In a new appraisal of the Central Bank Bill, the Majlis Research Center, the expert wing of Iran’s Parliament, said the bill will potentially enhance the independence of the Central Bank of Iran, but that won’t be sufficient.
MRC’s review showed that CBI will still remain among the 25% of countries with the lowest level of central bank independence from the government.
In June 2021, lawmakers approved the outlines of the Central Bank Bill as part of a broader banking legislation. The bill aims to reform CBI’s organizational structure and make changes in its governance.
The MPs backing the bill said the new rules will raise the independence of central bank above the world average.
Examining the level of CBI’s independence based on international standards, the parliamentary think tank said the outcome of its research disproves the MPs’ claim.
The research center gauged CBI’s independence in the Majlis bill against the independence level of central banks in 182 countries.
In other words, CBI’s independence refers to the extent to which it could handle its monetary and banking mandate without being influenced by the fiscal budget deficit.
Deficit in the government budget is seen as the main cause of the unbridled expansion of monetary base and money supply in the economy which, by extension, gives rise to inflation.
MRC said an independent central bank is less likely to succumb to the government request to borrow funds when it fails to realize revenues envisioned in the budget.
Like most of its peers, CBI has a duty to maintain the general stability in prices and control inflation. To realize these goals, CBI must remain independent in the real sense of the term.
In addition, this will also help improve the government’s financial discipline and discourage it from asking for central bank money.
CBI’s Increased Independence Challenged
Although lawmakers backing the bill boast about the new legislation’s potential in increasing the independence of central bank, opponents believe the other way around.
They are of the opinion that the law will undermine the authority of the central bank and allow the unwanted intervention of irrelevant bodies into the country’s banking affairs.
They also express surprise about the numerous mechanisms enshrined in the law for removing the governor of central bank from office.
As per the provisions of the law, a high council will oversee the central bank and replace the governor, who will be relegated to second position.
Members of the council will fall into two categories: executive and non-executive. The governor and vice governor will function as the executive members while non-executive members will include experts in the fields of banking, monetary, accounting, fiscal management and law.
Opponents of the bill consider the preeminence of non-executive members over the governor as unreasonable, as the former is not accountable for the central bank’s performance while the latter is held responsible as per the provisions of the bill.
In the new law, the high council will replace the Money and Credit Council, which is currently the main monetary and banking policymaking body.
While members of both MCC and the high council are selected by the government, either directly or otherwise, the members of the latter have to be chosen mainly from among financial and monetary experts, not government functionaries. This is expected to reduce the government’s role and influence in CBI decision-making.
While there are contrasting views about the new banking law, both the opponents and proponents unanimously agree that the present banking law is obsolete and should be reformed. The current rules in force were passed half a century ago and are deeply flawed, as they fail to protect the value of the national currency, which the main duty of central banks around the world.
