Iraq: Letter of Intent, Memorandum of Economic and Financial

by katt Mon Jul 11, 2011 10:42 pm

http://www.imf.org/external/np/loi/2011/irq/030311.pdf

Financial Sector
12. Financial intermediation is at a very low level in Iraq. A functioning banking sector is
essential for the development of a strong private sector. We have begun to embark on our
banking sector reform strategy:
 A critical step will be to complete the financial restructuring of the two largest stateowned
banks, Rafidain and Rasheed, based on their completed financial and
operational audits. In this regard, we formed a Bank Reconciliation Unit that
comprises technical level staff from the banks, the CBI and the Ministry of Finance,
and with the assistance of Ernst and Young (who were the agents of the Ministry of
Finance in the external debt restructuring process) to: (i) deal with all legacy external
liabilities taking into account the government’s actions in the context of Iraq’s external
debt restructuring (ii) indentify and propose to write-off non-performing loans to
defunct state-owned enterprises; (iii) propose a course of action for other remaining
unreconciled accounts; and (iv) after the balance sheets have been cleaned up, revalue
the remaining foreign currency denominated balance sheet items. The BRU will work
under the supervision of the Restructuring Oversight Committee (ROC), consisting of
the Minister of Finance, the Governor of the CBI, and the Chairman of the BSA. The
BRU will send its recommendations for final approval to the respective boards of the
two banks. Through this process, we aim to complete the restructuring of the balance
sheets of Rafidain and Rasheed by end-June 2011 (a structural benchmark).
 Meanwhile, the Ministry of Finance will continue to work closely with the World
Bank under its banking sector project to modernize these banks by moving ahead with
the plans for their operational restructuring. These banks will operate on a fully
commercial basis, on market terms, and the government will refrain from directing
any lending. Decisions on the recapitalization of Rafidain and Rasheed will not be
made until the restructuring of their balance sheets has been completed and adequate
progress has been made in their operational restructuring, especially by establishing an
appropriate governance structure and strengthening risk management and control
functions. More generally, given the vulnerabilities these (and other) banks face due to
operational risks, the CBI will continue to improve its oversight systems and monitor
closely the activities of the banks, particularly during the transition process.
 The new set of prudential regulations for commercial banks, including those related to
minimum capital requirements, liquidity risk, and anti-money laundering, are being
implemented. Work on the relevant reporting tables for the banks will be completed
soon in consultation with the IMF and other technical assistance providers. Under the
auspices of the World Bank banking sector project, we have conducted a full
assessment of the banking supervision department, and this report will form the basis
of improving this department.