12312
Independent,  Powerful, It Will Rule
Economy, Business And Markets

Independent, Powerful, It Will Rule

C entral bankers are the lords of economy and finance. This is true for the world’s top central banks like the Fed, ECB, BOJ and BOE or the SNB. The Swiss National Bank’s recent move to abandon a self-imposed peg of the Swiss franc against the euro, introduced in 2011, sent the franc soaring against the euro by almost 40 percent, is a testament to the power they exert. But, the Central Bank of Iran is far from wielding the power and independence that its foreign counterparts have.
The bank is under strict financial sanctions, which have diminished its foreign reserves. Thus it has lost face in the foreign exchange market. Gone are the days when remarks by its governor calmed traders. Today, even its actions have little effect. In 2012, the bank had to resort to closing down all currency trade in a bid to halt the collapse of the rial, when vows to stabilize exchange rates and financial intervention failed. At that point the bank had overplayed its hand so much so that traders saw the bank as the boy who cried wolf. Not much has changed in this regard.
Many argue that the CBI’s ineptitude is the economic sanctions that have blocked its assets overseas and cut it from the global financial system. That is naive. Yes, having $100 billion of your money trapped overseas does hurt a lot. But that’s not the whole picture.
Just look at the list of issues the bank is contending with and you’ll see that even with a $100 billion, the leopard doesn’t change its spots!
It is struggling to bring 7,000 unauthorized financial institutions, including one Ayandeh bank, under its supervision. The CBI tried but failed to cut interest rates for the past year. But, the same institutions have not complied, leading to drainage of deposits from banks towards their coffers.  
Furthermore, past monetary decisions by the central bank and the former government have led to dozens of billions of dollars in toxic debt on the balance sheets of state-owned commercial lenders, in turn driving them towards property speculation. Not a good banking model! The central bank is seeking to undo this knot in a civilized way, read without panic and bankruptcies. Results will materialize slowly, if at all.
At the heart of the matter is the limitations of the central bank’s legal powers and its authority to make decisions.
In rich countries, monetary policy is the domain of the governors. Not so in Iran. The Money and Credit Council, a body within the central bank but controlled by the government sets monetary policy, not the governor and his deputies. This essentially makes the bank an arm of the ministry of finance.
The bank also plays the role of the treasury for the government. It receives oil revenues, and then prints rials and gives it to the government. Sometimes the foreign receipt part doesn’t take place, thus curbing the bank’s control over inflation.
And even when policies are made, the bank is too feeble to implement them. It doesn’t have the capability to exert pressure on banks or the currency market, let alone combat those who defy its writ.
So, how can we ask for inflation to be restrained, monetary policy to be set and the currency’s value be stabilized, from our central bank in its current condition?
Luckily, the solution is simple enough, at least on paper. A separation of powers is necessary. Monetary policy should be detached from fiscal policy, and the bank should be isolated from politics.
To do so, the CBI should be given full autonomy on money matters, a structure similar to its foreign counterparts in developed countries. A system of governance, where all three branches of government have a bit of say in the bank’s governance, better guarantees the bank’s autonomy. But that requires a change in the Constitution, a long process but a necessary one.
Furthermore, the central bank’s legal clout and ability to exert power on its turf needs augmentation. Its influence has to cut through the lobbying of vested interests. Its responses to financial crimes must become rapid. For this it needs more legal powers and a wider array of financial tools to help it set and oversee monetary policy. Again most of this falls to lawmakers.
Many officials in the current administration have expressed their desire to give the central bank autonomy and new legislation is under work to give the bank new powers. But a half-hearted attempt is rarely effective. What is needed is a fully independent central bank. After all a strong and independent central bank can help iron out government policies. We should let the governor rule his domain.

Short URL : http://goo.gl/7NJ7HI

You can also read ...

Mental Health Investment: The Economic Case
The link between mental health and economic productivity is...
Bloom and billet sales made up the lion’s share of KSC’s sales.
Iran’s largest steel exporter Khouzestan Steel Company...
IZMDC’s Zinc Output Tops 8,000 tons
Iran Zinc Mines Development Company’s subsidiaries produced a...
Carmakers Pile Into Europe Scrappage Offers
Renault-Nissan and Kia are the latest car companies to launch...
Banks will now draft a single set of balance sheets that adhere to CBI’s IFRS-based templates.
Minister of Economic Affairs and Finance Masoud Karbasian and...
Ikarus buses were popular in Iran during 1990s.
Hungarian bus manufacturer Ikarus is set to re-enter Iran...
Plan to Make Home Loans More Affordable
The administration of President Hassan Rouhani is mulling new...
IRICA Chief  in Turkey
Foroud Asgari, the new head of the Islamic Republic of Iran...

Trending

Googleplus