Iraqi banks rely on government support to recover from ISIS devastation

Sunday 11/12/2016
An Iraqi employee counts bills with a money counting machine at Ashur International Bank in Baghdad, on December 5th. (Reuters)

London - Iraq’s private banks are pin­ning hope on the oil-rich government to bring balance sheets severely affected by Is­lamic State’s (ISIS) takeover of parts of the country back into the black.

Iraqi Private Banks’ Association President Ali Tareq told Reuters that several lenders could not pass a stress test of international stand­ards at their current level of capi­talisation.

“Collectively, banks have lost nearly 100 branches in hot areas with all their assets, funds, build­ings, everything without any com­pensation,” he said. “If a stress test is held currently, it should take into consideration the current sit­uation of the country and the Iraqi banking sector.”

The weakness of the private banks does not severely affect the overall banking sector, which is dominated by state-owned banks feeding on business from the oil-rich country’s government. It is a setback, however, for government efforts to develop the private sec­tor and reduce the nation’s reli­ance on oil revenues.

To reinvigorate private lenders, the central bank considered offer­ing private banks the possibility of setting up a $422.8 million fund that would invest in the govern­ment’s “strategic infrastructure projects”, such as housing, trans­port and sewage ventures, Tareq said.

The government would thus provide the banks with a steady stream of business that would help restore their balance sheets.

“The central bank is in the final steps. It has sent a letter to the participant banks to determine their shares. All banks are allowed to participate,” Tareq said. “Other than levying interest, the banks will be engaged in long-term, guaranteed projects.”

Other than damage to the assets of the banks and the banks’ cli­ents, the militants’ sweeping ad­vance across northern and west­ern Iraq caused a rush on liquidity. People became worried that they would no longer be able to access their money deposited in banks. Iraq relies almost entirely on cash for day-to-day transactions.

Iraq’s state-owned banks — Rafidain, Rasheed, Agriculture, In­dustrial, Real Estate and the Hous­ing Fund — control together 86% of total deposits — $48 billion — and 45 private banks share the remain­ing 14%, said Tareq.

“There were many withdraw­als of deposits by citizens because the circumstances at the time re­quired that they have liquidity,” said Tareq. “Bank transactions were dealt a heavy blow at the same time, as lending and letters of credit” to the private sector “decreased as the government ex­ecuted fewer projects”, he added.

Iraq has been prey to war and in­surgency since the US-led invasion of the country in 2003. As a result, Iraqis are reluctant to use banks in case violence prevents them from accessing their cash or restrictions are placed on withdrawals.

Private banks suffered a lot more than the state-owned ones that relied on government liquid­ity and transactions to stay afloat throughout the 36 years of wars and sanctions that the country went through.

The Iraqi government is hoping that a new deal by the Organisa­tion of the Petroleum Exporting Countries (OPEC) to lower output for a six-month period will help the war-weary country generate enough revenue to help pay for its costly, 2-year-old fight against ISIS.

Iraq, whose oil revenues make up nearly 95% of its budget, has been reeling under an economic crisis since late 2014, when oil prices began their descent from a high of more than $100 a barrel.

Iraq’s financial crisis has forced the government to introduce aus­terity measures, eliminating posts, merging some ministries, halting spending on construction projects and imposing new taxes. It has also sought loans from foreign and local lenders.

Some expect Iraq’s defence spending to be reduced when ISIS militants are driven out of the northern city of Mosul.

“I call it a peace budget rather than a war budget, as much of the military expenses will go down with the liberating of Mosul this year, ending major battles,” said Mudhir Mohammed Salih, an eco­nomic adviser to the Iraqi prime minister. “By then, we’ll see more surpluses to cover other areas.”

In July, Iraq secured a $5.34 bil­lion loan from the International Monetary Fund (IMF) that could unlock a further $18 billion in loans. The IMF has established a series of benchmarks connected to the 3-year loan, requiring Iraq to reduce public spending, im­prove collection of taxes and cus­toms fees and fight corruption and money laundering. Other loans and payment facilities also were offered from other countries to cover defence costs.

The Arab Weekly staff and news agencies