1. Rising from the ashes: the Central Bank of Iraq
Robert Pringle and Nick Carver trace the remarkable story of the resurrection of the
war-torn country’s central bank.
Author: Robert Pringle and Nick Carver
Source: Central Banking Journal | 18 Aug 2004
Categories: Central Banks
Topics: Central Bank of Iraq, Treasury bills
In the spring of 2003 the Central Bank of Iraq almost ceased to exist. In the days following the
fall of Baghdad on April 9, its offices and their records were ransacked and the main building
was reduced to ashes. A gang of looters tried - unsuccessfully - to blow up the main safe doors.
Some of the central bank's vaults, which are in the central bank compound on the banks of the
Tigris in central Baghdad, were flooded. The central bank's printing works were attacked and the
printing plates and unused notes stolen. The central bank governor, a Saddam appointee, fled. At
the same time, the foreign reserves had already been depleted by the attentions of Uday Hussein,
one of Saddam Hussein's sons, who had seized $1 billion in cash - in dollars and euros - only a
week before the invasion on the basis of an authorisation from his father. More widely, the
domestic banking system had ground to a halt, as up to one-third of Iraq's 600 banks were
destroyed by looting and arson.
Up and running
Since those dark days, the Central Bank of Iraq has risen physically from the ashes. The flooded
vaults have been pumped out and repaired, the intact buildings refurbished. A smart new central
bank security force has been established with a reassuringly strong security fence around the
perimeter of the central bank compound. The staff have returned to work. A new governor -
Sinan Shabibi - has been appointed, and established a good relationship with the existing senior
central bankers. The central bank even has an internet connection and a new website
(www.cbiraq.org). At the same time, the central bank replaced the old Saddam and ‘Swiss' dinars
with new high quality dinar notes, and has established a foreign exchange auction and a treasury
bill auction.
This resurrection has been universally welcomed. More controversial has been the decision about
the particular monetary policy regime made by the Coalition Provisional Authority (CPA) and
the Central Bank of Iraq.

2. When it became clear in the course of last year that the coalition authorities had opted to
establish the legal and operational framework for a fullyfledged central bank, incorporating
"international best practice", complete with a managed floating exchange rate and a discretionary
monetary policy, critics were not slow to scoff. One of these was Steve Hanke, who argued in
these pages (Central Banking, Volume 13 Number 4, Spring, 2003) that there were several
problems with this approach.
First, he argued that the central bank would be able to conduct monetary policy only with direct
instruments, which were "antithetical to a market economy and counterproductive to the
development of a well-functioning banking system".
Second, the dearth of quantitative data on Iraq's economy and the inadequate training of bankers
would make it virtually impossible for the central bank to operate a rational monetary policy in
practice.
Thirdly, it was likely that the central bank's independence would be undermined by pressures
from the budget and banking system. Fourth, a managed float would be very difficult to manage
in practice. Hanke noted that history shows that when a central bank cannot operate through
markets and is not supported by a robust banking system, low inflation and economic growth
cannot be expected. Instead critics like Hanke recommended a fixed exchange rate system or
dollarisation - an extreme form of fixed exchange rate.
This article, which is based on extensive interviews with some of the key policy advisers
involved, tells the story of what actually happened. It also explains the reasons that led coalition
authorities to take the decisions they did and assesses the progress made between the invasion in
April 2003 and the handover of sovereignty to an Iraqi government on June 28 2004. To do this
it is necessary to go back to the situation facing the occupying powers. The article starts by
setting the stage. It then follows two main inter-linked themes: first, there is the story of the
currency exchange - how Iraq was provided with a new functioning currency and a basic foreign
exchange market; second, there is the progress made in establishing a new monetary and central
banking regime, with a new central bank law, and the start of treasury bill auctions. The story is
told so far as practicable in chronological order.
The immediate post-war situation
An initial problem was a shortage of cash for essential public sector pay. As the banking system
was not working, notes were not re-circulating. The answer was to pay these workers initially in
dollar notes flown in from the United States. The coalition authorities made an initial payment to
all public sector workers and pensioners in recognition of the extraordinary costs of the war.
However, the authorities decided to pay the April salaries in dinars, both to try to stem the
progressive dollarisation of the economy, which was thought to be politically disastrous, and
because many Iraqis preferred payment in familiar dinars, which they could use for small
purchases in the market. One dollar was worth around 2,000 Iraqi dinars (ID) while notes as low
as ID25 were in use, and ID250 was the highest denomination in common use. The notes came
largely from the flooddamaged dinars in the central bank's vaults. The value of the April salary

3. payments was about ID130 billion, which translated into about $65m at the then prevailing
exchange rate of ID2,000 to the dollar.
It quickly became evident however that the existing note circulation was inadequate for practical
reasons. This was partly because the "Saddam dinar" was printed using offset technology not
lithography, and so was relatively easy to forge. Since a printing machine had been stolen (it was
later "bought" back from the robbers), as well as paper and plates, there were very good quality
forged ID10,000 notes in circulation1
. This led to the "dinar discount problem". There were two
denominations of dinar in wide use: the 250 note - worth a few cents - and the 10,000 note,
worth about $5. The ID10,000 note was not trusted because of the risk of forgery, and as it was
first printed only in the summer of 2002, was inconvenient for small value purchases and
difficult to break. So it traded at a discount of approximately 25% compared with the ID250
note, and a huge amount of effort was diverted into managing the denomination of dinar cash
holdings. The CPA tried to reduce this discount over the summer of 2003 by printing more
ID250 notes and running dinar exchanges where Iraqis could exchange their ID10,000 notes for
ID250 notes. But the central bank's printing presses could not produce the ID250 note fast
enough.
Deciding on a new physical currency
Yet a currency exchange would be expensive and risky, so there had to be powerful reasons for
it. The main reasons were as follows. First, it was important to provide a unified currency
serving all of Iraq in place of the two currencies (as explained below, the Kurdish region in the
north still used a pre-Gulf war note issue). Second the country needed a currency that could not
easily be forged. Third, there was little confidence in the Saddam dinar even in areas where it
was still used as a means of payment, ie, in the south. Fourth, one of the notes (the ID 10,000)
was trading at a (varying) discount and there was only one other denomination in use, thus
making the currency highly inconvenient in day-to-day use. Fifth, Saddam's head was on the
notes - this was naturally unacceptable on political grounds. But the CPA would have gone ahead
with the currency exchange even without this issue - the other motives were compelling. The
cost of the exchange was $170m divided between $50m on the operation and $120m on printing
new notes.
There was discussion of re-denominating the dinar; as it had once been a "heavy" unit, it had
been worth more than $3 for each dinar in the "old days", so one idea was to knock three zeros
off. But this would have created confusion2
and possibly led to a perception that holders were
being ripped off. So it was decided to simplify the exchange and offer new notes
1:1 for Saddam dinars.
A further complication was the so-called "Swiss dinar", which was used in the Kurdish region.
This note was simply the pre-Gulf war note issue. This currency had appreciated strongly against
the Saddam dinar over the previous year to be worth about 250-280 Saddam dinars. The currency
exchange team looked at the relative purchasing power of the two notes and judged the fair rate
to be between 100-150 Saddam dinars for one Swiss dinar as the recent appreciation was due
partly to one-off factors such as foreign exchange inflows. For instance, foreign aid agencies had
been very active in the Kurdish region, entailing a supply of foreign currency. To get the cross

4. rate right was of critical importance so as to avoid a situation where workers would suddenly be
paid different real wages in the two regions of the country. The problem in choosing the cross-
rate was either appearing to rip people off by exchanging at a rate below the market rate or of
damaging competitiveness by exchanging at a rate that overvalued real wages - the East German
problem. Paul Bremer discussed this issue extensively with the Kurdish leaders and reached
agreement on an exchange rate of 150.
The currency exchange was announced by Paul Bremer, the CPA administrator, on July 7 2003.
Bremer said that an exchange of banknotes would begin on October 15 and run for three months
at a rate of one to one and "for the first time in 12 years all of Iraq will again have one set of
banknotes." This preannouncement of the issue and exchange rate had the effect of supporting
confidence in the 10,000 note, although the discount on large denomination notes did not
disappear fully until September. In the meantime, payment of public sector wages had to be
made in dollars3
. But the view among the advisers was that this period of dollar payment should
be kept as short as possible.
Planning a monetary regime
Thus the coalition committed itself fairly early to producing a new note issue. But this in itself
was a relatively minor decision in longer-term policy terms - though of crucial operational
importance (the complex logistics of the exchange are described later in this article). The big
policy question faced by the coalition advisers was what type of monetary regime should be
established. In particular, as the exchange rate is the crucial price in such an economy, should it
be fixed, flexible or floating?
Moving to a monetary board with a fixed exchange rate was considered, but there were
insurmountable objections to such a course. First, there were at that stage - in the spring and
summer of 2003, before the $18 billion of American supplemental assistance was agreed -
wholly insufficient external assets to provide initial backing for a new currency. Secondly, it was
unclear what rate to fix at. Having depreciated rapidly in previous years, the dinar was showing
extreme volatility - in the weeks following coalition victory, the dinar appreciated from ID3,500
to ID800 to the dollar (as fears that the coalition would abolish the dinar completely subsided),
and then fell back to around ID2,000 to the dollar. Estimates of what a "stable" rate might be
ranged at the time between ID1,000 and ID2,500 to the dollar; and given the divergence between
the rates for the ID250 and the ID10,000 (see figure 1 on page 65) it was not even clear what the
real market rate was. Thirdly, even if the rate at the time could have been fixed at a reasonable
level, there was near total uncertainty about what rate would be appropriate in future, given the
likely shocks from reducing or eliminating subsidised prices, changes in oil revenues and future
capital flows, which would deliver a massive shock to any fixed exchange rate system - not to
mention the enormous political and security uncertainties.
Moreover, the authorities had no idea what the true inflation rate was. If inflation turned out to
be 40% per year - some thought it could be much higher - any fixed rate would have been
unsustainable. The costs of fixing at the wrong rate would have been very high, as credibility
once lost is hard to rebuild. Also there was no intervention mechanism to ensure the market rate

5. was kept in line with the official rate - at that point, in June-July 2003, the only foreign exchange
market was a street market in physical cash.
Dealing with dollars
On the ground, during the summer of 2003 the economy was still moving rapidly towards
dollarisation. People saved in dollars and there was a ready supply of dollars from the spending
of the CPA. But from the coalition point of view, dollarisation was the wrong direction for
several reasons. Politically, it was not what the Iraqis wanted; and it could easily have been
criticised as economic imperialism. Economically, use of two currencies by the government
under a floating regime opened up the danger, graphically illustrated by Argentina, of a currency
mismatch between assets and liabilities.
However, it was inevitable given the demand for imports that Iraq would be essentially a dual
currency economy until the dinar became an internationally accepted currency. So the key
objective of monetary policy became the promotion of a stable dinar-dollar exchange rate, as the
most appropriate intermediate target for promoting price stability
That way there was a hope that a process of de-dollarisation could be set in train.
However, there was no organised market on which an exchange rate could be established. In
addition, from October, salaries were to be paid in the new currency, so the supply of dollar
currency to the market from the CPA would be cut off. The problem then would be how to re-
channel dollars to the market to avoid a sudden shortage which would trigger a sharp drop in the
exchange value of the new currency, and a lack of foreign currency to pay for imports,
undermining confidence in the new dinar. That explains the urgency behind the move to set up
foreign exchange auctions.
Foreign currency auctions start
The first auction of dollars was on October 4 2003. The Central Bank of Iraq bought dollars from
the Ministry of Finance outside the auction process. The supply of dollars that could be
auctioned was therefore constrained by the amount of dinars the finance ministry needed to cover
budget expenditure (and, of course, ultimately by the dollar revenue from oil sales). If the
demand for dollars in the market turned out to be lower than the central bank's purchases from
the Ministry of Finance, then the central bank would accumulate reserves over time. Auctions
were held initially three times a week, and then six days a week; so 24 to 25 per month. To avoid
the market rigging the auction in its favour and against the central bank, staff members of the
central bank were sent several times a day into the market to note two-way displayed prices. Bids
came through banks and were settled by book entry; therefore were confined to banks' customers
or non-bank currency dealers. This ensured a quick result. This provision was also intended to
encourage greater use of non-cash means of payment. Within weeks, the auction size rose from
$20,000 to over $10m.

6. Currency exchange - the nuts and bolts
We now return to the currency exchange process, which had been announced in July but which
actually took place in the three months from mid-October. The logistics were extremely
complicated. They involved organising the printing and secure distribution of an initial two
billion new notes, weighing over 2,000 tonnes and picking up and verifying 10 billion old notes
weighing 12,000 tonnes.
A British company, De La Rue, who had plates from printing Swiss dinars in the past and Iraqi
experience, got the tender for printing the notes. This turned into a very large-scale consortium
project; with printing done in the United Kingdom, Spain, Sri Lanka, Malta and Kenya. Currency
was printed in 50, 250, 1,000, 5,000, 10,000 and 25,000 dinar denominations.
The authorities had to forecast dinar demand in the currency exchange in order to place an order
for printing the new notes. In the event, they ordered ID6 trillion-worth of new currency
(approximately 150% of the estimated value of the two sets of old dinars combined). But demand
turned out higher than anticipated, partly because of difficulties of cash circulation (the banking
system was not yet linked) and partly due to redinarisation. So a supplemental order was placed
for a further ID6 trillion, bringing the total number of notes ordered to three billion.
High-risk exchange process
The group put in charge of managing this process was the Iraq Currency Exchange Team (see
box). How was the new money to be transported safely into the country? British and American
armed forces were not in a position, given other tasks, to protect the physical security of all the
complex elements in the exchange. So private security firms were used to supplement the
military, and Iraqi police to protect the exchange sites. An airport in Kent, Britain was used to
assemble the notes the printing consortium produced. Twenty-eight trips by 747s, each aircraft
carrying a payload of 90 tonnes, were used to fly the notes to Baghdad until early November
when a plane chartered by DHL, a delivery company, was hit by a surface-to-air rocket. This led
to changed strategy, storage at a warehouse in the Gulf region and using a smaller plane to fly
into Baghdad. The cash was stored in depots at Mosul, Baghdad and Basra, and was guarded by
Arabic speaking Fijians who had served as UN peacekeepers in Lebanon. Russian planes were
used for intra-country transport. Armoured vans and a fleet of 40 large trucks delivered cash to
individual bank branches, and by January 15 road convoys had made more than 1,000 return
journeys delivering new currency and picking up old.
Two hundred and fifty exchange locations were designated at branches of state-owned banks and
private-sector banks. Determining the capacity of the sites was crucial to the effectiveness of the
exchange. In choosing how much cash to allocate to each site the currency exchange team had to
weigh up factors such as the size of the safe, the number of teller windows, opening hours and
whether or not they could open on a Friday, which is taboo in certain areas of the country.
Numerous logistical difficulties were encountered. One was that the currency exchange team
found they had grossly under-estimated the weight of old dinars to be picked up. They had

7. projected 3,000 tonnes, but it turned out to be actually 12,000 tonnes, since the central bank had
underestimated the proportion of low denomination dinar notes in the note issue.
Verying banknotes
The next problem was how to check the authenticity of the 10 billion banknotes offered in
exchange for new ones. The currency exchange team wanted to do sample verification per teller
in order to speed up the verification process. But after some attempted frauds had been
uncovered, they reverted to 100% verification, as favoured by the central bank. Also, the notes
had no advanced security features and could not be machine verified4
. So the laborious process
of verification by hand was decided on; this process is expected to finish in autumn 2004.
To avoid a risk of re-circulation "under the counter"(as happened in Afghanistan), the currency
was dyed red immediately after being handed in and before verification. Warehouses scattered
around Iraq were full of sacks of red money. Commercial banks bore the risk of taking in
counterfeit notes; the new money passed to the banks was essentially loaned to them at a zero
interest rate and discrepancies corrected later.
The exchange took place over three months starting on October 15, and was completed
comfortably before the January 15 cut-off point. In terms of queues, the exchange was in some
respects smoother than the changeover when the euro replaced national currencies in the euro
area. Long delays and waits were rare. After January 15 the old notes were valueless. While in
other countries (such as in the euro area), central banks generally stand ready to provide new
currency for old notes for a long time, if not indefinitely, the central bank was adamant that it
could not offer to swap old dinar indefinitely as this would give counterfeiters too many
opportunities for fraud. Remarkably, there were no major attacks on exchange sites, although
there was a major attack on a currency delivery in the flashspot town of Samarra.
The smooth exchange process has been capped by a strengthening and then stable exchange rate.
This led, as was hoped, to a process of reverse dollarisation; as the dollar was a depreciating
asset, holders started to switch back into dinars. Cash in circulation in July 2004, was around ID6
trillion, an increase of one-third on August 2003. The three months of the exchange saw the dinar
appreciate from ID2,000 to the dollar peaking at ID1,250-1,300 in mid-January. Since mid
February the rate has stabilised at around ID1,450.
Centeral bank reform under way
We have described the considerations that led the CPA to decide to endow Iraq witha fully-
fledged central bank and a flexible exchange rate, and we have also outlined how Iraq was
provided with a new currency. With the framework in place, the CPA advisers could then start
putting in place some of the other key building-blocs needed for a functioning monetary regime.
One of these was the legal underpinnings.
A new central banl law was passed March 6 2004, replacing an old one from 1976. The central
bank was given independence to avoid recourse to monetary financing; stronger banking
supervision powers (it was given ability to close banks); and competence to conduct a range of

8. financial operations (swaps, repos etc). Most appointments to the monetary policy and
management board have been made.At present the same deputy governers hold office as did
under Saddam's regime, which has helped tohold the central bank together (while not perhaps
being helpful in terms of installing a new culture). For the time being the centeral bank will need
play a role in cash distribution. it will need a payment system division, a monetary operations
divison and a refocused research capability. At present the centeral bank is trying to work out
what they need for the longer term.
The central bank remains hampered by the lack of vital information. Policy makers know the
amount of domestic currency cash in circulation (but not the volume or valueof dollar
transactions), government balances, and foreign exchange reserves but still do not know bank
loans outstanding - or the true inflation rate. Untill statistics are improved, the central bank
cannot conduct a proactive monetary policy.
Building markets
To give monetary policy some teeth, the central bank also needs to be able to operate in the
money markets and influence short-term interest rates. So markets also have had to be built from
scratch. On this front, the signs so far are promising. Interest rates were liberalised in spring
2004. On July 18, the central bank successfully auctioned on ID150 billion-worth of 91-day
government paper at 6.8% - in fact the auction was oversubscribed. Development of these
auctions, and any secondary market trading, will have three positive effects. Firstly the central
bank will be able to build up a picture of yield curve, essential to carrying out its policy and
understanding of the economy. Secondly, as banks earn money from the paper they may be able
to offer interest on customer accounts, which will encourage use of the banking system by Iraqis.
Thirdly, as new bills continue to be auctioned and old ones held by the central bank expire, the
central bank will be able to create a "natural" shortage in the base money market - monetary
policy will have some teeth. This last scenario however remains a long way off, perhaps two to
three years.
One year on from the rubble, the central bank has created fledgling policy tools. The central bank
can influence the exchange rate through its auctions of foreign exchange, at present about $15-
20m a day, and the exchange rate has been stable since February. In fact, there is a danger that
this stability is interpreted as a commitment by the central bank to a set rate - exactly the effect it
does not want to create. This is a competitive market and the dinar is clearly in demand. The
central bank has not needed to sell all the dollars it receives from the Ministry of Finance in the
market, and as a result its foreign exchange reserves are increasing by $200m-250m per month.
"Banking for the brave"
A money market, in turn, requires a banking system and this remains stunted by the continuing
violence in the country and paralysis of the large state-owned banks which dominate the market.
The security situation means Iraq remains a far from attractive place to do business. Iraq has 17
private sector banks, which is indeed something to build on, and an electronic payment system
with national coverage has been set up to encourage non-cash means of payment. Three foreign
banks have been granted licenses to operate and the government has invited bids for more. Long

9. term Iraq may look a good prospective market, short term it is banking for the very brave. The
two state-owned banks Rafidain and Rasheed, which dominate the domestic market, are
international pariahs. Their assets abroad are frozen and subject to transfer to the Development
Fund for Iraq, while the treatment of their liabilities depends upon the settlement of the Iraqi
debt. As a result they cannot operate outside the country, and international banking in Iraq is
provided by the new Trade Bank, which issues letters of credit on behalf of the government, and
the small private banks, which are not subject to asset freezes or creditors' claims.
Maintaining credibility in the face of shocks
Turning now to future prospects, the central bank faces a number of shocks over the medium
term, which it must manage to maintain credibility. Firstly, the United States has earmarked over
$18 billion of supplemental spending for Iraq. While welcome, such a large inflow of foreign
exchange will create problems for a central bank seeking a stable exchange rate.
Secondly, price liberalisation, a plan for which is likely to be part of an IMF programme, has the
potential to be inflationary. At present around 60% of the Iraqi population are dependent on food
baskets and the price of petrol is heavily subsidised. The subsidies are worth $2.5 billion and $5
billion-6 billion respectively - very large sums in the context of a $25 billion economy. In total
around 50% of Iraqi public expenditure is on subsidies. As the food basket is replaced with a
monetary handout, the demand for cash will increase. The central bank will have to meet the
extra demand for cash and be able to distinguish between price level changes - which are
inevitable - and any inflation that could start to build up. The biggest risk however lies with
public demands for compensation and the government's response. If the government agrees to
large wage increases and handouts, extra revenue will have to be found. Should oil revenue fall
short, the central bank may be faced with a populist government attempting to force it to
monetise debt.
Fiscal threats and Iraq's debts
Whether monetary stability will be sustained in practice will depend crucially on the adequacy of
revenue to fund the budget expenditure, and the absorptive capacity of the economy, relative to
the political pressure to raise expenditure sharply. Now that sanctions are lifted and oil revenues
are flowing in, budget balance should not be impossible, even given the vast expenditure needed
on infrastructure and repairs. Producing a balanced budget in autumn 2004 will be key to
obtaining an IMF postconflict facility and access to loans.
The signs so far are mixed. Firstly, the budget for 2004, which was set in October 2003 to
balance, is so far running a deficit of $7 billion (about 30% of GDP). At present this is funded by
"reclaimed assets", which is money left over from the old Oil For Food programme on deposit at
the New York Fed. This revenue will not be available for the 2005 budget, however. Secondly,
in 2004 markets have been kind. Both the demand for oil and its price have been higher than
anticipated, and this has helped government finances. But with oil revenues 98% of the budget,
state income is at the mercy of the market. Thirdly, and worryingly, a culture of balanced
budgets has not been created. Saddam has gone but deficits continue. Should this approach to
budget setting be maintained, the central bank could come under pressure to monetise the debt.

10. This is, of course, prohibited by the central bank law, but the reality will be demonstrated by the
behaviour of the government in the next 12 months.
Lastly, Iraq's state debt of $120 billion looms large in the background. James Baker, a former
American secretary of state, obtained an international consensus that there should be a Paris Club
decision on Iraqi debt by the end of 2004, but how much and when will be paid has yet to be
agreed. Until a rescheduling can be agreed on, Iraq's financial position will remain in doubt .
Progress in perspective
The progress made so far needs to be viewed in the perspective of Iraq's history. The central
bank had been operating in an economy that had suffered from many years of mismanagement
well before the invasion. The war with Iran in the early 1980s had caused a big drain on
resources, exhausted foreign exchange reserves and led to a massive build-up of foreign debt.
Then after the first Gulf war in 1990, oil revenues, which had accounted for 80-90% of Iraqi
government revenue, collapsed as a result of sanctions (though sanction-busting arrangements
with Syria and Turkey to sell them oil generated some foreign exchange). Public spending was
not cut commensurately. Resort to monetary financing in early 1990s led to inflation and in
1995-6 to hyperinflation. The central bank had become accustomed over many years to quasi-
automatic financing of the budget deficit, which was financed by the issue of treasury bills. This
period left a legacy of weak balance sheets in domestic banks and a debased currency. More
important, it instilled a mentality in the central bank of acquiescing in inflationary policies - a
culture that could still be an obstacle to stabilityoriented policies in future.
Fast-forward to June 2004.
One year on from a central bank that was bombed, burnt, shot at and flooded the Iraqi central
bankers and their advisers have had considerable successes. They have distributed a new
currency, the exchange rate has been stable and the dinar is in demand. The decision to follow a
managed float that aims for a stable exchange rate, rather than gamble on a fixed rate at the
beginning, has so far been vindicated. Sinan Shabibi, who became governor in September 2003,
is highly experienced in debt management from his time at UNCTAD, though perhaps less so in
monetary policy implementation. Iraq's central bankers have set up an auction for government
debt. The central bank network is functioning - branches in Mosul and Basra (looted and blown
up respectively in the war) are being repaired and the Kurdish region's "central banks" have been
incorporated into the Baghdad-based network. Central and commercial bankers are learning how
to operate in a market, not in response to Saddam's diktat. And market-based indirect instruments
of monetary policy are being developed, based on the new treasury bills and the fledgling market
yield curve.
Naturally, uncertainties remain. Information is patchy and the central bankers need training. The
banking system is still underdeveloped, and the true value of balance sheets unclear. Without a
banking system and better information, discretionary monetary policy cannot operate. To that
extent, the jury is still out on the charges made by Hanke and other critics. The government is
unlikely to resort to monetary financing in 2004, but the 2005 budget is fragile. The central
bank's resolve in resisting government demands has not been tested. Expectations of the value of
the dinar may be stable now, but expectations of good fiscal behaviour by the government and

11. central bank capability to cope with increasingly complex monetary issues, which ultimately
underpin it, are unproven.
The Iraq Currency Exchange Team
The Iraq Currency Exchange Team was part of a group advising the CPA on economic policy.
Peter Macpherson, a former head of USAID and president of Michigan State University, was in
charge of economic policy at the CPA from May to October 2003. Marek Belka, who is now
prime minister of Poland, took over until spring 2004.
The currency exchange team was led by Hugh B. Tant III, a retired Pentagon general, who is
now working for a community bank in South Carolina. John Rooney of Crown Agents was his
deputy, in charge of operations and then responsible for winding down the exchange. Jacob Nell,
an adviser from the British Treasury and a former assistant editor of this journal, was
responsible for executing the budget and cash management for the Ministry of Finance, and also
was the policy adviser to the currency exchange. John Dulle from Bearing Point, a consulting
firm based in the United States, was the lead logistics planner. Simon Gray, of the Bank of
England, advised the governor of the central bank, Sinan Shabibi, on the overall direction of
monetary policy and helped establish the foreign exchange and treasury bill auctions. Larry
Blume, a contractor working for the American Treasury, was responsible for the currency
exchange "roadshow" and for the verification and destruction of the old dinar notes. Karen
Triggs from the British government coordinated the exchange team's information campaign,
while Basel Abushaban, US Department of Defense, Baghdad director of all ground operations
from the United States who coordinated and led money movements in Baghdad and the central
provinces. Advisers from the Treasury in the United States and the Boston Fed helped on the
decision to proceed with the currency exchange.
Notes
1 Another complication was that when the printing plant was looted, four series of ID10,000 notes, each with a
value of ID1 billion, were also looted. These notes were properly printed, but were not issued by the central bank,
and caused a great deal of confusion. Eventually the Central Bank of Iraq accepted them as legal tender.
2 Not least since the highest denomination note would have been ID25, and could have been confused with the old,
pre-1990 (Swiss) 25 dinar note.
3 At one point last summer, the Baghdad municipal workers went on immediate strike when an attempt was made to
pay them in ID10,000 notes.
4 It did prove possible to machine count the notes, though all 1,500 counting machines brought in for this purpose
had to be re-calibrated to cope with the poor quality of the old notes coming in.