Truck and Barter: The Iraqi Central Bank Law

May 24, 2004

The Iraqi Central Bank Law

By Kevin

David DeRosa praises the new Iraqi Central Bank Law:

One part of the Iraq story that gets little attention is what the ruling Coalition Provisional Authority has accomplished in re-building the country, including its financial sector.

The financial architecture for Iraq centers on establishing an independent central bank. What's remarkable is the scope and detail the coalition brought to the task of establishing that institution. In March, the CPA published the Central Bank of Iraq Law, which is far more than a law -- it's a primer on central banking.

The law's 74 articles and 42 densely written pages cover every topic imaginable on how to run a central bank, including: the bank's capital stock, its board of directors, its relationship with the rest of the government, management of its foreign reserves, monetary policy and open market operations, reserve requirements, issuance of currency, supervision of the banking system, the national payments system, compilation of official statistics, audits, criminal offenses and the establishment of a financial services tribunal.

The coalition maintains the "goals of the new law are to achieve long-term growth and prosperity through measures designed to maintain domestic price stability and foster a stable and competitive market-based financial system.'"

Under the official rules, the CBI's first task is to maintain "domestic price stability". However, since "price stability" is not defined in the document, it is left to "international standards", meaning a slow and steady inflation will probably result. Only under a regime of price stability is the CBI permitted to pursue policies to promote "sustainable economic growth, employment, and prosperity."

At least they're making it harder to game the system than before. Still, actively managing a fiat currency is not an easy task; unlike the rather mundane accounting, minting, and servicing tasks of a government currency based on a set number of certificates tied to gold, fiat money is easy to print, and profitable to manipulate.

But an independent central bank presents advantages to professional economists and the general public, as such experts are required to assume positions of importance and power in the polity. We may think Greenspan has way too much influence on the stock market and other areas, and his position may be a net cost to our economy, but it's hard to deny that the public statements of a powerful secular Iraqi central banker might be the only source of finance and economics education for a vast majority of the rural population, and might be a huge stabilizng force.

Anyway, the Law and the extended and detailed Annex makes for fine reading on a Monday evening after your child and wife have gone to bed.

Meanwhile, note that the CBI is authorized to create balance of payments, monetary, and other financial statistics, but not macroeconomic statistics. How are they to manage the economy when they don't have the data?

Note: Also see my earlier posts on Iraqi Economic Statistics and the head of the CBI, Sinan Shabibi.

Posted at May 24, 2004 11:37 AM

Comments

A floating currency is not fiat money. Nor is a pegged currency. Fiat money has exchange controls which are designed to divorce it from markets.

Also, the article is a bit gushing. Saying that the financial system of Iraq is on a sound footing because the central bank is "independent" (of the nonexistant political authorities) is dada-esque.

The reason the CBI is not obligated to gather macroeconomic statistics is (a) those functions are separate in America--the commerce department and the treasury do all those things; the BLS gathers inflation indices and employment data; and (b) this is a Middle Eastern economy. The financial system is sacrosanct because it's not tied to the agenda of the rulers.

Comment by James R MacLean at May 25, 2004 01:49 AM | Permalink

You have a rather uncommon definition of fiat. I used a more standard definition:

A currency is a fiat currency if it's not explicitly tied to (backed by) another commodity (like gold), regardless of whether exchange rates with other currecies are floating or defended by a CB.

Good points all around, though. I agree with the gushing, but I give the guy extra points for thinking about a subject few have bothered to examine.

Comment by Kevin Brancato at May 25, 2004 06:22 AM | Permalink