The main objectives of macroeconomic policies, in general, and monetary policies, in particular, are price stability, economic growth and a favorable employment level. Since it is hard for policy makers to achieve the ultimate goal directly, therefore, determining intermediate objectives and introducing appropriate instruments are deemed necessary. In case of monetary policy, the issue of setting an intermediate objective is often reflected in controlling rate of return and money supply. With the monetary policy aimed at controlling monetary aggregates, attempts are made to prevent monetary expansion, incompatible with liquidity and inflation targets set in the development plans, and to finance productive and investment sectors.Monetary Policy Instruments in Iran
In implementing monetary policy, the Central Bank can directly resort to its regulating
power or affect money market conditions indirectly as issuer of high-powered money (notes and
coins in circulation and deposits held with Central Bank). On this basis, two different monetary
policy instruments are being utilized: direct instruments (with no reliance on market conditions)
and indirect instruments (market-oriented):
1. Direct Instruments
1.1. Banking profit rates - With the implementation of Usury-free Banking Law and the
introduction of contracts with fixed return and partnership contracts, the regulations pertaining
to determination of profit rate or expected rate of return on banking facilities and the minimum
and maximum profit rate or expected rate of return, as is stipulated in the by-law of the Usuryfree
Banking Law, are determined by the Money and Credit Council (MCC). Moreover, the CBI
can intervene in determining these rates both for investment projects or partnership and for other
facilities extended by banks.
1.2. Credit ceiling – According to Article 14 of the Monetary and Banking Law of Iran, the
CBI can intervene in and supervise monetary and banking affairs through limiting banks,
specifying the mechanisms for use of funds and determining the ceiling of loans and credits in
2. Indirect Instruments
2.1. Reserve requirement ratio: Reserve requirement ratio (RRR) is one of the CBI’s indirect
instruments of monetary policy. Banks are obliged to deposit part of their liabilities in the form
of deposit with the CBI. Through increasing/decreasing this ratio, the CBI contracts/expands the
broad money. According to Article 14 of the Monetary and Banking Law of Iran, the CBI is
authorized to determine RRR within 10 to 30 percent depending on banks’ liabilities’
composition and field of activity.
2.2. CBI Participation Papers: Appropriate implementation of monetary policies by the CBI is
done through open market operations, which provide the required flexibility in liquidity
management and intervention in the money market. Following the implementation of the Usuryfree
Banking Law, tailoring appropriate Sharia-based instruments for the development of open
market operations in the context of liquidity management and affecting money and capital
market became a necessity. Utilization of bonds, owing to its fixed interest rate nature, is
prohibited according to Islamic Sharia; however, utilization of participation papers and
investors’ partnership in economic activities and payment of profit is encouraged. According to
the 3rd FYDP Law, the CBI was authorized to issue participation papers through the MCC
approval. However, based on the 4th FYDP Law, issuance of Participation Papers by the CBI is
authorized upon the approval of the Parliament. By using this instrument, the CBI could affect
broad money (M2) through monetary base, thereby controlling the rate of inflation.
2.3. Open deposit account (ODA): One of the bold measures taken for the efficient utilization
of indirect monetary instruments in the framework of the Usury-free Banking Law is to allow
banks to open a special deposit account with the CBI. Regulation on ODA was approved by the
MCC at the end of 1377 (1998/99). The main objective of this plan was the adoption of
appropriate monetary policies to control liquidity through absorption of banks’ excess
resources. The CBI pays profit to these deposits on the basis of specific rules.
Banking System and the 4th FYDP
Major Monetary Policies in the 4th FYDP Law
Article 2, Paragraph B: To create financial and budgetary discipline during the course of the
Plan, monetizing budget deficit through borrowing from the CBI and the banks is prohibited.
Paragraph A: Since the beginning of the 4th FYDP, allocation of banking facilities (by
various economic sectors and regions) and priorities given to sectors and regions shall be
carried out through encouragement of the banking system by using cash subsidy and
administered funds with the approval of the Cabinet.
Paragraph B: Requiring banks to extend facilities at lower rates, within the framework of
Islamic contracts, shall be allowed if the difference between the lower rates and the official
determined rate is financed through subsidies by the government or administered funds. Reserve
requirement ratios for commercial banks, private banks and non-bank credit institutions are
unified at the rate of weighted average of reserve requirement ratio at the end of 1382.
Paragraph C: 1. To enhance economic growth, curb inflation and improve the efficiency of
the banking system’s financial resources, the government is required to reduce its
indebtedness to the CBI and banks during the 4th FYDP through the inclusion of
repayments in the annual budgets.
2. During the course of the 4th Plan, at least 25 percent of banking facilities shall be
allocated to agriculture and water sector in coordination with relevant executive bodies.
3. Increase in the outstanding of directed credits during the 4th FYDP period shall be
reduced by 20 percent on average per annum compared to the approved figure for 1383.
4. The government is obliged to take initiatives regarding the establishment of
electronic banking system and putting into operation the national and international
electronic banking services and payment systems in all banks and for all clients.
Paragraph D: To create a competitive environment free from monopoly in the banking
system and to economize the operation of public institutions and organizations, enterprises,
entities and municipalities, the mentioned enterprises are authorized to select the agent bank
themselves to receive banking services.
Paragraph E: The composition of the General Assembly of the Central Bank of the Islamic
Republic of Iran is as follows: the President (Chairman of Assembly), Minister of Economic
Affairs and Finance, Head of Management and Planning Organization, Minister of Commerce
and a minister selected by the Cabinet.
Note 1: The Governor of the CBI is appointed on the basis of the President’s nomination,
after being confirmed by the General Assembly, upon President’s decree.
Note 2: The Deputy Governor of the Central Bank is appointed on the basis of the Governor’s
nomination and after being confirmed by the General Assembly, upon President’s decree.
Paragraph F: The composition of the membership of the Money and Credit Council (MCC)
is changed as follows:
- The Governor of the Central Bank of the Islamic Republic of Iran,
- The Minister of Economic Affairs and Finance or his Deputy,
- The Head of Management and Planning Organization or his Deputy,
- Two ministers, selected by the Cabinet,
- The Minister of Commerce,
- The Head of Iran Central Chamber of Cooperative,
- Two monetary and banking experts nominated by the Governor of the CBI and confirmed
by the President,
- The Attorney General or his Deputy,
- The Head of the Chamber of Commerce, Industries and Mines,
- Representatives of the “Economic Affairs” and “Plan and Budget and Audit”
Commissions of the Parliament as observer, selected by the Parliament.
Note: The Council will be chaired by the Governor of the CBI.
Paragraph G: To implement monetary policies, the CBI is authorized to use participation
papers or other similar instruments within the framework of Islamic contracts, subject of
Usury-free Banking Law approved in 1362, with the approval of the Parliament.
Paragraph H: In order to maintain public confidence in the banking system, the system of
deposits insurance is being created, and the Ministry of Economic Affairs and Finance is
required to put into effect the necessary legal measures by the end of the first year of the 4th
B: The government is obliged to:
1. Schedule the repayment of external debts (short- and medium-term) in a way that their
repayment would not exceed 30 percent of government foreign exchange revenues by the end
of the last year of the 4th FYDP (excluding buyback agreements). Priority will be given to
2. Arrange the repayment of external debts during the course of the 4th FYDP in a way that
their net current value would not exceed $30 billion in the last year of the 4th FYDP,
excluding debts due to contracts subject to Foreign Investment Promotion and Protection Act.
Source : http://www.cbi.ir/