posted from an article CK posted in Outkast (note bolded area at bottom)

Iraq issuing $170m T-bills every two weeks
Tuesday, 20 April 2010 at 08:37, Reuters, Baghdad

Iraq's central bank has been selling 200 billion dinars ($170 million) at bi-weekly treasury bill auctions this year, but mostly to state-owned banks because a tax issue makes it difficult for private banks to participate, a central bank official said on Monday. "This is the hazy picture of the treasury bills, there is no competitive element," Mudher Kasim, a senior central bank advisor, told Reuters in an interview.

Kasim said the central bank has sold a trillion dinars in one-year T-bills since the beginning of the year with an interest rate of between 5 per cent and 6 per cent.

But as private banks have to pay tax on the profit from the bills, Kasim said that so far state-owned banks – which dominate the country's banking sector – have done most of the buying.

He said the tax dated back to the days of Saddam Hussein, whose regime was toppled by a US-led invasion in 2003.

The International Monetary Fund agreed a $3.6bn standby loan arrangement for Iraq in February.

In its letter of intent to the IMF Iraq wrote that it would conduct more frequent bond auctions to help fund a budget deficit and that it hoped interest rates would eventually be determined by the market.

Kasim said that the bi-weekly auctions would continue, depending on the size of Iraq's 2010 budget deficit, which fluctuates with the price of oil and the pace of oil exports.

The Iraqi government is dependent on oil for more than 95 per cent of its revenue.

The central bank advisor said the T-bill auctions were not affected at all by the ongoing wrangling over forming a government following inconclusive Iraqi elections in March.

The central bank cut its base rate by 100 basis points to 6 percent at the beginning of April amid tame inflation, which slowed to 3.4 per cent in February.

The official interest rate in Iraq is more of a guide to bank rates than a direct monetary mechanism as the banking sector is small and capital markets in this war-ravaged country are undeveloped.

Kasim said a further interest rate cut was unlikely at this point as the bank's policy has been to keep rates at around 2 percentage points above inflation. If rates go too low, Iraqis might move their money out of the country, he added.

"We think monetary policy has worked very well," Kasim said. "If we go any lower it could encourage capital outflow because it's not viable to invest in Iraq."

The advisor said that the bank also has no plans to change the exchange rate of the dinar, which has been at 1,170 to the dollar for almost a year, for the foreseeable future.

"Our long-term policy is to make the Iraqi dinar stable and strong," he said.

The central bank said in February that it expects to redenominate the dinar by knocking three zeroes off the nominal value of bank notes to facilitate currency transactions.

The dinar's relative value would remain unchanged. But Kasim said the bank has tempered its hopes of getting this done by early 2011 because the security situation in Iraq has made moving large sums of money around the country a major challenge.

Although Iraq is no longer plagued by wholesale sectarian slaughter, daily attacks by largely Sunni Muslim insurgents are still a reality.

"It (lopping three zeroes off bank notes) is still a strategy for the next year or four years," he said. "I do not know... if we find the security situation is viable to implement this strategy we will do it."

"It is a very risky game."