The world expects a lot of its central bankers,” wrote The Economist. Politicians demand that they control inflation, keep the economy growing and the financial sector stable. The same goes on in Iran. The central bank’s to do list is mounting, more often than not with contradicting demands. But the Central Bank of Iran’s tale is different in some regards.
The economy ministry, which packs a lot of punch in the bank’s policy through the Money and Credit Council, wants the bank to curb inflation, stabilize the currency, and lower interest rates in line with inflation. There is also the CBI’s supervisory role in the financial sector which entails dealing with rogue institutions and sorting out the accumulated toxic debt on the balance sheets of Iran’s main commercial lenders.
The industry ministry and the chamber of commerce are asking the bank to direct the flow of money towards manufacturers and exporters, who suffer from cash flows shortages. They argue that if the bank regulates the financial sector smartly, lenders can finance well off firms without increasing inflationary pressures, a fine idea apart from the issue of getting reliable financial data from loan applicants.
Then there are those with vested interests and also MPs, who contend the bank is suffocating businesses by trying to contract money supply, thus stifling economic growth. But business growth is not only a function of cheaper money. Looking at the euro zone with it’s near zero interest rates and stagnant economy is proof enough.
Political pressure on the central bank is such that its officials try their best not to use the word “contractionary” in any context. In nearly every interview, the governor and his deputies try to prove money supply is growing and the bank doesn’t have a contractionary approach to monetary policy. It’s the same story with the word “expansionary”. They have even gone as far as using “disciplinary monetary policy” to walk a fine line between the two.
But the central bank cannot see to everything at once. “Some of these demands contradict each other,” Governor Valiollah Seif said recently. Curbing Iran’s galloping inflation requires a contraction in money supply, while stimulating growth needs an expansion.
If the economy was only suffering from inflation or recession, things would be far simpler. But Iran suffers from stagflation, taking things to an entirely different economic paradigm. Iran’s economy contracted 1.9 percent during the last fiscal year which ended in March 2014. Headline inflation stood at 34.7 percent for the period.
There is also the effect of sanctions which have a direct diminutive effect on the central bank’s power. The bank’s foreign reserves are blocked, leaving the treasury little strength, with which it can help stabilize the foreign exchange market. With the current state of the central bank, not much can be asked of it.
Furthermore, given the weight of the government within Iran’s economy, much falls on the administration’s approach towards fiscal spending.
The central bank will be hard pressed to curb inflation if the government presses on with the profligate projects – a legacy of the previous administration – or increases its current budget. On the other hand, the needed growth in the economy is more a byproduct of the government’s investment budget and how it treats domestic businesses. Cheap money is the way to avoid in this inflationary environment.
The foreign exchange market’s stabilization is also in the hands of the government and has little to do with the central bank. A deal with the West over Iran’s nuclear energy program would do far more to stabilize rial’s value against foreign currencies than the CBI could hope to achieve with its depleted reserves. The lifting of sanctions would also have a transforming effect on Iran’s economic output.
Apart from regulating the financial sector which is central bank territory – a field also under extra-CBI influence – the government itself is the most affecting factor for change. As for the governor and his men, they should focus on rebuilding CBI’s influence and turning a blind eye to the demands that are made more due to political concerns than economic logic.
