The Effect of Federal Budget Financing Through Monetary Issuance on Banking Sector Efficiency in the Iraqi Economy for the Period )2004-2024(

Abstract

This research examines the impact of financing the Iraqi federal budget through monetary issuance (the issuing of currency) on banking sector soundness indicators during the period 2004–2024. The research employs a quantitative analytical approach, utilizing the limits testing of the distributed interval autoregressive (ARDL) model as a statistical tool to examine the short-term and long-term relationships between the monetary issuance variable and key banking sector efficiency indicators: the capital adequacy ratio (CAR), the non-performing loan ratio (NPL), return on assets (ROA), and return on equity (ROE). The central hypothesis of the research is that the expansion of monetary issuance significantly harms the efficiency of the banking sector. The results confirmed all four hypotheses; the growth of monetary issuance is positively correlated with inflation and NPL ratios, and negatively correlated with short-term profitability indicators. Cointegration models confirmed the existence of long-term relationships at an annualized correction rate of 43.8%. The capital adequacy ratio has consistently exceeded the minimum Basel III standards; however, non-performing loan ratios—particularly in state-owned banks—remain high compared to international standards. These findings have significant policy implications for the coordination of fiscal and monetary policy in Iraq.