Economic Rebound and Fiscal Expansion
Iraq's Banking System Reforms: 2024 Updates
As of September 17, 2024, Iraq's banking system is undergoing significant reforms aimed at enhancing its stability, efficiency, and integration into the global financial system. The Central Bank of Iraq (CBI), led by Governor Ali Mohsen Al-Alaq, is at the forefront of these efforts, implementing measures that are crucial for the country's economic development and fiscal sustainability.
Since the new government took office in October 2022, domestic stability has improved considerably, facilitating the passage of Iraq's first three-year budget in 2023. This fiscal expansion, which started in 2023, supported a strong recovery in Iraq's non-oil economy following a contraction in 2022, demonstrating the government's commitment to economic diversification and growth. Domestic inflation declined to 4 percent by the end of 2023, reflecting lower international food prices, the currency revaluation in February 2023, and the normalization in trade finance.
Financial Sector Modernization
The CBI's initiatives include the modernization of the financial sector and restructuring of state-owned banks. Recognizing the need to align with international standards, the CBI has engaged in high-level discussions with the U.S. Treasury, the Federal Reserve, and major financial institutions such as Visa, Mastercard, MoneyGram, Citi Bank, JP Morgan, and international auditing firms like KPMG, Ernst & Young, K2i, and Oliver Wyman. These consultations have focused on enhancing the monitoring of foreign transfers and cash sales of U.S. dollars, improving transparency in foreign trade financing, and strengthening protections against money laundering, terrorism financing, and other financial crimes.
Shift to Direct Banking Relationships
A key reform is the planned shift from the current electronic platform for foreign transfers to direct banking relationships between Iraqi banks and international correspondent banks by the end of this year. This transition, developed in consultation with global partners, aims to improve the stability, transparency, and efficiency of Iraq's foreign trade financing, contributing to a more stable exchange rate and a more robust financial system.
Digital Banking and Financial Inclusion
The CBI has also reported receiving between 60 and 70 applications for digital banking licenses, indicating a significant interest in expanding digital banking services in Iraq. This move is expected to foster financial inclusion and streamline banking services, making them more accessible to the general public and small businesses.
Fiscal and External Imbalances
Despite these positive developments, the ongoing fiscal expansion has led to imbalances and increased Iraq's vulnerability to oil price fluctuations. The International Monetary Fund (IMF) has emphasized the need for sound macroeconomic policies and structural reforms to secure fiscal and debt sustainability, advance economic diversification, and achieve sustainable, inclusive, and private sector-led growth.
Digital Transformation in the Banking Sector
To visualize the digital transformation in Iraq's banking sector, the following enhanced table provides a snapshot of the digital banking landscape as of September 17, 2024.
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