Iraq's inflation rate may fall to 20 percent this year if sabotage attacks that deepened shortages in the economy ease, Central Bank governor Sinan al-Shabibi said on Saturday. Inflation reached 30 percent last year as mismanagement, lawlessness and attacks against refineries and supply lines drove up fuel and electricity prices and pushed overall prices and insurance rates higher, Shabibi told Reuters on the sidelines of a World Economic Forum meeting in Jordan. "We have seen the pressures ease so far this year and we are hoping for a faster pace of rebuilding that could a create a more desirable kind of inflation," Shabibi said. Anti-US insurgents have waged attacks against Iraq's food and fuel lines that managed to disrupt supplies, drive prices up and create a black market parallel to the subsidised prices, although government efforts in recent months have succeeded in easing the situation.
The attacks also contributed to keeping Iraq's oil output at around two millions barrels per day - two thirds of its pre-1991 Gulf War level.
"This deprived us of oil export revenue. The security situation is affecting everything in our cash-based economy," said Shabibi, adding that crude exports brought around $20 billion of revenue last year.
He said the monetary authorities have been functioning despite the violence, citing work on a secondary market for treasury bills, reorganisation of a state-opened al-Rafideen Bank that accounts for 90 percent of all assets in the banking system, and an electronic payment and settlement mechanism that could be in place by the end of this year.
Like any monetary authority in the would, curbing inflation remained the main target for the Central Bank of Iraq, the former exile said.
Although wages went up sharply after US invasion and hyperinflation from the crushing 1990-2003 sanctions era ended, Shabibi said consumer prices remained beyond the reach of ordinary Iraqis with the economy still short of returning to its prewar levels.
"We have the tools to remedy the situation such as higher interest and deposit rates but for these to be effective we need a larger banking system and an acceleration of the entry of foreign banks in the market," Shabibi said.
He was referring to several foreign banks that were awarded licenses to operate after the war, such as HSBC and the National Bank of Kuwait, but have not entered the market in force because of the violence.
A functioning lending and banking system would help the Iraqi economy recover, especially agriculture and industrial production that remain almost obliterated after the US invasion, Shabibi said.
"These sectors have also taken a hit from the liberalisation under the US occupation authority," Shabibi said. "It is not up to the central bank but these polices may have to be revaluated while keeping a generally open trading system."
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