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Sun 2 Nov 2008 06:45 AM

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Recession latest threat to Iraq

Central bank governor says global economic downturn and falling oil prices causing growth to stall.

Slowing global growth and a steep fall in oil prices, which threaten to drag Iraq into recession, outweigh concerns about high inflation for Iraq's economy, the country's central bank governor said on Saturday.

Central bank governor Sinan Al-Shibibi told newswire Reuters that Iraqi growth was already beginning to taper off due to the sharp slide in oil prices, which are less than half the all-time high they hit above $147 a barrel in July.

Al-Shibibi said the bank would take slowing growth into account in setting interest rates.

"The perception of global recession and demand being lower for oil have affected Iraq very much. There will be a reduction in economic activity," the central banker said on the sidelines of an investment conference in Baghdad.

This, he said, would most likely favour loosening monetary police in the medium term. "Of course we'll have to change monetary policy accordingly to address the real economy. Inflation remains important, but the key concern for us is to guard against recession," he said.

Al-Shibibi reiterated remarks he made on Monday that bank interest rates would be lowered by one percentage point to 15 percent in the next few days. He said such a move was possible due to lower inflation, which was trimmed from over 60 percent in 2006 to around 13 percent today.

"The target is to lower [inflation], of course - in the 10 percent range would be good," he said. "We have to take that into account along with the lowering of oil revenues."

In September, the International Monetary Fund (IMF) forecast Iraq would grow by 9 percent in 2008. But as the global economy looks ever more grim, such goals may be harder to meet.

Officials are also seeking to expand Iraq's non-oil economy, which is expected to expand by just 3.5 percent this year.

Falling oil prices already prompted the government to slash its planned budget for 2009 from $80 billion to $67 billion. US crude closed at $67.48 a barrel on Friday.

Al-Shibibi said the bank would consider further cuts to bank interest rates following the cut expected in coming days. More cuts may not be necessary, he said, since liquidity was seen as sufficient.

"Despite the fact that interest rates are high, lending is increased, even at 16 percent rates. We don't have a credit crunch, domestically. The question is only the reduction in oil revenues and how that will effect the real economy."

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