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October 2018, No. 89


Banking

 

Coming out of Imposed Policies


All the three economic institutions have legal and defined powers and are responsible for those authorities, and do not need to be subject to another institution.


Dr. Tahmasb Mazaheri, Former governor of the Central Bank of Iran (CBI)

It seems that we need to offer a clear definition for the ‘economic team’ in order to be able to comment on the performance of the incumbent government’s economic policies. The government’s economic team can be defined as the government’s chief policy-makers, namely the President and the first vice president, as well as the economic ministers, including the head of the Management and Planning Organization of Iran (MPO), the minister of finance and economic affairs, the CBI governor, the minister of industry, mine and Trade, and the minister of oil, which are generally effective. This definition is more comprehensive than the conventional definitions which introduce the Ministry of Finance and Economic Affairs and the CBI as the economic team alongside the MPO because the authorities of these three institutions, while maintaining legal independence of vote, execute the policies the government delegates to them; and this is just normal and customary!
In the breakdown of the economic policies, the CBI is responsible for monetary and banking policies and, in this regard, it has legal independence for decision making.

The MPO chief is responsible for financial-budgetary policies and the government’s revenues and expenditures are formulated and implemented at this institution. In this regard, the MPO is independent from the CBI and the Ministry of Finance and Economic Affairs, and decides independently. The Ministry of Finance and Economic Affairs also is in control of financial and capital market policies as well as economic policies that deal with the private sector and foreign investment, and has full authority in this respect.

All the three economic institutions have legal and defined powers and are responsible for those authorities, and do not need to be subject to another institution. These institutions, while having autonomy, complement each other. But the point is that, in some cases, each of these three organizations decides in their own interests and proposes a policy in expert discussions and reports. But in other cases, policies are being proposed by an institution such as the CBI, which is not consistent with the overall view of the government and the President. This contradiction leads to a decision that is taken by the President himself. This means a decision is made which is contrary to the expert and policy views of the said institution. That is where the differences surface and the relevant organization implements the communicated policy. After implementing these policies, which is not the choice of the policymaker, the harmful effects of the decision would hurt the organization.

Now, if the relevant institution defends the decision, the expert body would not cooperate; meantime, if they fail to defend the executive policies, they would be questioned as to why this decision has been made.
This phenomenon has occurred over the past five years at the Ministry of Finance and Economic Affairs, the MPO and the CBI. For example, regarding monetary policies, interest rates on deposits and foreign exchange rates, what has been implemented has been different from expert opinions of the CBI. The CBI has always defended a single rate for foreign exchange however the policy of suppressing the exchange rate and using it as an anchor of inflation control has been communicated by the government to the CBI and the latter has obeyed. Today that the negative effects of this policy have been unveiled, the CBI can neither defend these policies nor can it say they have not been approved by it and have been imposed by the government. Spending more than what the budget decides and the consequent budget deficit is not approved by the expert body of the MPO. The government’s enthusiasm to provide more service to the people would cause the government to expend more than its revenues and cause budget deficits. The result was that liquidity under the first term of the Rouhani administration was two and a half times higher and created the potential for increasing inflation and the growth of prices for goods and services.

Under the current circumstances, the economic team is defined within a single set as long as it is subject to the policies of the government and the President. The heads of the MPO, the CBI and the minister of finance and economic affairs are responsible for implementing the communicative policies; thus changing the economic team, if not accompanied by a revision of the economic policies of the government and the President, would not make a difference. But if changes in the cabinet are accompanied by a change in the views of the government and the President, we can expect tangible changes. Of course, a change in the views of the President and the government can make the current economic team counter new conditions that could lead to their success.

 

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  October 2018
No. 89