The board of directors of the Central Bank of Iran has warned about consequences of the new legislation related to the banking and monetary system.
In a meeting late on Wednesday, the board expressed serious concern about the potential “irreparable damages” and outlined flaws in the new banking bill being discussed in the Majlis.
Lawmakers last Sunday decided to give urgency to debating the bill as part of broader banking laws. The bill, among things, calls for structural changes in the central bank.
Highlighting the need for new legislation from which complementary rules would be possible, the board criticized procedures through which rules are drafted. “The [planned] legislation has not gone through the right path.”
They said lawmakers drafted the bill without drawing on the knowledge and expertise of monetary and banking experts, the CBI’s public relations website reported.
The law-making institution has been criticized for acting beyond its purview and trying to establish general policies, which is the function of central bank.
Banking officials say the bill has merged policymaking, lawmaking, executive and supervisory roles the new law will not allow financial banking experts to have a say in policymaking.
Controversy Over CBI Independence
Unlike what lawmakers say about the positive side of the new legislation in increasing the independence of central bank, senior banking officials say the opposite will happen.
The new law will undermine the authority of the central bank and make way for unwanted interference in banking affairs, they have said.
“The law is a breach of the separation of powers. It allows the three branches, the executive, legislative, and judicial powers to intervene in CBI affairs. This will increase its dependence.”
They also expressed concern over the diverse methods to be enshrined in the law for removing the central bank chief.
As per provisions of the law, a “high council” will be atop 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 executive members while the non-executive will include experts in the banking, monetary, accounting, financial management and legal fields.
Opponents of the bill reject the superiority of non-executive members over the governor as unreasonable as the former will not be accountable for CBI performance as the latter.
In the new law, the high council will replace the powerful Money and Credit Council, which now is the main monetary and banking policymaker.
While members of both the MCC and high council are selected by the government, either directly or otherwise, the latter have to be chosen mainly from “financial and monetary experts,” not government bureaucrats. This can and will undermine the government’s role and influence in CBI decision making.
The government cannot remove non-executive members of the high council. When a new government takes office, the president is not allowed to replace the majority in the high council in one go. Replacing council members would be gradual and over the four-year tenure of the government.
Opponents of the bill stress that “trusting important banking affairs with non-executive members will allow them to make decisions that may be hard to implement because they do don’t see themselves accountable”.
“Inefficiency in supervision and audit” in the banking system, “ambiguities about interest rates and setting the bar high” for the central bank are key issues of concern for the CBI officials.
While there are diverging views about the new law, both opponents and proponents admit that the present banking laws have outlived their usefulness and must change.
The laws were passed half a century ago and are imbued with flaws that have failed to protect the value of the national currency, the main duty of central banks.
In supporting the new law, the Majlis Research Center says it has the potential to improve CBI governance.
“The CBI must safeguard the rial as per law. However, the currency has lost its value by 3,320 times compared to 1972 and the average inflation rate is much higher than the world average,” the research arm of parliament has said.
