US Embassy Diplomatic Cables from WikiLeaks

[Broke IronWorker]

this shows how they are very very aware of what is going on with the dinar

E.O. 12958: DECL: 12/13/2017

TAGS:

SUBJECT: DASH FOR DINARS AS DOLLAR DEMAND DROPS

Classified By: Economic Section Deputy James Freund, reasons 1.4 b,d

1. © SUMMARY: Demand for the dinar has risen this past week

in response to the holiday period, a reported drop in

imported good prices in Baghdad due to an appreciating dinar

against the dollar and improved security, and speculation

among money traders of a sudden appreciation of the dinar

that occurred around this time last year. How the Central

Bank of Iraq (CBI) handles growing demand for the dinar will

be critical, especially in terms of expectations management

and injecting dinar liquidity into the market This is an

encouraging development for Iraq and reflects a vote of

confidence by Iraqis in their domestic economy and the

government's monetary policies. END SUMMARY.

---------------------

Surge in Dinar Demand

---------------------

2. © Growing demand for dinars began showing up in the

CBI's foreign currency auctions on December 9, when the

CBI-listed market rate was 1,208 dinar per dollar versus the

auction price of 1,216 dinar per dollar. On December 10 the

CBI-listed market rate appreciated to 1,194 dinar per dollar

and then on December 11 the CBI-listed market rate

strengthened further to 1,175 dinar per dollar. We do not

have anymore CBI-listed market rates, but a senior USAID

consultant to the CBI told us on December 13 the rate among

Baghdad money traders was hovering around 1,108 dinar per

dollar. A senior Task Force for Business and Stabilization

Operations (TF-BSO) consultant to the CBI confirmed with her

contacts there that the CBI bought 45 million dollars and

sold only 8.6 million dollars at the official auction price

of 1,126 dinar per dollar. Another USAID consultant to

Iraq's Central Office for Statistics and Information

Technology (COSIT) said employees there believe the market

rate could reach 1,000 dinar per dollar because today it is

between 1,100-1,105 dinar per dollar. Finally, our local

staff who are paid in dollars are complaining today of

difficulty in finding money traders willing to take their

dollars for dinars.

3. (SBU) In terms of background, the CBI maintained an

official exchange rate from 2004-2006 of approximately 1,477

dinar per dollar. The CBI moved to appreciate the dinar

through its foreign currency auction process in response to

high summer 2006 inflation rates reaching 76.6 percent for

August year-on-year (y-o-y). This auction process is managed

and is also referred to as a "crawling peg" exchange rate.

During the auction, the CBI invites banks to buy or sell

dollars at rates based on a combination of its monetary

policy and the effect of current market trends. The CBI has

worked closely with the International Monetary Fund in

designing and implementing monetary policy.

4. (SBU) Since September 2006, the dinar has appreciated

approximately 17 percent against the dollar, while the dollar

has declined by 12.6 percent and 6.9 percent against the euro

and Pound Sterling respectively. At the beginning of 2007,

the exchange rate was 1,304 dinar per dollar. During

December 12 trading, the CBI sell rate of 1,216 dinar per

dollar reflected an appreciation of only 6 percent against

the dollar for the major part of 2007. The slowing of

appreciation likely reflects the impact of significantly

reduced inflation for 2007, down to 15.5 percent y-o-y in

November.

-----------------------------------------

Confluence of Events Driving Dinar Demand

-----------------------------------------

5. (SBU) Observations over the last three years have shown

that prior to holiday periods, demand has been strong for

dollars rather than dinars. Here we see a change in the

trend, an increase in demand for dinars prior to the Eid

holiday and the beginning of the Hajj. Eid al-Adha is a two

day religious celebration starting on Wednesday, December 19.

Iraqis will have four days off with the weekend and due to

improved security levels, a greater number of Iraqis are

participating in the Hajj. The strong demand for dinars

represents a vote of confidence by Iraqis in their domestic

economy and the government's monetary policies.

6. (SBU) The dinar appreciation combined with better security

conditions also likely are increasing dinar demand because

dinar prices for goods appear to be beginning to drop in

Baghdad. This is especially true for imported goods, which

Iraqis are eager to buy. In a meeting today with staffers

for the Council of Representatives Committees on Finance and

Economic Affairs, they confirmed to econoffs that dinar

prices for vehicles are declining. One staffer said two

pickup trucks recently purchased for the Economic Committee

were bought for a lower dinar price than when the purchase

BAGHDAD 00004058 002 OF 002

was previously considered.

7. (SBU) Another factor is that last year there was a

substantial appreciation of the dinar against the dollar

between November and the end of December, and money traders

could be expecting this to happen again. A December 10 CBI

press release announcing the withdrawal of the three lowest

dinar denominated coins (dinar 25, 50, and 100) also could

have further spurred speculation. Iraqi markets are not

efficient or well integrated and prices are not well

arbitraged--this means rumors can have big effects

temporarily.

-----------------------------

CBI Action Will Play Key Role

-----------------------------

8. © COMMENT: How the CBI handles growing demand for the

dinar will be critical, in particular on expectations

management and injecting dinar liquidity into the market.

The TF-BSO consultant notes the CBI is taking this situation

very seriously, and when she was at the CBI this morning all

the key managers were going to a meeting on the issue. She

also said she had never seen such a long line of armored

trucks snaking around the block waiting to get dinars in her

entire three years consulting with the CBI. The CBI also

issued an immediate press release today to dispel the rumors

of sudden appreciation to 1,000 dinar per dollar or lobbing

off any zeros to the exchange rate. The CBI's foreign

currency auction's daily volume has fluctuated, but not

substantially diminished.

9. © This is a good news story for Iraq, and the CBI is

showing increased institutional capacity to respond to

monetary issues. A stronger dinar is helping to curb

inflation and imported goods are becoming cheaper for the

average Iraqi as long as security continues to improve.

Moreover, this gives the CBI a chance to continue to

de-dollarize the economy; something that often is difficult

to do in oil-rich countries. END COMMENT.

BUTENIS

Classification CONFIDENTIAL

Released Aug 30, 2011 01:44

Created Sep 5, 2008 10:42

Share

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RR RUEHBC RUEHDE RUEHIHL RUEHKUK

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FM AMEMBASSY BAGHDAD

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INFO RUCNRAQ/IRAQ COLLECTIVE

RUEATRS/DEPT OF TREASURY WASHDC C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002854

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E.O. 12958: DECL: 09/01/2018

TAGS:

SUBJECT: IRAQI DINAR CASH CRUNCH: TIGHT BUT MANAGEABLE

REF: A. BAGHDAD O/I 8/11/2008

B. BAGHDAD 2431

Classified By: Economic Counselor Michael Dodman for reasons 1.4( and

(d)

1. © Summary: Iraq's vastly increased public spending

combined with bureaucratic delays in the purchase of new cash

supplies by the Central Bank of Iraq, an antiquated and

not-yet interconnected banking sector, and continued reliance

on cash payments for government salaries has caused a cash

crunch in Iraq. Based on current rates of disbursement, we

believe that the banks have a sufficient supply of vault cash

Iraqi Dinars to meet government payrolls and other demands

for the next two weeks. The Central Bank is expecting a new

cash shipment to arrive in September, but some provincial

bank branches are reporting that their dinar supply is

dangerously low. Intervention by the Embassy's Public

Finance Management Action Group helped to avert a crisis with

the Ministry of Defense, ensuring that sufficient funds were

available to meet payroll needs for the security services

going into the month of Ramadan. End Summary.

----------------------------------------

Enough Cash -- But Not Where it's Needed

----------------------------------------

2. (SBU) Based on information from the Central Bank of Iraq

(CBI), we believe that based on current expenditure levels,

banks have a sufficient supply of Iraqi Dinars (IQD) to meet

government payrolls until at least mid-September. Banks in

Iraq currently hold approximately IQD 1.7 trillion (USD 1.4

billion) in vault cash. This far exceeds the IQD 400 billion

needed to meet the banks vault cash reserve requirements.

Despite the banking system overall having sufficient dinar

notes, certain bank branches have indicated that their

cash-on-hand is not enough to meet their customer demands.

This is a particular problem for Iraq since GOI payrolls, for

the most part, are paid in cash, and it comes at a time when

many Iraqis increase their spending in celebration of the

beginning of Ramadan. The situation is tight, but manageable.

3. (SBU) Highlighting this problem was a September 1 report

from PRT Diyala that there had been no cash shipment from

Baghdad to Diyala since August 6. As a result, the five

central Diyala Rafidain bank branches have been forced to

postpone almost all cash disbursements, including the large

numbers of end-of-month government employee and teacher

salaries as well as payments to pensioners. Diyala

Supervisor-General for Banks Salih Rasheed told the PRT that

the Rafidain headquarters in Baghdad claimed that it also had

no reserves, but expected replenishment from the CBI by next

week.

------------------------------------

Payroll System Compounds the Problem

------------------------------------

4. (SBU) The Government of Iraq's payment system continues to

be cash-based. Government payroll rosters are compiled at

the local accounting offices of each ministry and then passed

on to a main accounting office such as the Governorate

Treasury or an Accounting Department of a ministry branch.

At this level the rosters are aggregated and sent to the

headquarters of the Ministry of Finance (MoF). The MoF then

orders a cash transfer, which is done with physical cash by

vehicle, to the branch of either the Rafidain Bank or Rasheed

Bank nearest to the local accounting office of the ministry.

In the case of the Ministry of Defense, cash transfers are

made to the Rafidain Bank branch at the Ministry of Defense

in Baghdad and collected there monthly by regional military

paymasters who then transport the cash back to their units.

5. (SBU) A more efficient system of transferring funds among

banks has not yet been adopted by most state-owned banks

though some private banks are now transferring funds

electronically and using ad hoc interbank borrowing

facilities. To overcome the current payroll crunch,

state-owned banks are just beginning to transfer cash between

their own branches in order to meet needs in various

geographic areas. This effort is piece-meal, however and not

always sufficient to meet needs.

------------------------------------

Budget Expenditures Also Play a Role

------------------------------------

6. (SBU) Data from the Ministry of Finance indicate that the

GOI spent over (IQD) 4 trillion (USD 3.7 billion)

domestically in both May and June, and over IQD 3 trillion

(2.5 billion) in July. Yet current account balances at the

CBI remain high as it continues to remove IQD from the

BAGHDAD 00002854 002 OF 002

economy by appreciating the dinar against the dollar through

its foreign exchange (FX) auctions. To keep inflation in

check, the CBI has soaked up IQD 17.9 trillion (USD 15.1

billion) through FX auctions so far in 2008; over the same

period, the GOI has transferred IQD 17.9 trillion for

domestic expenditures.

------------------------------------------

New Money is Coming -- But Not Fast Enough

------------------------------------------

7. © As reported Ref A, delays in the CBI's printing of new

banknotes and a failure to calculate the increased demand for

cash caused by recent civil service pay increases and more

aggressive GOI domestic spending have exacerbated this cash

crunch. Lacking dinar cash, Iraqi banks have increased their

disbursement of the USD notes that they also maintain as

vault cash. CBI data also show a significant spike in USD

sales in July and August, somewhat undercutting its previous

efforts in "de-dollarizing" the Iraqi economy.

8. © The CBI, which had injected IQD 8 trillion (USD 6.7

million) worth of new dinar notes earlier in 2008, informed

us that it expects a cash shipment of IQD 800 billion (USD

670 million) to arrive shortly. This shipment will consist

of 32 million IQD 25,000 (USD 21) denomination notes and be

sufficient to meet roughly one week of cash demand. The CBI

has ordered a total of approximately IQD 3 trillion (USD 2.5

billion). (Note: TREASATT advocacy and efforts with the CBI

led to the GOI being willing to accept currency printed at

DeLaRue's Nairobi, Kenya facility, which has spare line

capacity. This should allow regular cash shipments to begin.

End note.)

9. © The CBI reported on September 4, that it has been able

to meet cash demands on a daily basis -- roughly IQD 20-30

million -- because private banks are continuing to deposit

cash in the CBI's vaults. Private banks offer a higher

average rate of interest on retail deposits than the

state-owned banks.

--------------------------------------

Close Call at the Ministry of Defense;

PFMAG to the Rescue

--------------------------------------

10. © The cash crunch, when combined with bureaucratic

squabbles between the MoF and the Ministry of Defense (MoD)

over the MoF's desire for the MoD to close out its FY 2006

and 2007 books created conditions where there was real doubt

whether there would be sufficient cash available at the MoD's

Rafidain Bank branch for August wage payments. The Embassy's

Public Finance Management Action Group (PFMAG), through

intervention with the MoF, MoD, CBI and the Rafidain Bank,

secured an agreement from the CBI to supply IQD 25 billion

(USD 21 million) in cash shipments for security ministries

payments. This averted what would have been a real crisis as

military paymasters were unwilling to return back to their

units without cash for salaries during the lead-up to Ramadan.

-------

Comment

-------

11. © Iraq's antiquated and inefficient reliance on cash

for all nearly transactions, and especially cash for

payrolls, pensions, and many other types of government

spending, when combined with state-owned banks whose branches

are not inter-connected makes the flow of new bank notes from

the Central Bank's vaults a fiscal jugular vein. Political

dangers exist when banks used for public salaries and

disbursements run low on cash. Yet there are some steps that

Iraqis could take fairly easily. For example, individual

Iraqi bank branches could meet their own cash needs by

issuing short-term certificates of deposit or other

incentives to encourage the depositing of some of the

approximately IQD 20 trillion (USD 17 billion) cash estimated

to be in circulation. The good news is that Iraqis are not

strangers to this type of problem and have developed coping

mechanisms such as running up tabs at local shops. The

Embassy's Public Finance Management Action Group (PFMAG) will

continue to closely monitor this problem and seek to both

address the underlying causes and symptoms of this problem

Some want to think it all a secret and just wanted to share some of the real facts

http://dazzlepod.com/cable/08BAGHDAD2854/?q=iraq%20new%20dinar http://dazzlepod.com/cable/07BAGHDAD4058/?q=iraq%20%20dinar

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INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002990

SIPDIS

E.O. 12958: DECL: 09/15/2018

TAGS:

SUBJECT: IRAQ CBI GOVERNOR ON POST-SBA RELATIONS, CASH

CRUNCH, AND HIS PROPERTY WOES

REF: A. BAGHDAD 2431

B. BAGHDAD CLASSIFIED OI SEPTEMBER 15

C. BAGHDAD 2854

Classified By: EMIN - Marc Wall, Reasons e.o. 12958 1.5 (B,D)

1. © SUMMARY: In a meeting with EMIN and Treasury Attache

September 14, Central Bank Governor Sinan Shabibi offered a

tour d'horizon of issues concerning the CBI. Shabibi looked

forward to the final tranche of Paris Club debt write off. He

was open to a follow on "precautionary" Standby Agreement

with the IMF in order to continue IMF technical advice after

the March 2009 termination of the current SBA. Shabibi said

the CBI remains committed to fighting inflation despite the

lack of understanding in the GOI of the of CBI's role. He

hopes to see inflation in the range of nine to ten percent,

at which time he anticipates adjusting the tools he uses. He

did not believe that the CBI policy rate was the most

effective such tool in an economy where credit is so limited.

2. SUMMARY CONTINUED: Saying "I will not be flexible on

this," Shabibi underscored his insistence that the GOI

provide the CBI with an appropriate parcel of land on which

to construct a CBI complex. He was confident that the next

delivery of Iraqi dinar will arrive September 15, with

regular deliveries to follow. He noted that the cash

shortage arose primarily because of the GOI decision suddenly

to increase GOI employees' salaries, which overwhelmed the

contingency cash reserve that CBI had planned at the

beginning of the year. END SUMMARY.

3. © In an introductory meeting with EMIN on September

13, Central Bank of Iraq Governor Sinan Shabibi, accompanied

by his Deputy Ahmad Al-Jaboory, told EMIN and Treasury

Attache that he looked forward to the final tranche of Paris

Club debt relief at the and of the current Standby

Arrangement (SBA) and said he "looks forward to continuing

our relationship with the IMF." He noted that the Iraq-IMF

relationship will change and should focus more on technical

assistance in areas like reserves management. He indicated

that he had had good meetings with the Financial Services

Volunteer Corps (FSVC), and looked forward to working with

them. At the same time, he was looking at training and

strategic advice from the IMF, and would want to ensure that

the two programs are not duplicative.

--------------------------------------------- ---

Central Banking Largely Misunderstood by the GOI

--------------------------------------------- ---

4. © Asked whether he was experiencing political pressure

on IMF SBA conditions such as inflation control and its

attendant high CBI policy rate, Shabibi admitted that the GOI

needed to coordinate better internally on its approach to

inflation fighting. Al-Jaboory noted that the IMF focus is

on economic stability which is something that is far less

visible to the average Iraqi than the salary increases and

capital projects the rest of the GOI is focusing on.

Shabibi, elaborating on this theme, said that the relatively

high policy rate of 16 percent must be put into context. He

noted that money is flooding into the Iraqi economy,

primarily from the oil windfalls but also from international

donors and investors. As for those who complain that the

high policy rate is choking off credit, Shabibi said Iraqis

-- both in government and in the private sector -- don't

understand the true cost of money after so many years of

GOI-subsidized lending. Eventually, he said, Iraq will be in

a situation where market rates will prevail, but it will take

time. (Note: See REF A for more on political pressures

against the CBI. End note.)

5. © Noting the success the CBI had had in curbing

inflation since the inflation spike in 2006, Shabibi said

that sometimes GOI ministers seem to want to take credit for

this themselves. He said most of his colleagues, while they

are good people, really don't understand, much less

appreciate, the role of an independent central bank in a

modern economy. One example from current circumstances is

the GOI focus on spending its oil windfalls. Ministers, he

said, focus only on how much money they spend without

differentiating between operating and capital expenditures,

and they don't understand that the former is inflationary

while the latter can be neutral. He is encouraging the GOI

to analyze how it is spending its windfall and not just focus

on how much it is spending. He wants the GOI to engage in a

dialogue on the equilibrium between these two effects. This

sort of thing, he said, is a new experience in Iraq for the

central bank, which historically has simply executed the

policies of the government.

6. © Asked how concerned the CBI is at inflationary

pressures, Shabibi replied that he is trying to bring core

BAGHDAD 00002990 002 OF 003

inflation down from the current fourteen percent to something

on the order of nine or ten percent. He anticipated that his

inflation fighting tools will change, with less of an

emphasis on the policy rate, which he wasn't sure had such an

important effect on inflation in Iraq, since borrowing was so

limited. He plans to develop a "policy package." Currency

appreciation would continue.

--------------------------------------------- -----

CBI: Still Hasn't Found the Home it is Looking For

--------------------------------------------- -----

7. © As to other concerns, Shabibi vigorously argued that

the single most important issue to him was the lack of

progress in securing a facility to build a new CBI complex.

Starting with an observation of how nice the Fed facility was

that he had just visited in Jackson Hole, Wyoming, Shabibi

said the Iraq CBI needs something comparable. He complained

that he wasn't getting any support from working levels in

GOI. Despite the good promises of his "friends" PM Maliki and

Finance Minister Jabr, building after building had been

offered and then withdrawn. Shabibi said he was frustrated

that eight months after the fire that destroyed the old CBI

headquarters there has been "no progress" in developing a new

one. This was especially frustrating since the CBI bought

nearly 80 acres for a new facility in 2004, but the transfer

has been in limbo due to the Iraqi intelligence service's

refusal to relinquish the property. Shabibi went over the

long story of the different properties that had been offered,

culminating in the latest offer from Finance Minister Jabr of

20 donum (note: about 50 acres), which had subsequently been

whittled down to six donum as ministry officials found other

uses for parts of the property. Complaining that four donum

had been taken for a hotel, Shabibi said -- "(MinFin) think a

hotel is more important than a central bank?!?"

8. © Shabibi said he "will not be flexible on this."

Al-Jaboory reinforced Shabibi's personal frustrations at how

CBI was being mistreated by the GOI, and said the CBI was

prepared to go so far as to sue the Finance ministry for not

returning its funds from the 2004 purchase and would complain

about lack of support from the GOI at the Bank/Fund meetings

in October. (Note: see ref B for more on Al-Jaboory's views.

End Note.) Shabibi complained bitterly that Finance Ministry

officials have not made good on Minister Jabr's promise, and

that they simply do not understand the role and importance of

a central bank, thinking it is "just another bank." His

bottom line: CBI needs 10 donum of land, and soon, since the

facilities they need to build will include separate

structures for cash handling, IT, training, executive and

meeting suites and storage vaults, which will take at least

three or four years to complete.

-----------------------

More Cash is on the Way

-----------------------

9. © Referring to the cash crunch the GOI has experienced

since late summer (REF C), Shabibi assured us that with a

delivery of 500 billion dinar on September 15, the payrolls

for August and September will be met. Moreover, Shabibi said

he is planning more or less "continuous" deliveries over the

course of the five year contract. He explained that one

reason there had been the August crunch was the Finance

Ministry's decision to use some of the oil windfall to nearly

double civil servants' pay in one payment. This was a sudden

decision, he said, which exhausted the contingency reserve

that CBI had planned at the beginning of the year. Treasury

Attache warned Shabibi to expect another spike in salary

payments in January 2009, when the GOI, after urging from the

IMF to delay its supplemental salary payments to avoid an

inflationary spike, will pay a second installment. Shabibi

interjected that one more reason for a full CBI complex as

that at some point in the future Iraq should be printing its

own banknotes.

10. © COMMENT: By insisting on his 10 donum bottom line

for the CBI complex, Shabibi clearly is drawing a line in the

sand. He believes that the GOI's mistreatment of the CBI on

the property is a cipher for a broader range of

misunderstanding within the GOI on the proper role of a

central bank in a modern economy. Moreover, it was clear

that at one level he feels personally disrespected: he

visibly stiffened when Treasury officer related a Finance

Ministry DG's comment that CBI "...won't get the 10 donum it

is asking for. If they insist on that we'll give it to

someone else." Shabibi responded "then let them give it to

someone else!" He is looking for more support from the USG

in this quest; wrapping up the conversation he said the

building issue is "really paramount," and dropped a broad

hint that "everyone says the CBI is doing a great job..."

implying that if we support his policy work we should also

BAGHDAD 00002990 003 OF 003

support his efforts to ensure the CBI can function

efficiently and independently in a proper facility. Embassy

will seek additional avenues to support Shabibi's efforts to

acquire a proper site for a new CBI complex. http://dazzlepod.com/cable/08BAGHDAD2990/?q=Shabibi

Edited November 17, 2012 by Broke IronWorker