Iraq Central Bank Fails To Sell T-Bills Worth $170M - Official

Iraq's central bank failed this month to sell two tranches of treasury bills, or T-bills, each worth up to $170 million, due to local banks' cash flow constraints, and is in talks for more international loans, a senior central bankcentral bank official said.

"Despite offering a high interest rate of up to 9%, banks were unwilling to buy these treasury bills," Mudher Kasim, a senior central bank advisor, told Dow Jones Newswires in an interview in Iraq's capital, Baghdad, late Sunday.

The central bank has been holding treasury bill auctions bi-weekly since last year, offering 200 billion Iraqi dinars ($170 million) in each round. In another auction earlier this month, the bank sold only IQD110 billion out of the planned IQD200 billion, Kasim said.

Local banks have been keen buyers of Iraqi T-bills in the past but have now scaled back their purchases amid cash flow constraints, partially as a result of granting trillions of dinars worth of marriage mortgages, which are extended to young civil servants to finance their marriages, and housing mortgages, Kasim said.

In addition, the central bank has issued new instructions to state banks preventing them from using deposits from ministries and other government offices to buy T-bills, the former chairman of state-run Rafidain Bank, Abdul Hussein Al Yassery, said.

The central bank has also imposed new taxes on the profit private banks make from T-bills, which has made it more difficult for them to buy more, said the chairman of one of Iraq's private banks, who asked not to be named.

Total treasury bills sold by Iraq's central bank since the country's U.S.-led invasion in 2003 up to now have reached IQD11.7 trillion, or around $10 billion, out of which a total IQD6.4 trillion were sold at an interest rate of 2% to the two largest state-run banks, Rafidain and Rasheed, which dominate the country's banking sector, Kasim said.

Some IQD3.9 trillion were sold to state and private banks to finance old debt inherited from Saddam's regime, while the remaining IQD1.4 trillion were sold to help finance projects, he added. The interest rates offered on these T-bills ranged between 5% and 6%.

The T-bill sales are meant to finance power projects and help finance the country's budget deficit, which stands at about $19.5 billion, Kasim said. However, at current oil price levels and with new oil field developments set to boost crude output, the government doesn't need to rely on the T-bill auctions, he added.

Crude has been trading mostly above the $70 a barrel mark in the past three months. Nymex crude oil futures for September delivery were trading down 83 cents at $78.15 at 1230 GMT.

Iraq's government depends on oil sales for more than 95% of its revenues. The country earned around $26 billion in oil revenues during the first six months of the year after booking total oil revenues worth $41 billion in 2009.

Kasim said the Iraqi government was seeking to draw more funds from the International Monetary Fund, which recently granted a $455 million loan to Baghdad, representing the first payment under a $3.6 billion standby loan arrangement for Iraq granted in February.
"We are in talks with the IMF to secure another amount which could be more than what we had received," Kasim said.

The Iraqi finance ministry is also in negotiations for another $250 million soft loan from the World Bank after securing $250 million earlier this year, he added.