Iraq’s Central Bank a Political Battleground

Sinan al-Shabibi, the former governor of Iraq’s Central Bank — the highest monetary authority in the country — was not the only banker who  made it onto the wanted list in Baghdad. Hussein al-Uzri, the former head of the state-owned Trade  Bank, preceded Shabibi.
Both bankers are, maybe by complete happenstance, friends with the prominent  banker and politician Ahmed Chalabi, who went from being one of Iraqi Prime  Minister Nouri al-Maliki’s supporters to one of his opponents. Perhaps it is  also a coincidence that he happened to take on substantial roles in the process  of redeveloping the Iraqi economy that was launched by Paul Bremer, governor of  Iraq after 2003. Shabibi assumed the position of Iraq’s Central Bank  Administrator and thus was responsible for exchange rates and exchange reserves,  while Uzri became head of the Trade Bank of Iraq, which regulates Iraq’s  international trade and funds reconstruction operations.

The prime minister’s rivals in Baghdad have noted that Maliki, for nearly a  year now, has been carrying out a plan to grab hold of power in this country in  which political divisions escalate proportionally with an increase  in fuel production.

Maliki is accused of launching a campaign to monopolize power, following the  complete withdrawal of US military troops.

In that sense, Maliki discharged Uzri in the middle of last year, after  accusing the latter of being involved in corruption. This is the same charge  upon which Shabibi’s arrest warrants were issued a month ago.

The latest accusation facing Maliki concerns his attempt to use his power to  influence Iraq’s central bank. This interference is prohibited by lists that  were set by Bremer back in 2004.

The central bank is viewed as a model for how the US wants modern Iraq to  be, and a symbol of transparency in a country that was plagued with corruption  during the era of the late President Saddam Hussein.

In 2004, Bremer drafted a special law for the central bank, which granted  the bank a large degree of independence from government policies. The bank was  in charge of exchange rates, amidst a general economic scene that had been  characterized by oscillations for many years, as a result of economic sanctions  imposed on Saddam Hussein’s regime.

Since then, the central bank decided to intervene directly with exchange  rates and thus a committee was formed to hold auctions three times per week to  sell the foreign currency for a fixed price. Hence, the bank succeeded in  stabilizing and preserving the required rate, even though it was losing $1  million weekly from exchange reserves.

It was not long before the central bank went ahead with increasing the value  of the Iraqi dinar by 20% relative to the US dollar. It went from a rate of 1500  Iraqi dinar per one dollar at the end of 2003, to a rate of 1200 per one dollar  at the end of 2004.

However, the international sanctions imposed on Iran because of its  nuclear program, and on Syria following the suppression of protests, have pushed  the Iraqi Central Bank into the spotlight.

The unofficial version of the story is that the US asked Shabibi to tighten  the procedures for currency selling within the local market, in order to  prohibit money transfers to Iran and Syria, which were both under sanctions.  When the central bank complied with the suggestion, the Iraqi government was  outraged.

In April of last year, the central bank adopted a series of measures to rein  in what was said to be smuggling operations aiming at providing Iranian and  Syrian banks with foreign currencies from Iraq. These measures included  decreasing the sale of US dollars from about $1 million per week to $300,000 at  most. This had a direct impact on the exchange rate of the Iraqi dinar, which  decreased in value by about 5% against the US dollar.

Prominent politicians in Baghdad noted that these measures — which, on a  general level,  were aimed at preserving the exchange rate and, on a deeper  level, to tighten the grip on Syria and Iran — angered Maliki. This incited him  to interfere — as he has done before — by appointing one of his close  acquaintances as head of the Trade Bank.

As a result, the cabinet authorized Abdel Baset Turki, the head of the Board  of Supreme Audit, to run the central bank temporarily.

Informed sources in Baghdad hinted that Shabibi was replaced as a result of  a deal concluded between Maliki and the head of parliament, Osama al-Najafi.

The sources stated that Najafi, who strongly objected to Maliki’s attempt to  take over the central bank, agreed on discharging Shabibi after making sure that  the prime minister would assign a Sunni, Abdel Baset Turki, as his replacement,  even though the latter is a potential ally of Maliki.

The committee formed by the head of parliament to investigate the  accusations of alleged financial impropriety against Shabibi disclosed that more  than a billion dollars were sold during the bank’s auction without tracing the  sources of the money. However, sources close to Maliki confirmed that the prime  minister’s anger is related to Shabibi’s failure to hand over legal documents  related to the selling procedures of about $220 billion in the auction.

Some of these sources claim that certain bank documents were counterfeited  in an unprofessional way, yet — despite that — have eluded auditing. This is a  fact that was later revealed by the parliamentary committee.

It is still unclear whether or not international parties will intervene to  investigate the central bank case. While a member of the parliamentary financial  committee announced last week that a delegation from the United Nations had  arrived in Iraq to investigate this case, the UN Mission in Baghdad and the  ministry of foreign affairs have both denied the claim.

Many Iraqis view the case of the central bank as a part of the political conflict in Iraq, and feel that the investigations  will not lead to anything.

The many problems deterring economic growth in Iraq — such as the case of  the central bank and the fuel and gas law, among others — will not be solved if  consensual political agreements are not reached.

Yet, the attempts to change the rules of the political game — set by the US  after its military withdrawal — require, according to many Iraqis, a  reconsideration on the part of Washington.