IMF draws on postconflict experience to help Iraq with currency and banking reforms

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The IMF has been heavily involved in preparations for the currency reform now under way in Iraq. IMF staff has also been advising on macroeconomic policy issues. What lessons can the IMF draw from its involvement in other trouble spots around the world?

Jeremy Clift of the IMF's External Relations Department spoke to Åke Lönnberg (Senior Economist, IMF Monetary and Financial Systems Department (MFD)), who has worked in Kosovo, Timor-Leste (East Timor), the Islamic State of Afghanistan, and, recently, Iraq, about his experience.

IMF SURVEY: What is the main focus of the IMF's work in postconflict countries?

LÖNNBERG: After a conflict or a breakdown of law and order, it is critical that institutional and administrative capacity be restored or enhanced at an early stage. A framework-underpinned by a simple but realistic policy stance-must be quickly put in place to reestablish macroeconomic stability and lay the ground for a quick resumption of growth. In addition, an early, realistic assessment must be made of external aid flows. Training people is also essential.

Once the first bases have been covered-getting the currency roughly right, establishing a functioning payment system, and setting up the key legal foundations- there is a backlog of important things that will still need to be done.

For my department, the major assignment in postconflict economies consists in helping establish or transform central banking functions and the payment and banking systems.We've done this in Cambodia (1991-95), Albania (1991-94), Rwanda (1994-99), Bosnia and Herzegovina (since 1996), Kosovo and Timor-Leste (since 1999), and Afghanistan (since 2001), among other places.

So Iraq is only the most recent case of the IMF supporting local capacity building by restoring or transforming central banking functions and the payment and banking systems.

IMF SURVEY: How do you do this?

LÖNNBERG: We have developed an operational framework for reforming postconflict economies, drawing on practical applications gained in dealing with critical events and milestones reached in our previous work.

Our department's methodology emphasizes the sequencing of actions within a graduated approach.

Key early decisions are the choices of a legal tender and an appropriate exchange rate regime. Setting up and operating a rudimentary payment system on an emergency basis will also be crucial if the established payment system has ceased to function. Preparation of key financial legislation-for example, for central banks, the banking sector, and the country's currency- is also a high priority. Such legislation should be in line with international best practices but always adapted to local legal traditions. Over time, core central banking functions should be restored and clearly distinguished from...