Trinity's Take: Abadi's True Test - Privatization

[TrinityeXchange]

With the Terms of Trade Shocks happening to Iraq, the plan of privatizing the country has become all the rave.  Not a new concept and as a matter of fact the plans of privatization has been in the works heavily since 2004.  Now I will not waste time building a case but please know that I form my opinion from much of the research out there (if interested I can share the sources), instead I will get straight to the point here.  

 

!The true test of Abadi's intent to privatize Iraq will be whether or not he promotes the Corporatization and Privatization of Iraq's key state-owned banks namely Rafidain & Rasheed!

 

Regardless of what you read or hear or think, this is what needs to be watched for in the news.  The World Bank performed a financial sector review of Iraq and listed "Medium to Long Term Task(s)" for the Ministry of Finance & CBI to pass into law these bullet point items as part of the economic liberalization effort:

 

■ Clarify the mandate of the specialized state- owned banks, and consider consolidation and conversion into a development banks with increasing their capital, which will not take deposits. 

■ Ensure state-owned banks work according to commercial principles and on a level playing field. Early corporatization of state- owned banks should be considered a key element. 

■ Over time the authorities should consider gradual privatization of the key state-owned banks.

 

Why is this important?  Because research has proven that as long as the banking structure is managed centrally (i.e. by government) whether fully or partially, a market economy is smothered.  It is like finally being given a Lamborghini but a governor is placed on the engine limiting its top-off to 75mph.   What is more, control of the banking structure will do just as bad if management is concentrated (a sleight of hand trick governments will attempt to retain control).

 

Many are wondering what impact this might have on an RV.  For those who believe value will be added to the currency once it is unpegged from the dollar, you should understand that moving to a flexible exchange regime has its risks.  Those risks are high if the financial sector is not well structured and configured to properly absorb fluctuations and shock in the market.  State owned or partially owned banks do not absorb shock well because their political and relationship interest get in the way of forming sound financial policy.  For example a consistent problem with state run banks is loaning to bankrupt businesses to help them stay afloat because the owners of the businesses are your friends.  Another common issue is with state run banks maintaining managers too inept for the job but appointed because of some personal affiliation.  Whereas Privatized banks often change management and scrutinize lending practices to ensure the bank's efficiency at conducting business.  Fully privatized banks without government intervention are more profitable.

 

And so I am not here to argue against an overnight RV versus a gradual rise in value from an overnight exchange regime change.  I am opining that Abadi will face the decision of his life - whether or not to fully privatize the key state owned banks.  

 

Remember that these key banks have been groomed for privatization and it is documented in the World Banks playbook for Iraq.  For instance when you see articles about E&Y and other 3rd party financial firms coming into Iraq, typically it is not for existing private banks like Bank of Baghdad or North Bank, these banks are not ready to carry the load of an economy like Rafidain & Rasheed.  The focus has always been to ensure the readiness of Rifidain & Rasheed Banks to properly privatize and handle the coming market economy because they are Iraq's financial powerhouse and dwarfs all other banking entities.  Recall articles like these from yesteryear: "The acting Finance Minister, Ali Yousef Shukri (pictured), is reported to have held a meeting with a representative of the World Bank to discuss the restructuring of the state-owned banks in Iraq. According to the report from NINA, the discussions related particularly to the Rasheed and Rafidain banks."  Well this IS the plan and a MAJOR cog in the engine for successful privatization of Iraq's economy.  

 

Can the GOI find within itself to relinquish its control of the money power and liberalize its banking sector?  

 

PS.  The concept I am presenting is not new for developing economies.  This is where many of them struggle when attempting to make that change from a socialist, government-centric economy to a true market economy.  This is the story of Egypt who adopted a very similar reformation plan as Iraq (the similarities are incredible really) from the World Bank but when time came to execute on the banking component, the government would not fully comply with the plan and fully privatize its state owned banks.  Egypt floated its currency in 2003, like any market-type economy should, but the long term effects have been troubling.  

[fancy]

Thank you Trinity.  I've been following your "takes" for awhile and it makes sense.  Thanks again for bringing this here and I look forward to your next "take"

 

Peace to you

[ronscarpa]

Thanks for your post Trinity - it is very interesting, informative & thought provoking...Be Blessed...!     

[TrinityeXchange]

thank you my friends for your kind words

 

i had to add this information from a 2004 article.  unfortunately i am not a subscriber to this source and cannot get the full article but even the summary speaks expressly to the subject matter.  

 

the article reveals a major concern surrounding privatization; the loss of jobs!  there will be propaganda, of course, where the GOI tries reducing public fears of privatization but job loss is inevitable.  government by nature is an obese animal.  state owned entities sold off to the private sector will typically undergo a 'trimming of the fat' to make the business more lean and efficient.  the last thing iraq needs is riots and protests happening over job loss due to privatization of state owned business.  the problem in a nutshell is that people grow dependent on the government for sustenance.  how do they deal with an abrupt change to their standard of living? how will the GOI help the people through the transitional phase of developing a market economy?

 

Iraq’s Rafidain Bank Looks To Restructuring, Possible Privatization

Published on Mon, 16 Feb 2004 - Volume: 47 Issue: 07 Print

VOL. XLVII

 

No 07

 

16-February-2004

 

IRAQ RECONSTRUCTION

 

Iraqs Rafidain Bank Looks To Restructuring, Possible Privatization

 

Iraqs largest bank, the state-owned Rafidain Bank, is looking at plans for restructuring which include laying off one third of its 7,300 strong workforce, and computerizing its 170 branches. The bank holds 75% of the countrys deposit base and had a virtual monopoly of the governments banking business before the fall of Saddam Husains regime in 2003. However, it is weighed by...

Edited February 18, 2015 by TrinityeXchange

[Wiljor]

Good morning TE, unfortunately we are still aways off from our target with yet issues to be resolved in Iraq. Security, banking, and as you say privatization of state owned institutions are at the top of the list. Its amazing how much damage was done in the previous regime with no conscious of the repercussions their actions would have. I still feel Abadi is on the right track and he will plug away at these issues one by one.

Trinity's Take has become a great soarce of information with a level headed, understandable format, which makes for a good read. Thank you for your efforts and they are very much appreciated.

[TrinityeXchange]

thanks for your kind words Wiljor.  

 

i feel you about the damage done.  i have had the wonderful opportunity of free discussions with a new friend of mine from the middle east and he has opened my eyes up to a lot.  simply put, the way that we westerners see and understand livelihood is entirely different than an easterner.  take for example the concept of taxation with representation.  it is because the citizen pays taxes to the government that the citizen in turn expects their government officials to represent their ideals (i'm speaking idealistically).  now consider what it is to be a citizen of a country where there is no taxation with representation.  where representation is more about family and tribe alignments and the resulting government takes care of some groups above others.  that is difficult for many westerners to imagine.  

 

much of what we saw the previous regime doing was typical for the new ruling sect to do however there was a conflict of interest because there were promises of forming a democratic state.  the previous regime was for all intents and purposes a transitional regime; bridging the gap between the regular way and a new democratic way.  

 

this is why mid east countries attempting a market economy find it difficult to fully commit to the staples of a market economy.  "you mean i have to completely let loose my control of the banking structure??"  so the government will attempt a market economy while retaining major banks to state ownership or retain partial majority ownership or maintain major shares after the banks privatize; all of which produces poor efficiency.  they have a hard time releasing control because it is typically not their way especially after finally getting their family/sect to a position of wealth and prominence.  

[Laid Back]

I have been reading all your post and I like the way you explain things.!

Thanks for bringing the facts and all the research you do.

In your opinion, how far you think we are from an increase of the exchange rate?

[TrinityeXchange]

difference between corporatization and privatization:

 

Corporatisation is changing the structure of a government or semi-government body so that it operates on business lines, with a mandate to trade profitably and an obligation to account to the government for its financial performance. Often the first step towards privatisation, but sometimes merely an illustration of governments' trend towards the devolution of financial responsibility. 

 

While Privatization is the transfer of government-owned services into private hands. This is usually justified on the grounds that private ownership makes for greater efficiency, although it is argued that greater efficiency is achieved only if privatisation goes hand-in-hand with increased competition.

 

we should expect to see the government of iraq at the very least corporatizing the specialized state owned banks.  if all goes according to plan, we will then see them privatize the KEY state owned banks.  in my estimation the key state owned banks is rasheed and rafidain.  look for information like that appear in the news.