News Release

September 22, 2003

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Coalition Failing to Plan for a Sound Monetary Regime in Iraq
Iraq needs a currency board or official dollarization

WASHINGTON--Now that Saddam Hussein has been removed from power, the Coalition Provisional Authority (CPA) can quickly establish stable money in Iraq. But the CPA's current plan to set up an independent central bank will fail to achieve this critical, postwar objective, according to a new Cato Institute study that recommends two viable alternatives.

The creation of a currency board or the dollarization of Iraq are two ways of quickly establishing sound money. "Either currency reform would help to establish confidence and stabilize Iraq's economy, paving the way for a timely U.S. exit," argue Cato Institute Senior Fellow Steve H. Hanke and Matt Sekerke, a research associate at the Johns Hopkins Institute for Applied Economics and the Study of Business Enterprise, in the new Cato Institute Foreign Policy Briefing Paper "Monetary Options for Postwar Iraq." Either reform would promote transparency, encourage fiscal discipline, and reduce inflation, they add. In addition, both monetary regimes have been implemented successfully in Iraq's past, as they have in other post-conflict situations around the world.

Critics of such reforms argue that the policies would diminish the nation's sovereignty, but Hanke and Sekerke reply that they would actually augment the people's newly won freedom. "The citizens of Iraq should not be coerced into transacting with a medium of circulation that is subject to debasement by the government," the authors maintain.

A central bank in Iraq would be subject to abuse by government and would suffer from the lack of financial institutions needed to maintain sound monetary policy. According to Hanke and Sekerke, the bank would be forced to resort to crude measures that would repress the fledgling market economy.

The analysis concludes with draft legislation for a currency board or official dollarization. This proposal should be used in place of the current plans for a central bank if economic recovery is to proceed. As Hanke and Sekerke note, "The vital first step for a postwar economic strategy is to implement a currency reform rapidly. Without sound money, transactions in the Iraqi economy will be impaired, and development will be postponed."