to the government. The traded goods sector is particularly badly off as Iraq is uncompetitive in every product market with the exception of minerals. In other sectors, the state enterprises are doing better. However, overstaffing is rife everywhere. Workers have the same security of tenure as public servants, and everyone is kept on the payroll, even in factories that were totally destroyed during the military campaigns against Iraq in 2003 and before. Since 2003, several attempts to reform the SOE sector have been announced, but they have not yielded any results as yet. Despite occasionally claiming efforts to the contrary, the politicians are very reluctant to initiate any reform, which would lead to redundancies for fear of political backlash and losing the benefits of patronage, which control over SOEs brings to the various political parties controlling different ministries. Instead, the creation of another 130,000 jobs in the state sector had been heralded in February 2013.

Thomas Doherty: There was an announcement some time back that the Ministry of Trade was going to privatize the State Company for Automobiles and Machinery and the State Company for Markets, two SOEs that sell cars and operate retail stores.  These would seem to be able to be easily privatized or just dissolved in favor of the private sector.  Well, it turned out that the reforms were rolled back, and now they are just talking about granting some contracts to foreign investors to operate shopping malls. This is another problem, the SOEs becoming required “partners” to any private sector enterprise.

In other sectors, the SOEs don’t have any picture of what their bottom lines really are, because of the complicated subsidies they receive. Some operate like spendthrifts who believe that as long as there are blank checks left in the checkbook or there is enough political capital they can hire and spend more. On the other hand, the managers of commercially viable SOEs, who really do want to operate better, have no discretion to hire, fire or purchase without tortuous bureaucracy through their own ministries and the Ministry of Finance. The United Nations Development Programme has provided a roadmap for eventual commercialization of the SOEs, but it’s going to be a gradual process.

Of course, the SOEs do provide needed employment, even if it’s often not productive employment. Paul Brinkley’s Task Force on Business Stability Operations, and other donors spent a lot of money on the SOEs in the hope that increasing employment would decrease the insurgency, which is recognition that employment is important to social peace. This is something the U.S. also recognized with the auto industry bailouts.

We talked to the Iraqi Railways people, and I was glad that they have an ambitious program to build an expanded cargo and passenger network, including a Baghdad commuter rail network, and cargo rail lines from the new Al Fao port. Railways are a worthy SOE for investment right now, in my opinion. Why not build a Baghdad Metro, too? The plans are supposedly on file from the 1970s. Unfortunately, the announcement of a Baghdad monorail to be built by Alstrom does not appear to have advanced much in the almost two years since that project was announced to great fanfare. 

      

4. Another issue is the role of the oil industry in the development of the country, and the oil curse. What problems could Iraq be heading for with the growth of the petroleum business?

Vladimir Halama: The symptoms of the oil curse already permeate the Iraqi economy, and are more acute than in other resource-based economies. Currently, all development depends on crude oil export revenues, as it is almost the sole source of income for the government. Large sums are spent on investing in the oil industry to increase the output levels as fast as possible, based on the view that much larger oil revenues will then adequately fund the development in areas that are currently underinvested, for example health, education, and labor-intensive productive sectors. This approach ignores the possibility that, in the meantime, social unrest could reach explosive levels as a result of, for example, the large numbers of young people reaching working age each year. Alternative approaches, suggested in the USAID-Tijara Assessment, would see an increase of investments in other areas at the expense of oil sector investments, a distribution of a portion of oil revenues through direct payments to Iraqis, and the setting up of a wealth fund for future generations that would invest in assets abroad.

Thomas Doherty: The report notes how little employment the oil industry actually provides relative to Iraq’s need for jobs. The oil money has to be cycled back into the economy in a way that provides jobs, and the education that provides future capacity for the health, education, and other sectors of the economy.

5. What kind of affect does the large oil-funded public sector have upon investment?

Vladimir Halama: As regards private sector investment, competition from subsidized SOEs has crowded out many areas of potential private sector economic activity. An exception to this is Kurdistan, which is experiencing a construction boom financed by Turkish capital, the telecommunication sector (mobile phones), and the recent crude oil service contracts awarded to oil multinationals, which are expected to finance the expansion of production and recoup their investment afterwards. While data is hard to come by, the volume of private sector investment so far appears to have been considerably lower than the forecasts that were made in the NDP.

Thomas Doherty: In Baghdad, the Ministry of Communications is seeking more and more of a role in the market. They are seeking to control 100% of the bandwidth in and out of Iraq, and the mobile phone operators are required to eventually use these government-controlled gateways as a condition of their licenses. Whether this will eventually lead to the banning of private-sector satellite gateways for internet services and other data, with the political and cultural implications this could mean, time will tell.

There are also various exclusive agencies written into Iraqi law for SOEs. For example, the Ministry of Transportation’s State Company for Land Transportation has the exclusive concession to move cargo overland out of Iraqi ports. Another of these exclusive agencies, one which the Ministry of Transportation through Iraqi Airways granted a Sharjah company, RUS Aviation, actually stopped other air cargo services from flying into Iraq, at least for a while. This is just another burden on business and job growth for the sake of a little rent collecting.

6. Can you explain how the oil industry affects the social contract between the citizens and the government?

Vladimir Halama: Personal and corporate taxes yield very little, and that blunts government’s sense of accountability towards citizens. The oil industry, massive in comparison with the rest of the economy, is government owned and controlled, and gives politicians ample scope for self-dealing and favoritism.

To avoid a misconception on part of the readers, it is necessary to digress here and stress that while terms like 'state-run' and 'government-controlled' suggest a unitary system of the Soviet kind, this is far from being the case. An uneasy truce among a number of gangs running protection rackets would be a closer analogy. Iraq has been listed for a number of years now among the ten most dysfunctional countries in the world, according to the Fund for Peace index, and it is not difficult to see why. Neither the parliament nor the cabinet are worthy of their name. Iraq's inclusive government contains political groupings, which are mutually hostile. Any proposed activity requiring cooperation among Ministers from different political, religious and ethnic affiliations engenders suspicion, and results in inaction. In turn, officials within the ministries, belonging as they often do to differing groups, do not cooperate with each other. Thus the Ministers do not carry out the decisions of the Council of Ministers, Directors General do not carry out the wishes of their Ministers, and officials, particularly at the provincial level, disregard the instructions of their Directors General, with killings not being an unknown form of resistance, particularly in areas which give rise to substantial kick-backs and bribes. True, many investment projects are embarked upon behind the facade of established institutions, but their effectiveness is highly dissipated by the cuts taken at all levels by prime contractors, and the numerous bureaucrats whose approvals are needed. Additionally, those in the vicinity of the projects want to be paid for not destroying them. For example, tribes living in the vicinity of oil pipelines want their members to be paid as members of oil pipeline protection forces, and carry out attacks on the pipeline to make their point. Such universal brigandry does spread the wealth around, but in a very unsystematic way. In fact, even the tribesmen employed in the oil protection force are not particularly well off when, as is so often the case, they have to give a share of their income to the local powerbrokers. In other words, there is no social contract between citizens and the government because people are primarily beholden to those immediately above them in the food chain.

Efforts by international institutions and aid agencies and diplomats and politicians of foreign powers to bring a measure of order and sanity to the situation have amounted to a little more than a spit in the ocean. However, you would hardly get that impression from reading pronouncements and 'success stories' published by these organizations.

Thomas Doherty: As Vlad and the report say, the oil fosters conflict over revenues, and also a sense of entitlement among elites and government employees. 

7. Baghdad came up with a National Development Plan for 2010-2014. The Tijara report found some major flaws with its strategic goals. Can you explain some of those?

Vladimir Halama: Actually, the goals of the National Development Plan cannot be faulted. They include all manner of desirable outcomes: balanced development of regions, overcoming gender imbalances, reducing maternal mortality, improving private sector enabling environment, and so on. Rather, the problem is that the NDP is not an actionable plan. Actions needed to achieve the goals are not listed or costed, so there are no benchmarks against which the outcomes could be monitored and evaluated. The few quantitative guidelines in the NDP, which relate to the allocation of the investment budget, have not been reflected in the budget. In practice, little heed is paid to the Development Plan.

Thomas Doherty: Agree with Vladimir, the NDP’s worthy, but broad goals have to be supplemented with specific actions needed to achieve those goals. It’s long past the time where the Iraqi government should just be saying it wants to “develop the private sector.”  It’s time to do some of the things, which numerous USAID, World Bank, and other donor programs have recommended to allow diversification of the economy. An Iraqi businessperson should be able to operate without checking with the government every day, which would be the case with a growing enterprise seeking to diversify its activities – the company would need approval from the Companies Registrar for increasing its capital and operating new lines of business.

8. Has the Development Plan helped Iraq move away from relying upon the state for managing the economy and delivering services?

Vladimir Halama: Iraq is still a state-run economy. The operations of the private sector are hemmed in by onerous regulations. The population receives subsidies, like the food distribution scheme, low utility charges, and has a strong sense of entitlement. The existing system enables those in charge of administration to appropriate for themselves considerable amounts of public money, and they have been successful in blocking any reform efforts. The inventiveness of the bureaucracy and political leaders in coming up with reasons and mechanisms for delay is breathtaking.

Thomas Doherty:  I don’t think the goals of the NDP were internalized by many Iraqi government officers. Some of the recent enactments of the Council of Representatives, like the establishment of a state-owned Islamic bank I mentioned above, seem to be moving towards more state involvement in the economy. There is also a lot of railing against “low quality imported goods,” which is partly true and partly a stalking horse for a return to autarky.

9. Iraqi law is also a barrier to developing a private sector. With regards to jobs for example, what kinds of difficulties are there to control the rapid expansion of the number of public workers?

Thomas Doherty: With the oil revenue available, public employment isn't so bad unless the workers are put to work thwarting private sector growth in bureaucracies or establishing monopolies. Iraqi law enables government bureaucracies to do that. For example, the Law of Transportation of 1983 says that “the socialist sector leads the transportation sector.”  This allows the Ministry of Transportation’s SOEs like Iraqi Airways and the State Company for Land Transportation to claim exclusive agencies, which crowd out private sector transportation enterprises. In other words, it’s not that bad that Iraqi Airways employs a lot more people than it would need if it were efficiently run: it’s bad if Iraqi Airways is preventing private sector competition in air cargo and passenger services. Same thing with the Ministry of Communications and its claim of a monopoly on international bandwidth.

The Coalition and subsequent donor activities did very little to change Iraqi law, which still contains numerous clauses subjecting private sector activity to state economic planning. A generation of Iraqis grew up with a statist political and legal philosophy, and it will take a generation to change. Although many Iraqi government officials now understand that the bureaucracy is overly burdensome, others believe that security or the need to prevent anyone from doing anything wrong justifies the control they exert over businesses.

This burden of bureaucracy falls most heavily on Iraqi businesses. Iraq has a tradition of contracting out for large government projects with foreign companies. Foreign companies with government contracts have glided into Iraq easily, exempted from the import and export, and other controls which Iraqis are subject to, because the Law of Major Development Projects of 1985, and other regulations exempted them from these rules.  This is one reason why there aren’t large Iraqi construction and engineering companies to build the infrastructure Iraq needs. It would be a good thing if the Iraqi government encouraged, and allowed the formation and growth of Iraqi companies, but that’s not going to happen under the current company law, where an Iraqi company has to run to the Companies Registrar every time it wants to raise its capital. 

10. Iraq needs good schools to train and prepare future workers, and help with development. How is the country’s education system doing?

Vladimir Halama: The intention to match the syllabus of technical schools with the demands of the labor market is still at the planning stage. School attendance and literacy levels have been falling in recent years. To improve the very low computer literacy in Iraq, schools need to be equipped better. Corruption infects the education system as well, and employers cannot be confident that graduates are competent in the field in they have received their diplomas.  

Thomas Doherty: Until Iraqi educational capacity is fully developed, it would be a good investment of both the Iraqi and American governments to fund Iraqis to study overseas, preferably in partnership with Iraqi universities. A generation of isolation and deprivation takes a generation to overcome. The Ministry of Higher Education also needs to liberalize its bureaucracy. For example, an Iraqi who has a bachelor’s degree in engineering or science field needs to jump through hoops to have a foreign MBA or MPA recognized in Iraq.

SOURCES

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

Prime Minister Maliki Completes His Clear Out Of Central Bank of Iraq

At the end of 2012, the governor of the Central Bank of Iraq Sinan Shabibi was charged with corruption, and forced out of office. At first, his deputy Matheher Mohammed Mudher Salah tried to put a positive spin on events, and was even mentioned as a possible replacement to his boss. Instead, he ended up being placed under house arrest for several weeks. Now it’s been reported that Salah has been retired upon orders from Prime Minister Nouri al-Maliki. The entire affair was seen as a power grab by the premier who disagreed with the Central Bank’s policies.

Deputy Governor of the Central Bank of Iraq Salah was forced into retirement by Premier Maliki to complete his clearing out of the old administration (Al Masalah)

On March 13, 2013, it was reported that deputy governor of the Central Bank of Iraq Matheher Mohammed Mudher Salah was being retired. This came at the orders of Prime Minister Nouri al-Maliki. This was the final act in the removal of the leadership of the bank by the premier. Back on October 15, 2012, the anti-corruption Integrity Commission issued a warrant for Central Bank Governor Sinan Shabibi, and several members of his staff. At that time, Salah claimed that he was not wanted, but that he was under investigation. He tried to put a positive spin on things by saying that the bank needed change, and that people were mentioning him as a candidate to be the new bank head. Things didn’t go his way as Maliki named the chief of the Board of Supreme Audit Dr. Abdul Basit Turki as the temporary head of the Central Bank, while Salah was placed under house arrest on embezzlement charges for several weeks. The official reason for the take down of the bank officials was manipulation of the weekly dollar auctions the bank held. Few believed that however, and instead pointed towards Maliki’s disputes with the Shabibi over his policies. The main one was the governor’s desire to revalue the dinar, which the prime minister objected to. It was also said that the premier wanted access to the bank’s reserves to fund development projects outside of the budget. The governor refused to go along with Maliki’s demands on all those issues. The prime minister has established a trend of using the security forces and corruption charges to get rid of those that oppose him. The charges against Shabibi, Salah, and the others fit that pattern, and accomplished its goal. Shabibi was out of the country when he was told about his arrest warrant, and has not returned to Iraq since then. Salah was then placed under arrest, and now forced into retirement, eliminating him from the administration. Maliki now has an acting governor that he can eventually replace with whoever he wants to solidify his hold over the institution.

The handling of the Central Bank of Iraq was another disturbing example of how the prime minister has attempted to assert his control over Iraq’s independent institutions. In 2011, Maliki charged the head of the Trade Bank of Iraq will corruption, forcing him to flee the country. That same year, the head of the Integrity Commission Judge Rahim al-Ogaili resigned, and later revealed that he was going to be charged with illegal activities. Then in 2012, the head of the Election Commission was arrested, but then found not guilty of bribery. That was followed by the warrant for the Central Bank officials. Finally, at the beginning of 2013, Maliki dismissed the head of the Accountability and Justice Commission after it tried to remove Chief Justice Medhat Mahmoud for ties to Saddam Hussein’s regime. All these actions were based upon a ruling that Mahmoud made that placed all of the country’s independent commissions under the cabinet, even though the constitution explicitly says they are part of parliament’s jurisdiction. Since then the prime minister has taken on the banks and agencies one by one, trying it replace their directors, and put allies in charge of each one. It’s that background that explains what happened to Salah and the rest of the leadership at the Central Bank.

SOURCES

Abedzair, Kareem, “Commission orders arrest of Iraqi Central Bank Governor on corruption charges,” Azzaman, 10/15/12

Al Masalah, “Refer the Deputy Governor of the Central Bank of the appearance of Mohammed Salah to retire after the cancellation of the extension service,” 3/13/13

Peel, Michael, “Iraq leaders’ fairness queried in scandal,” Financial Times, 10/22/12

Shafaq News, “Shabibi deputy: there is no official notice against me,” 10/17/12

Al-Shaher, Omar, “Iraqi Government Seeks Control Over Central Bank,” Al-Monitor, 1/21/13

Sowell, Kirk, “Inside Iraqi Politics No. 49,” 10/31/12

Premier Maliki’s Politicization Of Corruption Charges In Iraq

One after another, the heads of independent institutions and some of the largest banks in Iraq have been charged with corruption. The first was the director of the Trade Bank of Iraq in May 2011, followed by the commissioner of the Election Commission in April 2012, and then the head of the Central Bank of Iraq in October. The chief of the Integrity Commission claimed he was going to be accused of corruption as well before he resigned in September 2011. Corruption is a huge problem in Iraq, and it is continuously ranked as one of the worst in the world. Therefore it’s believable that there would be graft and theft at these organizations. However, the fact that Prime Minister Nouri al-Maliki and his State of Law list were directly involved in each case makes many believe that the premier is attempting to gain control of each one of these institutions. They also follow a Supreme Court ruling that the Integrity Commission, Election Commission, and Central Bank were all under the executive rather than legislative branch. Maliki has now gained leverage over most of them by appointing their temporary leaders. This all points to the prime minister manipulating corruption charges to centralize power in his hands.

The Trade Bank of Iraq was the first target on Maliki’s list. According to the Bank’s Director Hussein al-Azri, on June 2, 2011, Prime Minister Maliki paid him a visit. He asked that the bank to finance a $6 billion deal with a South Korean company to build power plants. Azri asked for a sovereign guarantee on the loan where the government would be responsible for the balance should the company default. Maliki said that one wasn’t needed. He then demanded that the department heads at the bank come to the meeting. A Maliki adviser then arranged a press conference where he said that the bank was under investigation for corruption, followed by security forces surrounding the building. Azri ended up fleeing, and eventually turned up in Lebanon where his family resides. In the aftermath, the integrity committee in parliament that looks into illegal government activities and the Finance Ministry issued a report saying that there were irregularities at the bank. One article said that Azri had given out $400 million in defaulted loans. Maliki stated that $500 million was missing from the bank. It later turned out that the investigation was never completed, and all the accusations against Azri came either from the prime minister or members of his State of Law list. Not only that, but the charges against Azri were made back in 2007, raising questions why it took four years for anyone to act upon them. The bank director ended up being sentenced to 15 years in prison in absentia in October 2012. In his place, Maliki named Hamida al-Jaff as the new head of the bank. The raid on the bank was immediately seen as political. A British adviser to the bank Sir Claude Hankes said that Maliki was behind the move. He told reporters that the government had attempted to manipulate the bank before, but had been rebuffed. Critics believed that the prime minister wanted control of the bank’s $14.9 billion in assets to fund development projects. In 2003, the Americans created the bank, which handles most major trade and financial deals. J.P. Morgan helped set it up, giving it ties with international financial markets. That was why it was the only bank in Iraq that could get credit from foreign institutions. Iraq does not provide sovereign guarantees, which makes it very difficult for Baghdad to finance large infrastructure projects outside of the energy field, which benefits from interest from foreign oil companies. Instead, the government has to rely upon foreign aid, private contractors, and cash payments to fund projects. With control of the Trade Bank, Maliki could use its billions to cover projects.

After the head of the Integrity Commission Judge Rahim al-Ogaili resigned it was revealed that he, and members of his staff were facing corruption charges as well. Judge Ogaili resigned from the main anti-corruption agency in September 2011 claiming that the government was preventing him from doing his work. Later, he told the Special Inspector General for Iraq Reconstruction that he was going to be charged with illegal activities before he left. His violations included providing statistics on the Commission’s work to the United States, a requirement for it to receive aid from Washington, and exaggerating the levels of corruption in the country in talks with the press. Judge Ogaili quit before he could be brought to court. Other members of the Commission faced similar accusations, forcing some to resign as a result. Prime Minister Maliki then named Izzat Tawfiq the acting commissioner. Since he is temporary, Tawfiq can be replaced anytime the premier wants. Maliki has opposed the Integrity Commission, and has continuously tried to block its investigations as a result. He has also demanded that all its major inquiries go through him. Now he might have that ability with Ogaili out of the way, and his man Tawfiq in office.

Maliki was less successful taking on the Election Commission. On April 12, 2012, the head commissioner Faraj al-Haydari was arrested, along with some of his staff. He was charged and found guilty of paying $130 to members of the State Property Commission to get public land. In October, an appeals court overturned his conviction. Haydari said that the charges stemmed back from 2008, and that State of Law parliamentarian Hannan al-Fatlawi was behind his detention. The commission head claimed that a court dismissed the case, and then Fatlawi went to another judge who eventually issued a warrant. Fatlawi was also the one that announced Haydari’s arrest, not the judiciary. Again, this case was seen as an attempt by Maliki to gain sway over an independent body. A member of the Board of Supreme Audit, which goes through the government’s books, said that acts of corruption at the Election Commission had been known for years, but no one acted upon them. The Board official told the International Crisis Group that he believed Maliki went after the commission for not going along with him during the 2010 elections. In that vote, Maliki’s State of Law came in second place, when the premier believed he would win. He then demanded a recount, but it did not change the results. The prime minister then allegedly accused the commission of helping the Iraqi National Movement win the balloting. Not only that, but lawmaker Fatlawi had gone after the commission before. Starting in May 2011, Fatlawi led an unsuccessful no confidence vote against Haydari for corruption, which was defeated in parliament in July. Then in September 2012, State of Law was blocked from expanding the number of commissioners from 9 to 15, which could have been used to put more of its followers on the staff. Iraq is due for two more rounds of elections, provincials in 2013 and parliamentary in 2014. If Maliki had been able to replace Haydari with his own election head or pack the commission with State of Law members that would give him great sway over the upcoming balloting. Those were leading causes for other parties to vote against Fatlawi’s no confidence vote in the summer of 2011, condemn Haydari’s arrest in the spring of 2012, and why Maliki was unsuccessful in expanding the number of commissioners this fall. These were all seen as crass moves by Maliki to take over the commission.

Today, the Central Bank of Iraq is caught up in the latest controversy involving the prime minister. At the end of October, arrest warrants were issued for the director of the Central Bank of Iraq Sinan al-Shabibi and members of his staff. A committee found evidence against them that had to deal with the sale of foreign currency. The premier then named the head of the Board of Supreme Audit Abdul Basit Turki the acting bank chief. The investigation into Shabibi started in August 2012 when a State of Law parliamentarian accused bank officials of laundering money. That led the Speaker of Parliament Osama Nujafi to call for a special committee to be formed. What that group found is under dispute. A State of Law member claimed that there was corruption involving dollar auctions the bank holds every week. Another lawmaker said he quit the committee, because others were going to form their own special group and release an anti-Shabibi report. Shabibi claimed that the government had been trying to get rid of him since 2009. He told the press that Baghdad wanted to use the Central Bank’s $63 billion reserves to fund development projects. The bank chief went on to say that was against the bank’s rules, and that he received threats and was intimidated as a result. Maliki and Shabibi have also argued over a wide range of issues such as revaluing the dinar and interest rates. In March, the prime minister ordered that all the bank’s policy decisions be sent to the cabinet for approval. The next month there were rumors that Maliki wanted Shabibi out to be replaced by one of the premier’s economic advisers. This was just like the Trade Bank of Iraq case. All the accusations against the Central Bank came from legislators belonging to Maliki’s list. With the long time director out of the way, Maliki could name his replacement that would then be beholden to him. Together, Baghdad would have over $70 billion to help finance projects. Whether this works out as well for Maliki as the Trade Bank is yet to be seen as Shabibi has said he will fight his charges, and no one has actually been arrested yet.

The prime minister’s intention to gain control of Iraq’s independent institutions was revealed in January 2011. That was when the Federal Supreme Court made a very controversial ruling that the Election and Integrity Commissions as well as the Central Bank of Iraq were all under the authority of the executive. This was despite explicit language in the constitution, which said that only parliament had that power. In February 2012, the Higher Judicial Council affirmed the court’s decision. Both happen to be under Chief Justice Medhat Mahmoud who is considered to be an ally of Maliki. Neither the commissions nor the bank were willing to go along with the courts. Now the premier has been able to name the heads of the Integrity Commission and Central Bank, while failing to do the same with the Election Commission. That was done by using corruption charges, which never go anywhere against important officials, unless someone more powerful is able to manipulate them. This appears to be the case here, as Maliki and his State of Law were behind all of the charges.

Many believe that Prime Minister Maliki is becoming an autocrat. Some of those accusations don’t appear to hold water. These four cases however, are more clear-cut. Maliki personally led the raid against the Trade Bank of Iraq, and legislators from State of Law made all the accusations against the Integrity and Election Commissions, and now the Central Bank of Iraq. Corruption is endemic in Iraq, but some of the charges have appeared minuscule at best like those against Election Commissioner Haydari and Judge Ogaili or have never become clear such as those against Central Bank head Shabibi. Not only that, but nothing is ever done against high officials like these over corruption, unless someone powerful wants action to be taken. That person is the premier who now at the least has gotten rid of officials who refused to follow his dictates. At the worst, he has gained de facto control over several independent institutions. This has all been possible by manipulating graft and theft charges to fulfill his political goals. This is a direct threat to Iraq’s developing political system. Without checks and balances, Iraq’s leaders like Maliki will be able to do what they like. The fact that he has attacked the commissions in charge of voting and fighting corruption are especially troubling, because he could now influence future elections and ensure that nothing is done about the rampant theft and graft within the government. This sets a dangerous precedent that the prime minister will use the courts and corruption to get rid of those that stand in his way. The Iraqi parliament has only been partially effective in blocking these moves, and could do a lot more. The problem is that the party bosses are unwilling to shake the boat, because they all benefit from the status quo. That means Maliki may be able to continue with these actions, concentrating more and more authority in his hands.

SOURCES

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