Sustainability of the banking system and the role of monetary policy: Financial liberation in Iraq

Abstract

The Iraqi economy is rentier and heavily reliant on oil revenues because oil prices are volatile and subject to supply and demand on the global market, causing money supply instability. A prudent monetary policy must be developed in the face of macroeconomic policies, even partial ones, in order to reduce inflationary pressures and achieve both internal and external monetary stability. Iraq also lacks a clear economic strategy and the country's economy is still susceptible to decision-makers’ whims and the demands of international organizations. It is, therefore, essential to discuss monetary policy's fundamental and successful role in managing the sustainability of the economy through its solid and practical tools. Iraq's monetary authorities scrambled to ensure the nation's economic stability through the use of monetary tools as the country's economic system started to shift towards a market economy in 2003, depending on supply and demand forces to manage the economy. The Central Bank uses tools of monetary policy, which are based on keeping an eye on the money supply and pursuing long-term objectives, to achieve the policy objective of economic stability. The goals of economic stability, according to economist Nicolas Kaldor, are to boost economic growth, achieve full employment, establish external balance, and fight inflation. This study examined the hypothesis that, between 1990 and 2020, monetary policy contributed to Iraq's economic stability using co-integration tests, fully-corrected least-squares techniques, and dynamic standard least-squares. The positive effects of monetary policy on economic variables, particularly economic stability, were demonstrated by the influence of foreign currency reserves on an improved current account balance, price stability, and a relative decline in unemployment rates. The GDP and the current account balance positively affected economic stability indicators, while the money supply adversely impacted most of them. To improve the balance of payments and encourage economic growth, investments should be made in the manufacturing and agricultural sectors.