Iraq's cbank wants hands off foreign reserves

May 24, 2009 at 15:22

In statement, central monetary authority tells Baghdad govt not to raid reserves to cover budget shortfalls.

Iraq's central bank said on Sunday the government should keep away from its foreign currency reserves, as the oil-reliant country scrambles to plug budget shortfalls following a fall in crude prices.

Iraq cut its 2009 budget three times due to a sharp fall in oil prices from highs near $150 a barrel last summer, and the central bank says ministers and other officials want to use part of its roughly $40 billion of foreign cash to fill the gap.

"Attempts to take foreign currency directly from the central bank's reserves to cover various government expenses will weaken the ability of monetary policy to bring stability," the central bank said in a statement.

The central bank said it was especially important Iraq's foreign cash reserves be used for maintaining the dinar's value against the dollar given the the country's volatile economy.

The exchange rate is set by the central bank through auctions. By law, the bank is obliged to maintain its independence from the government.

In addition to the fall in oil prices, Iraq's oil exports have also flagged over the past year, and some politicians have warned of financial "catastrophe" next year if the country does not find a way of boosting revenues.

The public sector is the main employer in the Iraqi economy and basic services such as electricity remain unreliable six years after the U.S.-led invasion that toppled Saddam Hussein.

Further budget cuts could stoke tensions in a country only just recovering from conflict.

Recent proposals to boost revenue have included selling $3 billion in treasury bonds, a 35 percent tax on foreign oil firms' profits and the sale of another mobile phone licence.