CBI: NEW RULES, STIFF FINES, MORE EFT, HIGH

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002090 SIPDIS E.O. 12958: DECL: 07/05/2018 TAGS: ECON EFIN IZ SUBJECT: CBI: NEW RULES, STIFF FINES, MORE EFT, HIGH LIQUIDITY REF: BAGHDAD 1946 Classified By: ECON Counselor Todd Schwartz for reasons 1.4(b) and (d) ¶1. (C) Summary: Central Bank of Iraq officials believe that a soon-to-be released Ernst and Young audit will demonstrate improved CBI performance. New CBI rules that take effect on July 1 will impose stiff fines on banks that fail to meet monthly reporting and statement-reconciliation requirements. Three banks, the Iraq Bank, the Economic Bank, and the Rasheed Bank, are likely unable to meet the new reporting timelines. The CBI is altering its fees structure to encourage all banks to move away from cash-only banking to greater use of electronic funds transfer (EFT). The CBI's purpose is to make it attractive for banks to use the system and encourage GOI ministries to use direct deposit. System liquidity is "very high" and Rafidain, Iraq's largest state owned bank, has an excess liquidity position of approximately USD 1.13 billion, a problem that has developed due to difficulties with budget execution. End summary. ¶2. (C) TFBSO Banking Expert met with Central Bank of Iraq (CBI) Director General of the Accounting Department Ihsan Samran, and Assistant Director General Haifa Peter on June ¶25. According to Ihsan, Ernst and Young's 2007 audit of the CBI would be completed in July. Ihsan expressed confidence that this audit will show that the CBI's overall performance has improved. ¶3. (C) Ihsan said that the CBI had raised the issue of statement reconciliation at a meeting of the Iraqi Private Bankers League the previous week. As of the first of July, all banks will be required to pull a statement from CBI every 10 days and reconcile their accounts to that statement, returning information on outstanding items to the CBI. At the end of each month, the banks will have to report that these statements are reconciled and detail any exceptions. Failure to comply with these schedules will result in fines up to USD 4,177 per day, and if more than 30 days overdue could result in the bank being barred from investment in CBI facilities, T-Bills and CBI Bills, be put on special settlement procedures, and possibly be subject to closing. Ihsan said that there were three banks that might not meet these reporting standards because their accounting systems are manual: the Iraq Bank, the Economic Bank, and the Rasheed Bank. ¶4. (C) Another issue that the CBI discussed at the Private Bankers League meeting was a proposal to begin the process of moving away from the use of cash towards electronic funds transfer (EFT) (reftel). Ihsan stated that some banks are not yet ready for EFT and also continue to hesitate to use both real-time gross settlement (RTGS) and automated clearing house (ACH). The fact that the wifi network that the World Bank is installing is not ready is another factor that bankers cite to justify their lack of willingness to use EFT. Mr. Ihsan said that CBI planned to move banks away from RTGS to ACH with a change in the fee structure -- doubling fees for RTGS use and reducing fees for ACH to the minimum. The CBI's purpose is to make it attractive for banks to use the system and encourage GOI ministries to use direct deposit. Ihsan said that the CBI was considering the formation of a payments oversight committee to be composed of CBI and bank representatives. ¶5. (C) TFBSO Banking expert met separately with CBI Loans and Agreements Department Reserve Requirement Unit Manager Kisma Umm Haider to discuss CBI reserve requirements. Effective the first of June, Iraqi banks are required to report their deposit information every two weeks, but they continue to calculate compliance on a monthly basis. System liquidity is very high. For example, Rafidain, Iraq's largest state owned bank, has a "very high excess liquidity position" as of June 25 of approximately 1.35 trillion IQD (USD 1.13 billion). Rasheed, the second largest state owned bank, is "much better in its treasury management," she said. As these deposits are made, the banks turn increasingly to the CBI deposit facilities. ¶6. (C) Comment: Observing bank deposit ratios, very high excess liquidity in the state-owned banks is a direct result of the GOI's problems with budget execution. The Ministry of Finance (MOF) traditionally practiced very stringent cash advance procedures, concentrating its cash holdings at the CBI in centralized MOF accounts. This has changed due to Embassy and MNF-I encouragement to "prime the pump" of capital spending by advancing large sums of money to the ministries and provinces for approved projects and provincial block grants through the state-owned banks. Difficulties actually spending the money mean that these funds build up in the banks. End comment. BAGHDAD 00002090 002 OF 002 CROCKER