Controlling Excess Liquidity and Achieving Success in Trade Finance, IMF commends the Central Bank of Iraq

 The IMF mission, led by Mr. Jean-Guillaume Poulain, which met with the Central Bank of Iraq from May 4 to 13, 2025, commended the bank's work in several areas. The mission confirmed that CBI has made progress in absorbing excess liquidity by increasing the issuance of short-term debt instruments (CBI's drafts and Islamic certificates of deposit), adjusting subscription limits for banks in CBI's auctions, and improving liquidity forecasting tools and practices. The statement issued by IMF stated that the mission commended the efforts of CBI to successfully transition to the new trade finance system, indicating that commercial banks now process trade finance transactions entirely through their relationships with correspondent banks. CBI has achieved significant progress by transitioning to the new system for financing foreign trade through correspondent banking channels, instead of relying on the daily dollar auction. This development has contributed to enhancing banks' compliance with international transparency requirements, such as OFAC regulations and others, in addition to improving their relationships with global correspondent banks. This step has resulted in narrowing the gap between the official dollar price and its parallel price, indicating relative success in curbing illegal speculation and reducing the currency leakage. The foreign exchange management methodology has become more effective compared to the past, especially with CBI continuing to take complementary measures, such as requiring traders to submit genuine import invoices and simplifying procedures for obtaining hard currency for legitimate importers.

In parallel, the mission welcomed the progress made in the use of digital technology and the Iraqi authorities' intention to implement a comprehensive reform of the banking sector, calling for its swift completion without delay. With technical support from IMF and other international bodies, the Iraqi government has begun implementing initial steps to reform government banks. These steps include auditing asset quality, estimating the size of non-performing loans, and drafting a financial and administrative restructuring plan for the two largest government banks (Rafidain and Rasheed). The Iraqi financial sector has also witnessed a growing trend toward digitization and the adoption of modern financial technology, both in electronic payment services and the launch of online and mobile banking platforms.

IMF believes that these technical improvements, along with steps to enhance cybersecurity in banks, promote financial inclusion, expand the activity of private banks, and restructure government banks, will enhance the efficiency of financial services and increase foreign correspondents' confidence in the Iraqi banking sector. The report also noted the expansion of private banks' activities in trade finance and small business financing, with expectations of further increases if obstacles facing them are removed. Initiatives to enhance financial inclusion, modernize electronic payment systems, and reduce reliance on cash in the economy are also crucial to strengthening banking depth. CBI launched a national financial inclusion strategy during the first half of 2025. The report also included important recommendations to enhance financial stability and facilitate the transfer of monetary policy effects to the real sector, including: reducing the phenomenon of dollarization, in which Iraq has made significant progress over the past two years; the importance of accelerating the completion of the comprehensive restructuring plan for banks to enhance their solvency; strengthening corporate governance for banks, developing digital infrastructure and cybersecurity for the financial sector; strengthening the role of private banks in financing economic development; and continuing to improve anti-money laundering and counter-terrorism financing procedures. It is also important for CBI to continue increasing the issuance of short-term securities to ensure better management of excess liquidity.

 

Central Bank of Iraq

Media Office