Article 46 of the Law on Removing Barriers to Competitive Production and Enhancing the Country’s Financial System, enacted by the Islamic Consultative Assembly on 2015/04/21, and its executive bylaw, which was approved by the Cabinet upon the proposal of the Central Bank of Iran on 2016/02/10, set forth regulations aimed at resolving the Central Bank’s foreign exchange obligations to the country’s banking system. This paper examines the established procedures and clarifies the outcomes of their implementation.
The provisions of Article 46 of the Law on Removing Barriers to Competitive Production and its executive bylaw are clear and concise, granting the Central Bank permission to cover the rial differences arising from its finalized foreign exchange commitments—from the official exchange rate to the current exchange rate—using the surplus account generated from the revaluation of its net foreign assets. This mechanism facilitates the settlement of the Central Bank’s finalized foreign exchange obligations.
Below, the aforementioned legal article and its executive bylaw are presented in their entirety.
Article 46 – The Central Bank of the Islamic Republic of Iran is authorized to cover the rial differences arising from the finalized foreign exchange obligations—from the official exchange rate to the current exchange rate at the time of payment related to imports of goods and services up to the end of the year 2012—from the surplus account generated from the revaluation of net foreign assets, following thorough examination of the documents and precise auditing after verification of the goods entering the country and compliance with pricing regulations and distribution by the facility recipients.
The report on the implementation of this article, including detailed information about the calculation method for the surplus generated from the revaluation of net foreign assets, the components of foreign exchange commitments at the official exchange rate, and the method of finalizing these commitments, shall be submitted by the Central Bank of the Islamic Republic of Iran every three months to the Planning, Budget, and Economic Commissions of the Islamic Consultative Assembly and the Court of Audit of the country.”
The executive bylaw of Article 46, with its subsequent amendments and additions approved on 2016/02/10, is as follows.
Article 1:
In this bylaw, the following terms are used with the meanings specified below:
A – Central Bank: The Central Bank of the Islamic Republic of Iran.
B – Agent Bank: Commercial and specialized banks that, with authorization from the Central Bank, engage in foreign exchange transactions and operations at the time of establishing definitive obligations.
C – Definitive Obligations: Foreign exchange obligations created within the framework of foreign exchange regulations and rules, arising from:
1. Importing goods and purchasing services up to the end of the year 2012.
2. Implementing projects in such a manner that liabilities related to them were finalized by the end of the year 2012.
D – Account: The surplus account generated from the revaluation of the Central Bank’s net foreign assets.
E – Audit: The foreign exchange audit of the years 2011 and 2012 of the agent banks and the verification of information on definitive obligations.
Note (Amended 2019/04/28): The settlement of the Central Bank’s foreign exchange obligations concerning the conversion of the rial income of foreign airlines into foreign currency at the reference rate, and the provision of foreign currency for imports without currency transfer by pharmaceutical companies under the supervision of the Ministry of Health, Treatment, and Medical Education, which have been priced and distributed at the reference rate, non-self-liquidating finances, and loans are conducted solely by verifying information on definitive obligations through auditing.
F – Approved Price: The price of goods determined based on the maximum reference exchange rate.
Article 2:
The Central Bank is authorized, upon request from the agent banks and in compliance with the provisions of this decree, to provide the difference in the rial value from the official exchange rate to the current rate for settling definitive obligations from the account.
Article 3:
The rial difference for definitive obligations can be provided from the account in the following cases:
A – Definitive obligations arising from the import of goods within the framework of foreign exchange regulations and rules.
B – Definitive obligations related to finance and non-self-liquidating loans.
C – Definitive obligations arising from the purchase of services within the framework of foreign exchange regulations and rules.
Article 4:
All payments will be made after the audit and confirmation of the entry of goods, the purchase of services, and the execution of projects in accordance with foreign exchange regulations, with the registration of information in the Central Bank’s related systems.
Note 1: Audits must be conducted by the Audit Organization or other independent auditors trusted by the Central Bank.
Note 2: Assurance of the entry of goods, as mentioned in clause (A) of Article 3, is subject to confirmation by the agent bank regarding the receipt of the green customs clearance for imported goods in accordance with foreign exchange regulations and rules.
Note 3: Assurance of project execution and the sale of manufactured products at the government-approved price, as mentioned in clause (B) of Article 3, is subject to receiving approval from the relevant ministry by the agent bank.
Note 4: Assurance of the service’s completion, as mentioned in clause (C) of Article 3, is subject to confirmation by the agent bank regarding the receipt of a final invoice for the service performed, issued by the contractor and approved by the client.
Article 5:
Regarding goods subject to price controls, in addition to complying with other regulations, before providing the rial difference for settling definitive obligations arising from the import of goods, the agent bank must obtain confirmation from the Ministry of Industry, Mine, and Trade regarding compliance with the pricing and distribution regulations of goods at the “approved price.”
1. Surplus Account Resulting from the Valuation of Net Foreign Assets of the Central Bank
According to the single article of the law approved on 22 September 2013 by the Islamic Consultative Assembly, this account is recorded and reported in the capital section of the Central Bank under the reserves account in the balance sheet of that bank. It reflects the differences arising from the valuation of the Central Bank’s foreign currency assets and liabilities due to changes in the exchange rates of currencies, gold, and jewelry, which is solely an accounting evaluation and is not considered realized profit, nor is it subject to taxation.
The balance of this account is solely usable for offsetting potential future losses of the Central Bank resulting from changes (decreases) in the legal parity of currency (valuation). The parity rate, as per Note 1 of the single article of the aforementioned law, is determined by the Central Bank through a legal mechanism. According to Note 2 of the single article of the aforementioned law, with the approval of this single legal article, Clause B of Article 26 of the Monetary and Banking Law of the country, approved in 1972, is annulled.
2. Definitive Foreign Exchange Obligations at the Official Rate
Considering the provisions of Article 46, the definitive obligations held by the Central Bank at the official rate during those years were set at 12,260 Rials per U.S. dollar or equivalent in other currencies. These were defined for:
A – Definitive obligations arising from the import of goods within the framework of foreign exchange rules and regulations.
B – Definitive finance obligations and non-self-liquidating loans.
C – Definitive obligations arising from the purchase of services within the framework of foreign exchange rules and regulations.
These obligations were established with and by the agent banks, which are commercial and specialized banks authorized by the Central Bank to conduct currency transactions and operations with customers at the time of creating definitive obligations, including operations specified in Clauses A to C.
3. Determining the Amount of These Foreign Exchange Obligations
It should be noted that determining the amount of such foreign exchange obligations was communicated to the agent banks through the “Guidelines for Reviewing the Fulfillment of Past Foreign Exchange Obligations,” document number 1015/60, dated 7 December 2013. The agent banks were instructed to determine the type of exchange rate applied to currency transactions and operations based on the deposit date of the customer’s Rial equivalent and the date of goods clearance or service provision, choosing one of the official rates, exchange rates, or the customer rate (non-sale of currency in exchange for Rials and delivery of the exact currency).
According to these guidelines, the supply of currency for operations or activities that were determined by agent banks to be settled at the official rate of that time, equivalent to 12,260 Rials per U.S. dollar or equivalent in other currencies, and confirmed by the auditor, was under the Central Bank’s responsibility according to the foreign exchange rules and regulations in place at the time the obligation was created. The Central Bank was obliged to supply currency (in exchange for receiving the equivalent Rial at the official rate).
Analysis of the Central Bank’s Authority Under Article 46 of the Law on Removing Barriers to Competitive Production
The Central Bank is authorized under Article 46 of the Law on Removing Barriers to Competitive Production to settle definitive foreign exchange obligations by providing and paying the Rial difference arising from definitive foreign exchange obligations at the official exchange rate up to the current payment date from the surplus account. In this regard, attention to the following points is necessary:
1. Fulfillment of Obligations by Agent Banks
These foreign exchange obligations, regardless of the fact that they are currently borne by the Central Bank and under its payment responsibility, have effectively been fulfilled by agent banks. In reality, according to legal documentation and the banks’ records, which can be verified by auditors, the foreign exchange obligations of the Central Bank to the relevant parties engaged in foreign exchange operations under Clauses A to C have been fulfilled by the agent banks. Therefore, the Central Bank is now obliged to settle the foreign exchange claims of the agent banks regarding these obligations.
In any case, the fulfillment of these obligations and payments by banks have been executed from the foreign exchange resources of the agent banks, which mainly comprise free resources and customer deposit resources. It is crucial to mention that, given the range of obligations of agent banks in conducting foreign exchange operations and their account balances with foreign correspondents (NOSTRO ACCOUNTS), which primarily include the reciprocal currency balances of depositors’ foreign exchange deposits and the banks’ free resources, making such payments was unavoidable. Currently, the restoration of the depleted foreign exchange resources of agent banks, particularly deposit resources that were held as loans or proxies, is practically not feasible with the receipt of the Rial difference. Furthermore, agreeing to receive the Rial difference amounts to failing to safeguard the depositors’ foreign exchange resources and breaches the fiduciary duties regarding investment deposits.
2. Nature of Foreign Exchange Obligations
The nature of these obligations is “foreign exchange,” and settling them in Rials, given that the obligation has not been converted, is not justified and is invalid. Banks paid in foreign currency, and at the time of payment, there was no agreement to convert the debt from foreign currency to Rials, nor were they authorized to make such an agreement. The Central Bank cannot merely settle these foreign exchange obligations by depositing Rials. Therefore, it seems that the settlement of foreign exchange obligations in exchange for the payment of the Rial difference is legally questionable. In any case, the bank cannot unilaterally decide regarding the depleted deposit resources used for fulfilling foreign exchange obligations without mutually settling foreign exchange deposits of the same years with the acceptance of the debt conversion by depositors into Rials within the Central Bank’s implemented procedures.
3. Surplus Account for Valuation of Net Foreign Assets
The balance of the surplus account resulting from the valuation of the Central Bank’s net foreign assets, according to the single article of the law approved on 22 September 2013 by the Islamic Consultative Assembly, is solely usable for offsetting potential future losses of the Central Bank due to changes (decreases) in the legal parity of currencies (valuation). The withdrawal from the balance of that account for the settlement of foreign exchange obligations is not anticipated or considered in the approved law.
Given the prescribed regulations for using the surplus account and the nature of the funds recorded in this account, which result solely from the revaluation of the Central Bank’s foreign assets and liabilities—essentially due to the depreciation of the Rial against foreign currencies, which is a surplus caused by inflation—there is a need to evaluate the inflationary effects arising from paying the Rial difference between the official rate of 12,260 Rials per dollar and the current payment rate, which is at least the exchange center rate. Such Rial payments, in fact, by providing liquidity for agent banks, would enhance lending capacity, increase money supply, exacerbate inflation, and continuously diminish the net worth of the Central Bank’s assets, thus undermining the monetary base.
It is also worth noting that the Central Bank’s obligations are in foreign currency, and it has been obliged, according to the foreign exchange laws and regulations it has established, to sell currency at the official rate to agent banks and deliver the sold currency to the banks in their foreign correspondents’ accounts. Now that these obligations are being settled in Rials based on Article 46, is it clear where the currencies that were supposed to be delivered to the banks and were under the payment obligation of the Central Bank have been utilized? It seems that the monitoring of the location and manner of usage of these currencies has been overlooked, and presenting a statement of their usages—which have been effectively deducted from the assets of public depositors and banks—is necessary for clarity.
Conclusion
It appears that depositors and banks, by accepting this settlement, will still hold foreign exchange assets and liabilities on their books, which, despite the unauthorized expenditures dictated by fate, are considered practically wasted and logically irreparable.
