Experts Underscore Central Bank Independence

EghtesadOnline: Iran's economy is bedeviled by a series of major issues arising from decades of mismanagement that has made the banking system bear the brunt as the country's predominant financer, although efforts in the last few years have been made to balance things out.

News ID: ۷۴۵۰۷۶

27 February 2018

On Monday, a host of high-level officials, executives, private sector figures and experts convened in the Seventh Iranian Monetary Policies Conference to discuss the need to modernize the banking regulator, the Central Bank of Iran, and bestowing it with its long overdue independence from the government. The event was organized by Donya-e-Eqtesad Media Group, to which Financial Tribune is affiliated, at Tehran's Espinas Palace Hotel.

Masoud Nili, President Hassan Rouhani's special aide, was the first keynote speaker  and said CBI's independence should be accompanied by curbs on government spending that will rein in its source-of-all-woes budget deficit, reform financial institutions and streamline management of oil income spending.

Iranian governments were banned from directly tapping into the CBI resources to make up for their budget deficits about 15 years ago, but instead of focusing on other viable sources of taxation, administrations have resorted to employing the resources of commercial banks who have bred billions of dollars in debts to the CBI to survive, Financial Tribune reported.

The top economist referred to this practice as “regressive” and a “domineering element” in the constant and alarming rise in monetary base.

Seyyed Ali Madanizadeh, an academic and economic expert, reviewed a number of central banks of other nations and their experiences in undertaking structural reforms and gaining independence. He stressed that structural changes in CBI must be coupled with government budget, debt, banking and financial reforms, as well as oil income management.

But misguided “expectations” were also a common theme broached by Nili and Madanizadeh, with the latter referring to a watershed 1968 speech by Milton Friedman in which the Nobel Prize-winning American economist had warned against expecting too much from monetary policy and monetary regulator in conditions where budget deficits are aplenty.

Forex Rates

CBI Governor Valiollah Seif also addressed the event and began by outlining monetary policy achievements, including lower inflation, reduced interest rates and forex stability.

But the image in the minds of most Iranians in the past few weeks has been the opposite, as forex rates continued their rally to the bewilderment of most and the US dollar and the euro reached all-time highs against Iran’s national currency.

Seif naturally referred to the surge, but maintained the stance held by a slew of other officials that forex fluctuations cannot be rooted in economic reasons as macro-indicators such as inflation, GDP and forex incomes have experienced positive growth.

He also pointed to expectations, but a different kind that is generated by economists, media and people who say rates will go up and exert a powerful psychological effect on the market.

Seasonal changes and the uncertain atmosphere generated and maintained by the US concerning Iran’s nuclear deal were referred to by the official as other reasons behind the forex rate hikes.

CBI intervened by allowing banks to issue one-year rial certificates of deposits at 20% interest, 5% higher than the current cap on deposits, following which forex rates have since dipped.

According to Seif, a whopping 1.01 quadrillion rials ($22.55 billion) worth of CDs were sold in the first week of the initiative.

Challenges Facing Banking System

A panel was held as part of the event, in which three bank CEOs and a former director of Monetary and Banking Research Institute discussed issues ailing Iranian banks.

One of the main topics of discussion were the CBI-sanctioned CDs that have practically increased the finished costs of banks, as lenders gain 18% interest on loans, generate next to zero from service fees and have to pay 20% interest.

“The [negative] outcome of such a situation is clear and does not need much pondering,” said Mohammad Reza Hosseinzadeh, CEO of Bank Melli Iran.

Parviz Aqili Kermani, the seasoned banker at the helm of Middle East Bank, opined that CBI’s high-interest certificates “will hurt the banking system in the long run”.

He referred to the next fiscal year starting March 21 as an exceptionally hard and vital year, as banks must act on the nine-point Iran action plan with the Financial Action Task Force by June, and come up with what he estimated to be north of $100 billion in costs to improve their capital adequacy ratio, reduce bad loans, shed excess assets and clean up their balance sheets.

After remarks by Bank Saderat CEO Hojjatollah Seyyedi, former MBRI chief, Mohammad Tabibian, spoke and emphasized that all the problems of Iran’s banking system emanate from its decades-old Usury-Free Banking Law that “defines banks as annexes of the government’s budget”.

The event was brought to a close with two other panels, one on the expectations of banks and manufacturers from CBI’s structural reforms and one on challenges facing Iran’s electronic banking players.