Economy, Business And Markets

CBI Independence Crucial

CBI Independence Crucial CBI Independence Crucial

Governor of the Central Bank of Iran has reemphasized the necessity of autonomous decision-making power of his bank in order to develop efficient monetary policies.

In a meeting with the newly-elected lawmakers on Sunday, Valiollah Seif acknowledged that as outside pressure had receded in recent months it paved the way for the much-needed space for improving CBI   monetary policy.   

“In recent months the CBI managed to implement monetary policies without any external pressure (budgetary or otherwise), and this led to some achievements,” he was quoted as saying by IRNA.

CBI independence has often been a hot issue in and among the powerhouses in Tehran, with some blaming the country's economic woes on the adverse meddling of politicians in major monetary policy – a practice all too common during the two-term tenure of former president Mahmoud Ahmadinejad.  

In one case the government dissolved the powerful Money and Credit Council –a decision-making body of the CBI – in August 2007, leading to the resignation of Ibrahim Sheibani, the then CBI governor, who a year earlier had called for the independence of the regulating body.

"The government has managed to lower the rate of inflation from 40% [in 2013] to 11% at the moment and is targeting a single-digit rate," Seif told the meeting with the legislators.


Keeping Up the Momentum

The senior official pointed to the expansion of correspondent banking relations in the post sanctions era, saying that "banking relations will improve in the coming months – markedly different from the past four months.”

Economic sanctions were lifted in January this year, following an agreement between Iran and the six world powers (the US, UK, France, China and Russia plus Germany) to limit Tehran’s nuclear activities.

European and Asian companies have flocked to explore one of the world’s biggest untapped markets but substantial hurdles to doing business in the country remain. US primary sanctions are still well and alive, effectively preventing international banks from handling Iranian business for fear of repercussions.

The CBI is planning to unify foreign exchange rates, Seif said, asking the incoming legislature to support the plan, “A single forex rate would help us curb and prevent rent-seeking and corruption in the market.” He did not elaborate.

Iran reverted to a dual exchange rate system in 2010 when the economic and banking sanctions caused huge volatility in the markets. The national currency (rial) lost 75% of its value in 2013.      

“The sixth five-year economic development plan has envisioned 39 plans and 150 measures for the central bank,” Seif said.

The present average capital adequacy ratio of banks is about 4.5%, Seif said. “This is while international regulations require the ratio not be less than 8%.”

He added that banks’ non-performing loans amounts to 1 quadrillion rials ($32.9 billion), or 12.5% of total loans, adding that NPLs normally account for 3.5%-5% of the lending of international banks.

“Government debt to the banking system are a major issue for lenders,” he said, “Toxic assets account for a large portion of the soured loans of banks.”

Government total debt is less than 50% of the GDP, which Seif thinks should be restructured based on a workable plan.

Seif dampened rising expectations of further interest rate cuts saying that "interest rates cannot be reduced when banks are struggling with capital shortages, even though the rate of inflation has dropped.”