Central Bank of Iran on Amend

Central Bank of Iran was established in 1960 seeking major targets of issuing banknotes, protecting national currency value and acting as a banker to the government. The Money and Credit Council had 15 members of which 4 experts were proposed by the Board of Ministers and 1 university professor was also introduced from the academic side for 3 years.

After 12 years, the Monetary and Banking Law was written in 1972 bearing the most significant change in the combination of the Money and Credit Council; the number of members reduced to 11 and experts were introduced from specific organizations for a 2-year tenure; consequently, the government vote right dominated the council decisions, weakening its autonomy.

Challenges Ahead Iran’s Debt Market

A well-developed debt market is proven to be a great advantage funding companies and therefore, providing grounds for economic growth in countries. Given the current conditions of Iran’s economy, developing an efficient debt market is unanimously said by experts to be of vital importance.

Debt market has the potential to lower reliance and pressure on banks for financing on one hand and contributes hugely to the government debt settlement by securitizing the debt, using the available mechanisms.

At the first glance, developing this market might seem easier than that of the stock market owing to the rather simpler structure of fixed-income bonds traded. There are, however, challenges ahead, whose identification might be the first step towards realizing this goal, the most important of which, taken from Tejarat-e Farda economic magazine, will be briefly stated below:

Lower Rates to Boost Iran’s Economy

By Mahdi Goodarzi & Mojde Rezaee

Of the major challenges with which Iranian manufacturing companies are struggling is the liquidity lack. This comes mostly from banks’ lack of a rating system to properly distribute banking resources in addition to high interest rates on bank deposits, which have raised financing costs.

Considering the still under-developed role of Iran’s capital and debt markets in financing, producers seeking for facilities largely refer to banks. Unfortunately, not only have banks’ troubled balance sheets lowered their ability to grant facilities, they have also been placed in an unhealthy competition to absorb money just to meet their previously made commitments to depositors. The final result has been nothing but higher interest rates on deposits, burdening banks with even more commitments. The rise in interest rates has eventually increased facilities’ prices. Expensive facilities, when Iran’s economy seems to have just kicked recession and showed signs of growth, will threaten the remained active companies’ survival.

Tax on Savings Interest;

Iran’s Economy Benefits from

the Liquidity Volume?

 By Mahdi Goodarzi & Mojde Rezaee

The 11^th Iranian government took office aimed at curbing the inflation rate and boosting economic growth, for which controlling and managing the liquidity volume is a pre-requisite.

Historically investigating liquidity growth in the country proves that nearly all governments have experienced such growth, mostly due to the rise in base money other than the money multiplier; the former is mostly made up of “the Central Bank of Iran’s (CBI) foreign reserves”, “the government and state-run sector’s net debt to the CBI” plus “banks’ net debt to the CBI”.

Although calculated with different base years, average economic growth has approximately been 4% over 1997-2016; besides, the private sector/people purchase power has annually grown by 3.25%.

Lowering the Interbank Rate, A Pre-Requisite

 By Mahdi Goodarzi & Mojde Rezaee

After lowering the inflation rate, the government started to drag other related economic indices down and managed to put the interest rate on a descending path, having supported stricter financial discipline and implemented correct monetary policies. Over the past 4 years, the Central Bank of Iran decreased this rate twice to stand at 15% on banking deposits and 18% on facilities granted.

Despite arising from so many factors, some experts, including Kamran Nadri, the Head of the Islamic Banking Group, see the following three contributing the most to sky high interest rates: banks’ weak financial and monetary structures resulting from credit crunch, high cost of money and overdue claims plus deposits flow to parallel markets which raises the probability of banks’ assets getting stuck. As long as such reasons exist, lowering the interest rate by decree will not yield any results but the weakening of state-owned banks.