The independence of central banks, necessary for the realization of a sustainable single-digit inflation, is one of the most basic principles for controlling inflation and creating stability; after all, economic stability is one of the key conditions for the growth and development of the country, said economist Seyed Ali Madanizadeh in an article for the Persian daily Donya-e-Eqtesad.
A translation of the text follows:
As the country’s history of the past 50 years shows, after the approval of the Monetary and Banking Act in 1972-73 and in the absence of the independence of the Central Bank of Iran, Iranian governments advanced their agendas regardless of whether they lead to economic growth or are used to deliver populist promises by tapping into CBI resources. As a result, the increase in money supply imposed inflation on future governments.
Employment plans of the 8th government [led by the then president, Mohammad Khatami], plans for fast-profiting enterprises and housing projects of the 9th and 10th governments [led by the then president, Mahmoud Ahmadinejad], provisioning the losses of bankrupt banks and unauthorized financial institutions, lending financial aid to the stock market, financing the budget deficit of recent years, underwriting bankrupt pension funds and semi-governmental companies, and subsidizing foreign exchange market in the governments of ex-president, Hassan Rouhani, are all examples of inflation-inducing programs over the past two decades.
Governments, directly or indirectly (through banks), strong arm the central bank to provide credit lines to banks, or force them to buy treasury bonds at low rates. The central regulator carries out the government’s orders matter-of-factly. With the growth in money supply, CBI only covers up the inefficiencies of the government and state and semi-governmental companies, and shirks its inherent responsibilities; it cannot even supervise other banks.
As a result, the monetary and foreign exchange policies of the country and consequently the stability of the banking system get out of the control of the central bank. The country registers high inflation rates and the smallest shocks to the economy lead to changes in inflation and macroeconomic variables such as exchange rate and instability.
However, certain perceptions in the country sadly led to changes in the first draft of the central bank law, the proposal of which was approved in the parliament last year. It is aimed at granting minimum independence to CBI.
The new changes have gutted the proposal; the recent version of the draft will bring about multi-digit inflation in the next few decades. At first, the parliament was supposed to write the law of the central bank, knowing well that governments won’t pass the central bank independence bill. Now, the parliament itself is working on a plan that could engender an independent central bank.
Unfortunately, some people constantly spread the idea that the independence of the central bank is synonymous with the creation of a private central bank independent of the establishment, whereas it is expected to act independent of the government and not the country’s political system.
By establishing a specialized council at the head of the central bank, which would operate under the supervision of the country’s political authority, the government cannot overhaul the entire composition of the bank. The government is allowed to only reshuffle a few people in a four-year period, such that the tenure of each CBI member must be longer than the president’s term in office. Once governments change, the composition of the bank’s decision-making council (equivalent to today's Money and Credit Council, which is called the Supreme Council in the new law) won’t change significantly.
The political decisions of the government won’t influence the country’s monetary decisions, so the central bank will be able to control inflation. As a result, the central bank will operate within the framework of the establishment, members will be appointed and dismissed by the government but it will not be affiliated to a specific government.
The opposition of previous governments (despite the parliament’s efforts) resulted in the transformation of the first draft of the proposal into the current one, which delegates the central bank administration to the ruling government and members of the central bank will not be able to counter the decisions of the government to control inflation.
To tame the inflation, CBI needs to counter the printing of money; the idea does not sit well with governments. The performance of Turkey in the last two years should serve as a cautionary tale, a telling example of a dependent central bank.
Contrary to popular belief, the legal instruments incorporated in the law to control banks can only be enforced if there is an independent central bank. Many laws and regulations to effectively supervise banks are toothless, in the absence of central bank independence.
It is my hope to see the members of the parliament stop this deviation that will play with the lives of millions of next-generation Iranians and reinstate the previous version of the proposal that will help establish a central bank that would effectively supervise banks and money creation, achieve low, stable inflation and set the stage for economic growth.
