Central Bank of Iran on Amend
Central Bank of Iran was established in 1960 seeking major targets of issuing banknotes, protecting national currency value and acting as a banker to the government. The Money and Credit Council had 15 members of which 4 experts were proposed by the Board of Ministers and 1 university professor was also introduced from the academic side for 3 years.
After 12 years, the Monetary and Banking Law was written in 1972 bearing the most significant change in the combination of the Money and Credit Council; the number of members reduced to 11 and experts were introduced from specific organizations for a 2-year tenure; consequently, the government vote right dominated the council decisions, weakening its autonomy.
Aimed at fighting Riba after the Islamic Revolution, the Usury-Free Banking Operation Law was prepared in 1983, which has been in place since then; the current law seeks targets of maintaining the value of national currency, keeping the equilibrium in the balance of payments, facilitating trade-related transactions and improving economic growth.
Some experts hold the idea that the CBI current structure has incurred heavy costs to our economy and acted as the main driver of high inflation rates; they also believe that the Achilles heel of the current law is the CBI lack of independence and the government dominance. If the CBI does not enjoy autonomy and independence, how can it resist demands, specifically those tied with national interest such as facilities to support strategic production or providing housing for the less fortunate? Such actions might reach their set goals; but the higher inflation rates they definitely will trigger will seriously endanger national economy’s interests in the long run.
Unanimously agree on the necessity of reforms in the CBI structure and law, some assume that there are 5 major areas to notice:
- Setting the CBI targets;
- Defining the CBI duties;
- Checking different aspects of the CBI independence and autonomy;
- Increasing the CBI Transparency and accountability; and
- Executing Good governance in the CBI body
Setting the CBI Targets
As its first and most important target, the CBI must seek price stability and controlling inflation keeping an eye on the banking system health and stability.
Defining the CBI Duties
The CBI duties falls in categories:
Formulating monetary policies; foreign exchange policy making, regulating banks and credit institutes; being banker to the government; offering advice to the government; preparing infrastructure; preparing rules and regulations and supervising payment systems; issuing banknotes and coins; and managing and safekeeping of foreign exchange reserves, gold and national treasuries.
Checking Different Aspects of the CBI Independence & Autonomy
The CBI independence and autonomy is a major issue falling into 3 categories:
- Legal structure autonomy, which refers to the CBI autonomy from the administration, parliament and other organizations such that the bank will be able to deal with and decide about long-term economic targets free from political issues.
- Operational autonomy, which refers to the CBI autonomy in policy making, performance, selecting instruments, and setting targets.
- Financial autonomy, which refers to the CBI autonomy from the government in terms of its budget such that it will not be forced into negotiating, bargaining or compromising with the government or parliament under any financial and budgetary pressure.
Increasing the CBI Transparency & Accountability
The CBI autonomy in materializing its targets will raise expectations; the CBI will be obliged to submit periodical comprehensive reports to the government and parliament to explain the current economic conditions and offer their projections.
Executing Good Governance in the CBI Body
Having a well-defined governance and full implementation of its instructions are pre-requisites without which talking about CBI independence/autonomy and transparency/accountability would be worthless; it is also required to establish cooperation between all parts to deal with any probable conflict of interest, judicial immunity and finally, attain the set objectives.
Government and Parliament Simultaneous Attempt
A scheme is set to be examined in the Majlis Economic Commission in early Azar (22 Nov- 21 Dec, 2017), which targets both the CBI structure and the laws and regulations and in case passed by parliament and then, the Guardian Council, it will be implemented. On the other hand, the government has sought similar goals by handing over two bills of Banking Law and CBI Law to the Majlis.
The scheme offered by the Majlis is made up of 10 chapters and 80 articles; it sets price stability as its major and number one target and sees the banking system stability and health as the CBI’s first priority, which will be followed by improving economic growth and employment rate keeping an eye on price stability.
The said scheme also defines an independent personality for the CBI, which will prevent the CBI becoming manipulated by the government to finance its deficiencies. As experts believe, the most important point about the CBI autonomy is tied with its role as the emergency lender to the government.
3 Wrong Turns
Experts refer to 3 wrong turns for the government to access the CBI resources:
- Selling the foreign exchange from the country’s oil export by the government to the CBI;
- Funding through commercial banks, which only results in their borrowing from the CBI and heavy debts on their balance sheets; and
- Demands set through the Budget forcing commercial banks to grant facilities by decree; such demands result in banks’ resource deficiency and eventually, borrowing from the CBI.
Among the above mentioned, the first item plays the most in the CBI lack of autonomy. In Iran, banks do not have a lot of foreign exchange resources; in fact, deposits they absorb in foreign currencies plus their own resources are far below their consumption and they have no choice but to pay to the CBI in Iranian Rial and buy foreign exchange in return, which originally come from oil exports in the government accounts and will simply end if the government stops supporting the CBI. As a way to reduce this dependency, indeed, the CBI must act as an agent to manage trading of foreign exchange for the government instead of purchasing it from them.
Not an SOS Lender Any More
The most important part of this scheme, with no doubt, is the measures defined to make the government borrowing from the CBI more difficult. The said scheme rules that the CBI can only grant petty cash with less than 6-month maturity; the total amount of the granted cash must be settled in the same budget year; the cash received by the government at any time must not exceed 5% of the its total tax income materialized in the previous year; the administration account balances and its other assets with the CBI will be held as the collateral for this borrowing and in case petty cash is not settled in the set period, the CBI is obliged to refrain from granting new money.
The Central Bank High Council
Stressing on the importance and necessity of the CBI autonomy, its structural reform has been planned; in this regard, the Central Bank High Council is introduced as the top-level policy maker, setting rules and regulations as well as supervising and regulating their implementation; the said board will replace the Money and Credit Council; it includes:
- The CBI governor as the chairman of the board;
- The CBI deputy governor as the board chancellor and secretary; and
- The chief of the Inspection Organization of Iran
- 3 macro-economic experts
- An expert in finance
- A juristic in banking law
- An expert in banking, specifically Islamic banking and finance
Duties of the CBI High Council
The CBI High Council is exclusively responsible in areas like:
Targeting macro-economic monetary and foreign exchange policies; deciding about time of implementing policies and the required instruments; approving guidelines and principles to regulate and supervise; approving the periodical reports prepared and issued by the CBI; approving the crimes proportionate with non-compliance of institutions with regulations; approving the CBI annual budget; offering political advise to the President and the Majlis on bills and schemes before their approval; granting permission for establishing/closing subsidiaries/branches of the CBI and the Organization and approving general rules and regulations overseeing maintaining the CBI foreign reserves (amount, combination and quality).
The requirements of assigning or dismissing members of this council are set in a way to protect them from those in power; in the first tenure, members will change every 2 years and nearly a decade will take for governments to become able to change all members; as a result, after some time, all members of the council will no longer be the choice of one president, which serves the purpose of the board independence.
It is worth mentioning that article 20 of the proposed scheme deals with the transparency and accountability of the council, obliging it to publicly release its negotiations and directives. Furthermore, the governor is also mandated to periodically issue the CBI performance report and plans consisting of monetary and foreign exchange policies, banking sector oversight, economic changes and reasons behind probable diversion from the set goals to the parliament members.
CBI Fiqh Council
In order to guarantee full and correct implementation of usury-free banking law as well as overseeing the banking sector performance and commenting on common procedures, operational methods, instructions, and their implementation to be compliant with Islamic laws, the Fiqh Council is formed.
- The CBI is not allowed to grant facilities without receiving collaterals;
- It is not allowed to guarantee the debts of the government, governmental organizations or any other organization;
- It is not allowed to purchase government issued and guaranteed securities in IPOs;
- It is not allowed to participate in establishing companies with its supervised organizations; and
- It is not allowed to do banking operations for any other institute/organization except the government.
Besides, the CBI is banned from granting facilities to ministries, state-owned companies/institutions (except from state-owned banks) and their subsidiaries as well as guaranteeing their commitments.
While the world took its first steps towards more independent central banks acknowledging their major duty of curbing the inflation and improving price stability, the Central Bank of Iran turned into the government piggy bank to finance its activities; it caused heavy fluctuations in prices and the 2-digit inflation rates over the past 4 decades, creating an insecure and un-predictable environment for economic activities. The goals/targets set by the proposed scheme strengthened with the priority it gives to the CBI independence, fortunately, can put the CBI in line with modern banking, which seems necessary for maintaining the 11th administration accomplishment in dragging down inflation from 40% to below 10%.
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