Truck and Barter: Real Interest Rates in Iraq

October 09, 2004

Real Interest Rates in Iraq

By Kevin

According to a frequent commenter on my Iraqi Dinar post, the private Baghdad based Al-Warka investment bank is offering 15% nominal interest on savings accounts (denominated in Iraqi Dinar). According to Central Bank data (pp. 28-30), the Iraqi government banks were offering 6.3% this June, down from 7% in January. If I'm reading this document right, Iraqi government debt is rediscounted at 6.35%.

The public banks are offering loans for 11%. If the private banks offer 15% on savings, how high are the interest rates on their loans? I'll try and find out.

Even if I can, it's tough to extract the real interest component from the nominal figures , because World Bank price inflation estimates in Iraq vary from 8.5% for consumer prices to 15% for the GDP Deflator. Meanwhile, the Central Bank bulletin (p. 29) shows price indices increasing one month and decreasing the next (however, food prices continually decreased and rent continually increased in 2004).

Overall, it seems that real interest rates vary widely in Iraq, so it's hard to come to any solid conclusions about the cost of capital made available in financial markets.

As an aside, I wonder how much capital is made available by the sometimes maligned Iraqi Dinar speculators who hold their currency in private Iraqi Banks...

Posted at October 9, 2004 01:27 PM

Comments

This sounds so bizarre: demanding/expecting a firm and reliable rate of interest in a society that has not persuaded many that it is safe let alone established something as reassuring as a rule of law and order. This may be a new field of study: economics near the battlefield. To borrow or rob? that is the question.

Comment by calmo at October 9, 2004 10:11 PM | Permalink

I think it is reasonable to expect a narrow range of interest rates on a single day in the same block of the same city for the same borrowers with the same collateral.

Comment by Kevin Brancato at October 9, 2004 10:19 PM | Permalink

So, the course of action is to borrow from the public banks at 11% and lend to the private at 15%. You are, of course, taking on the credit risk of the private bank, but if you were, say, an American graduate student in economics, you should be able to sidestep the responsibility if they go belly up. I doubt that Iraqi law extends to an extradition treaty with the USA just yet.
4% for nothing on someone else's money. One way to pay tuition I guess.

Comment by Tim Worstall at October 10, 2004 08:22 AM | Permalink