Download IRAQ: The remains of the Banking System

Lessons from Transition Europe:
Post-Conflict Strategies for
Rebuilding
1
Relevance of ECA Countries Early in
Transition or Post-War Phase










Collapse of GDP
Hyperinflation
Corruption
High levels of black market activity
State control
Absence of market-based commercial banking
Unsuitable legal/regulatory environment
High levels of debt
Recovering from sanctions
Broken trade and investment relationships
2
Private and Financial Sector
Development

Lessons from Bosnia, Kosovo, Macedonia, Serbia, Caucasus
and elsewhere suggest the following immediate priorities:






Establish rule of law and provide beginning framework for sound
judiciary
Inject capital into the economy with market-based signals that can
be built on in subsequent phases
Restore functioning banking sector based on initial prudential
framework emphasizing stability
Seek broad trade and investment links
Seek environment in which there is recognition of the need for
maximum market, fiscal sustainability, and lowest level of
political risk
Second phase of development to focus on laying the
groundwork for long-term growth
3
Lessons from Serbia for Iraq
Serbia:





Resolve major banks
Introduce key legislation
and banking regulations
Reinforce with SME lines
of credit through
potentially sound banks
Establish framework for
debt restructuring
Introduce fiscal and
structural incentives to
bring money outside the
system into the system
Iraq:






Resolve 2 large banks
Introduce best practice
laws/regulations for viable
commercial banking
Inject funds into economy for
SMEs based on credit
worthiness standards
Conceptualize framework to
ease debt overhang
Take medium-term view to
fiscal sustainability
Professionalize civil authority
4
“Territorial” Lessons: Kosovo and PA
Kosovo






Narrow “central” bank
Prominent micro-finance
role via bank + NGOs
Manual to automated
payment system
Sound prudential
framework
Rational licensing policy
with reasonable capital
requirements
Strong entrepreneurship
Palestinian Authority






Need disciplined
monetary framework
Link efforts to regional
trade
SME and micro-finance
opportunities abound
Phase in sound legal,
regulatory and judicial
requirements
Harness entrepreneurship
Root out corruption
5
Lessons from Bosnia for Iraq and PA








Bosnia
Currency board
Easing of ethnic tension
Gradual settlement of
property disputes
Consolidation of banking
system
Strong banking supervision
linked to deposit insurance
Foreign banks
Lending to citizens and SMEs
Problems: legal, judicial,
corruption and state
enterprises






Iraq and PA
Monetary discipline needed
Dispute resolution based on
sound legal framework
essential
Politicization based on
ethnic priorities slows
progress towards single
economic space
Financial discipline in
banking and enterprises
indispensable
Corruption is a killer
Business climate must be
open to trade and investment
6
Lessons from Macedonia
Macedonia




Small economy, but in
region where other interests
look at Macedonia as part
of regional economy
Banking reform without
state enterprise reform does
little
Cost of corruption
undermines open trade and
investment regime
Little reserve for political
instability
Iraq and Palestine




Regional trade and links
essential for market growth
(PA) and diversification
(both)
Comprehensive structural
reforms needed for
competitiveness
Outside investment essential
for capital and governance
Ethnic and community
conflict will only increase
political risk and constrain
prospects
7
Lessons from Azerbaijan for Iraq
Iraq
Azerbaijan




Reliance on oil
dangerously
concentrated
Weak non-oil sectors
bifurcate income
distribution
Focus on Oil Fund stoke
corruption
Post-war period requires
years of economic and
institutional rebuilding



Need to diversify by
increasing non-oil
output
Agriculture and
processing represent key
potential areas
Influx of diaspora talent
will help with economy,
but may cause
resentment due to
income and experiential
differences
8
The Iraqi Economy: Pre-war








Devastated by sanctions since 1990
UN Oil for food deal in 1996 allowed for some
sale of oil to alleviate humanitarian crisis
Highly centralized economy
High degree of state ownership
Government experiments with market reforms
met with limited success
Almost full dependence on oil revenue for
foreign exchange
Huge black market for consumer goods
Corruption, criminality, and patronage
9
Post-war Iraq: What remains?









Almost all banks have been looted
Bank infrastructure destroyed
No functioning banking system
No formal payment system
State enterprises have had their assets stripped
Most industries not functioning
SME sector has no access to bank credit
because of bank failure
Supply and trade networks have fallen apart
Critical supplies and infrastructure being
restored slowly
10
Palestinian Economy Today






Weak resource base for investment flows even if
political stability achieved via “road map”
High level of dependence on donors for income
supplements, food aid and medicines
Unemployment high and erratic resulting from
political and trade tensions
Absence of stable trade relations in the region weaken
prospects
Unclear legal framework rooted in Ottoman, British
mandate, Jordanian and Israeli features
Under the best of circumstances, still a very small
economy and country
11
What to Do? Phase 1:
Emergency, short term measures


Goal: Boost the economy quickly, create jobs,
and set rules for viable banking sector (0-18
months)
Priorities:
 Establish an interim credit fund to increase
access to credit for job/value-creating SMEs.
 Conduct financial sector assessment (focusing
on banking system assets, liabilities,
management, governance, prudential norms, etc).
 Conduct a corporate sector review, and develop
privatization plans and TA strategy.
12
Phase 2: Medium-term measures


Goal: Create the foundations for a functioning
market economy (2-4 years)
Priorities:






Bank and enterprise reform and privatization
Investment climate reforms
Commercial legal framework for business and
secured transactions
SME development and growth
Comprehensive legal and regulatory framework for
banks and non-bank financial sector
Sound public sector institutions based on
professional standards
13
Options to Achieve These




Lines of credit focused on quick-disbursing funds
for sound banks and SMEs based on prudential
norms for commercial banks
Adjustment credits introducing comprehensive
programs and strategies for financial sector,
enterprises, civil service, professional
associations, and NGOs
Trade/export-related credits/insurance to
stimulate regional trade and diversification
Technical assistance from advisory services,
ESW, lessons learned from other markets and
regions
14