DOHA, Qatar – With assault rifles and acetylene torches, roaming bands of robbers have nearly wiped out Iraq's once-booming banking system, posing one of the biggest hurdles to reconstruction efforts.
Baghdad's financial district is a wreck of blown-out vaults, burned-out buildings and blocks of broken glass. Smoldering at the center of the chaos is the Iraqi Central Bank, where all nine floors have collapsed into a hollow shell.
The U.S.-led Office of Reconstruction calls the situation dire, with one official conceding "there is little or no banking in place, no money flow."
Rejuvenating the lifeblood of Iraq's commerce is a high priority. Near the top of the list is rebuilding a central bank that can back a new national currency, shell out loans, set interest rates and manage the country's billions of dollars of debt.
"Without a central bank, there can be no banking system," said Rafael Jabba, director of economic activities for the U.S. Agency for International Development in Iraq. "That's why we're arranging alternative forms of credit when the banks aren't up and running."
As part of the reconstruction plan, USAID will roll out loans of between $100 and $250,000 to individual entrepreneurs and small- to medium-sized businesses, Jabba said. He hopes the loans will start flowing within 45 days.
Jabba's team plans to visit the southern city of Basra in coming days to seek partnerships with local lenders. A similar survey of Umm Qasr, the first major Iraqi city with restored power and water, proved disappointing. All four of its banks had shut down.
A few U.S. Treasury officials are already in the region working to reboot the banking system. The financial guru in charge is Peter McPherson, a former deputy U.S. Treasury secretary who was appointed just last week.
Decades ago, Iraq's financial system was considered one of the region's most modern; its pool of well-educated technocrats even helped other Middle Eastern countries, such as Jordan, establish their own central banks.
But the system was run into the ground by Saddam Hussein, who treated the Central Bank as his own private account.
According to Salah al-Sheikhly, a former Central Bank governor who has lived in exile since the 1980s, the Central Bank had been in chaos for years, stripped by Saddam of its power to independently regulate exchange rates and interest rates.
The U.S. Treasury now wants to develop a plan that unwinds the tightly controlled, nationalized financial system and transforms it into to a free-market economy.
There are a few private banks in Iraq, but the system is dominated by four main state-run lenders in the south and central parts of the country, Jabba said.
Before the war, Baath Party loyalists enjoyed preferential treatment in getting loans. The Iraqi dinar was such a weak currency that people preferred to store wealth in the form of U.S. dollars; few deposited much in banks for fear of seizure.
Launching a new currency will help, but protecting deposits is the first step.
Backed by machine guns and tanks, the U.S. military is guarding nine still-intact bank vaults in Baghdad that contain an estimated $1 billion in gold and jewelry deposited there for safekeeping by the city's wealthy before the war.
One vault was in the Central Bank, which had caught fire before the looting. By some accounts, it holds some of Iraq's most precious items: ancient gold artifacts that were taken from the National Museum. It may also contain an accounting of Iraq's nebulous debt burden and possibly records of Iraq's overseas deposits or hidden accounts.
U.S. troops deemed the building too unsound to investigate, and an Office of Reconstruction official said Sunday they still don't know what's inside.
Yet more insights are likely from interrogations of Saddam's former finance minister Hikmat Mizban Ibrahim al-Azzawi, who was arrested Friday by Iraqi police.
In the mid-1970s, al-Azzawi was appointed governor of the Iraqi Central Bank, but Saddam fired him in 1977 because he refused to transfer a large amount of money abroad for Saddam's uncle. He regained the finance minister's portfolio in 1995 — after years of writing articles in praise of Saddam.