Economy, Business And Markets

CBI Proposes Debt Repayment Mechanism

CBI Proposes Debt Repayment Mechanism
CBI Proposes Debt Repayment Mechanism

The Central Bank of Iran has recently asked the parliament to let it use money made up from difference in foreign exchange rates, which have repeatedly fluctuated in recent years, to repay its debts to businesses, according to a report recently released by the CBI. The central bank called it an exceptional situation.

The central bank has been facing serious challenges to pay millions of dollars to hundreds of Iranian importers.

In the year that ended on March 20, 2014, the central bank made at least 740 trillion rials in profit after it converted foreign currencies into the Iranian rial for its domestic use, due to the rial’s dramatic depreciation against major foreign currencies. The sum, along with other profits made up in the years prior, should be deposited for future use in the central bank and cannot be used for the repayment of CBI’s debts, according to law.

Now the central bank insists that if it is not allowed to use the money, the exact amount of which has not been announced, it will have to inject further liquidity from other resources to clear its debts. CBI officials argue that their proposal will help the government avoid a further hike in the monetary base, which they believe could pose serious problems to the fragile recovery.

According to the officials, a further increase in liquidity could reverse the effect of the government’s recent attempt to curb inflation, which exceeded 40 percent last September. It is now around 22 percent. That was because the Rouhani administration stuck to monetary discipline in the past year and stabilized the foreign currency market, the report said.

CBI officials also believe their decision to clear the debts through the said mechanism is in accordance with Article 24 of the government’s new plan of action, which seeks to bring the economy out of recession. The 18-month plan is currently being assessed in parliament as some parts need lawmakers’ approval.

The CBI report said the decision, if approved by the lawmakers, would help clear banking accounts as well. But critics say the CBI is trying to use the same mechanism to repay its debts as the previous government was trying to.

In June 2013, former president Mahmoud Ahmadinejad’s administration claimed it had legal right to use the money for repayment of its debts, referring to Article 26 of the Monetary and Banking Law, which holds the government responsible for reacting against possible losses caused by changes in gold and foreign currency rates. The parliament rejected the previous government’s proposal.