Troubled banking sector a drag on Iraq's economy

BAGHDAD – The shelves are packed with imported goods at Baghdad’s thriving Warda supermarket, and customers can barely move their shopping carts in the narrow aisles without bumping one another.

If there were a bank to borrow from, owner Ammanuel Dankha al Tallani said, “I would ask for a loan to open a new market 10 times bigger than this one.”

But there isn’t. Three months ago, when he sought $2 million to build a new store elsewhere, the bank agreed to only $250,000, at high interest and collateral.

To understand the economic shambles that is Iraq, look no further than the banking sector. There are no electronic funds transfers for payroll or bills and almost no checking accounts or credit cards. ATMs are few and far between. There are no home improvement loans and few mortgages.

For most Iraqis, banks serve only as a safety deposit box.

With proven oil reserves third only to Saudi Arabia and Iran, Iraq could one day be one of the richest countries in the world. Oil is Iraq’s sole export, accounting for two-thirds of gross domestic product. President Barack Obama this month cited estimates that in the coming years, Iraq’s economy “will grow even faster than China’s or India’s.”

But compared with pre-2003, industry and agriculture are moribund, and construction is frozen in Baghdad and many other parts of the country. Eighty percent of the economy is in government hands, according to the Central Bank of Iraq. Unemployment and under-employment are at 46 percent, the bank says.

What makes the outlook so bleak is that Iraq lacks the banking infrastructure to grow out of this mess and the political will to undertake dramatic economic reform. Dominating the financial scene are two bloated state banks with phony balance sheets.

“Iraq is a completely destroyed country. Nothing is working. All the sectors are obsolete, and we have to start from minus, not zero,” said Ali al Dabbagh, a minister of state and the official government spokesman.

Some of Prime Minister Nouri al Maliki’s top aides disparage the role of the private sector and are perfectly happy to have the public sector crowd it out.

To give but one example, half the public budget, including much of the oil revenues now starting to pour in, is going not to invest in future production or to capture the gas now being flared off – which could provide enough electricity to power the whole country. Instead it’s going to a jobs program to put more Iraqis on the government payroll.

Banks may be the single biggest obstacle to creating a free-market economy. Iraq is one of the most “under-banked” countries in the Middle East and beyond – with only 450 bank branches in a country of 31 million. Saudi Arabia, by comparison, has 6,000 branches for 18 million residents.

At the heart of the crisis are two debt-laden, state-owned banks that are the depository for all government funds. Far from functioning as lending institutions to stimulate the economy, the Rafaidan and Rasheed banks are widely thought to facilitate the corruption that bogs the economy down.

The World Bank, in a major review of the Iraqi financial sector, said in September that it was crucial to “clean up the balance sheet” of the two banks, noting that this had been under discussion since 2006.

These are not small banks. They have a monopoly on government deposits and control 90 percent of the bank assets in Iraq. The losses on their books are enormous, because of devaluations of the Iraqi dinar – in which government debt was denominated – as well as loans to defunct state enterprises, losses from the two Gulf wars, and “claims related to fraudulent currency exchange,” the bank said.

The losses may be so great that the banks in fact have a negative worth of several billion dollars.