Interest Rate Cuts, Forex and Inflation
The suitable workings of managing currency
fluctuations to maintain
financial stability and
economic growth and the health of the banking system were among
other major talking points.
The 27th annual Conference on Monetary and Foreign Exchange Policies was
held in Tehran on July 1-2 with a focus on financial stability.
Discussing the Central Bank of Iran’s role in maintaining financial
stability, the institutional and operational structure of capital and bond
markets, credit crunch and the role of financial stability in curbing
inflation with the goal of attaining sustained economic growth were the
objectives of this conference.
The event also focused on the effects of imbalance in budget and
quasi-fiscal activities on financial stability in which the effects of these
categories will be measured against the balance sheets of the banks and CBI.
Factors exerting an influence over the convergence and divergence of rates
in financial markets, ways of creating convergence between rates in
financial markets, price wars and their effects on banks’ risks were also
The suitable workings of managing currency fluctuations to maintain
financial stability and economic growth and the health of the banking system
were among other major talking points.
The role of the banking system’s international ties in managing the foreign
exchange market and the longstanding issue of unifying the dual foreign
exchange rates were also discussed in the confab.
High Bank Rates: A Challenge to Investment, Production
On the first day of the conference, First Vice President Eshaq Jahangiri,
Minister of Economic Affairs and Finance Ali Tayebnia, CBI Governor
Valiollah Seif, CBI Deputy Governor Akbar Komijani, and Head of the
Management and Planning Organization Mohammad Baqer Nobakht delivered
Jahangiri referred to the administration of President Hassan Rouhani’s
general tendency of keeping away from reducing rates through official
directives, and noted that the current rates present challenges to
investments, production, and macroeconomic endeavors.
After a round of negotiations and meetings last year between the CEOs of
private and state-owned banks and a subsequent decree by the Money and
Credit Council, a top financial decision-making body, bank interest and
deposit rates were officially set at 15% and 18% respectively.
However, a number of factors, including a shortage of capital and credit
crunch in the banking system, have caused the real interest rates currently
offered by a number of banks to be around 20%. The interbank rates are also
in the same ballpark even though, as Jahangiri pointed out, they have been
brought down from the 30% witnessed at the beginning of the government’s
tenure in Aug 2013.
Echoing the President, who recently announced that banking reforms will play
a central role in his agenda for the second term in office, the first vice
president said reforming the ailing sector is “one of the key policies” that
could help the country overcome its significant hurdles.
A problematic 11% general unemployment rate and, more importantly, a
troubling 25% unemployment rate among young graduates, coupled with the low
purchasing power of people, were identified as major problems by the
“Iran will need to generate one million jobs a year to live up to the task,”
he said, noting that women should be a main focus for the jobs.
According to Jahangiri, unifying the country’s dual exchange rates, a plan
which was supposed to be implemented last year but has been delayed, because
conditions for a stable and lasting rate unification are yet to be provided,
will be followed up as a “high priority” in the next administration.
He said the government has been successful in stabilizing macroeconomic
indices despite the fall in the oil revenues, stressing, the success was the
result of policies for financial and monetary discipline, management of
liquidity and controlling inflationary expectations.
Jahangiri said the 11th government managed to hand over financial and
monetary stability to the 12th government, and this in his words was a “big
More on government achievements in the banking sector, he said inter-banking
interest rate was lowered up to 17 percent from about 30 percent when the
11th government took over. “Of course the rate has gone a bit higher but it
is expected to be lowered. Such a bank rate will make investment, production
and economic activities more difficult because growth will be expected to
take place when bank rates are lowered in tandem. In the final days of the
11th government, the officials in charge need to and intend to make a
precise assessment of the policies adopted in the period.”
The top government official said some policies for single parity rate system
will be transferred to the next government and it would definitely be
pursued in the next government.
“All officials and organs have the duty to move in line with the policies of
the Economy of Resistance,” he said, adding that appropriate investment is
needed for better economic conditions. “Over recent years, investment in
Iran has been highly negative, following a falling trend and is not yet in a
To address unemployment problem, foreign investment should be absorbed,
while attending to non-oil exports and export of goods and services,
Elsewhere in his remarks, the VP thanked bank directors and managers for
their invaluable efforts and said the banking system has afforded a great
deal of help and assistance to the small- and medium-sized institutions. He
called for banking reforms and said it is the key to overcome challenges
facing the country.
Since about two years ago, there have been efforts to provide legislation on
amendment of the banking system so that Iranian banks will operate on
international standards in dealing with the overdue debts and capitals and
build links with the international banks.
A Source of Eroding Stability
“Iran will need to generate one million jobs a year to live up
to the task,” Jahangiri said, noting that women should be a main
focus for the jobs.
The economy minister referred to the high interest rates as a “significant
obstacle to growth of investments and employment and a source of eroding
“The real rates, which are in no way proportional to the inflation rate of
around 10%, have increased the costs of production units and lowered the
competitive power of domestic production while lowering people’s capability
of repaying loans, which itself reduces the profitability of lenders,” he
Tayebnia underscored the importance of reducing the unruly interest rates
for causing a boom in the beleaguered housing sector, stressing that getting
the sector out of recession will not be possible without rate cuts.
Owing to the significance of rate cuts which, if unachieved, could dash all
hopes of sustained growth and job creation, the official pitched the idea of
creating a specialized committee “in the foreseeable future”.
The minister spoke of the advantages of the government’s plan to increase
the capital of state-owned banks and improve their capital adequacy ratio,
saying their total capital of 110 trillion rials ($2.93 billion) four years
ago increased to 590 trillion rials ($15.73 billion) last year.
Furthermore, “100 trillion rials ($2.66 billion) of construction resources
were supposed to be allocated for capital increase of banks as part of the
current annual budget, which was not approved by the Parliament”.
He urged all official bodies to prioritize bank capital increase because
investing in the banking system has the biggest impact on economic growth.
He further provided statistics on the average GDP growth of Iran in the past
40 years, which he put at 2.3% and called inadequate.
Interest Rate Monitoring Body
Tayebnia also said Iran has been successful in establishing brokerage
relationship with more than 240 foreign banks. He said the conference has
turned into an effective institution for debate and dialogue on the most
important economic issues of the country.
He stressed that for the current Iranian calendar year of 1396 (2017-18),
which is the initial year of the Sixth Five-Year Economic Development Plan,
the average economic growth rate of eight percent, one-digit unemployment
rate and one-digit inflation rate have been targeted.
He noted that last year, the government had managed to eliminate the
inflationary and deflationary crises hitting the country since the years
2012 and 2013.
The minister said as far as short-term measures are concerned, the last
Iranian year 1395 (2016-17) marked the year of non-inflationary vibrancy
with an economic growth rate of 12.5 percent and an inflation rate of nine
percent. Major portion of the economic growth rate was caused by an increase
in oil production and export, he added.
“However, without oil economic growth reached 2.9%, 5.4% and 5.6% in the
second to fourth quarters of the year from minus 1.8 percent in the first
month of the year.”
Looking into the long-term plans, it should be said that low level of
growth, harsh fluctuations, and tiny share of productivity in growth have
turned into a serious problem for the economy, said the minister, adding
that the average growth rate of 2.3 percent cannot address social demands
and prepare the ground for elimination of poverty. “So, we will have no way
but jump to higher levels and sustainable economic growth so as to end
economic vulnerability and make it resistant, while eliminating
Tayebnia said maintaining economic stability and tranquility is the most
important factor for achieving economic growth. “Public trust in government
has been the most important achievement of the 11th government.
All should join hands to safeguard the achievement.” Elsewhere in his
address, Tayebnia said one more key measure taken by government over recent
years has been lifting restrictions facing the banking system. This was
achieved following implementation of the Joint Comprehensive Plan of Action
(Iran Nuclear Deal) and lifting of the sanctions, which led to establishment
of banking relations, including establishment of brokerage relationship and
facilitation of banking exchanges, he added.
He reiterated that at the time of sanctions, only 30 small and risky banks
cooperated with Iran but today, more than 240 banks have brokerage relations
and in the near future, relations will be established with more banks.
He also hailed government success in banking domain such as controlling
inflation expectations, controlling forex market, ensuring falling inflation
rate and higher economic growth rate.
The minister proposed creation of a financial monitoring body to ensure
proper implementation of the policies and their evaluation in order to
resolve the problems in the way of cutting interest rates.
Uncertified Credit Institutions under Fire
The CBI governor made a jab at uncertified credit institutions that have
grabbed many headlines recently, as many angry depositors demand their
capital back from a number of these discredited entities.
Seif said their activities in the past few years have forced lenders to
initiate “an unprincipled competition over bank interest rates”, which was
exacerbated by the entry of bonds published by the government to clear its
debts and subsequently affected their profitability and capital adequacy.
According to him, the banking system allocated a total of 570 trillion rials
($15.2 billion) during the first two months of the current fiscal year that
began on March 21, registering a 16.4% rise compared with the same period of
About 70% of the loans were in the form of working capital, he added.
Seif also referred to statistics released by the Central Bank, according to
which a 12.5% GDP growth was achieved last year, mostly owing to a boost in
oil and derivatives exports.
“The non-oil sector has also improved immensely, upgrading its negative
total GDP growth in the first quarter of last year to a positive 3.9%, 5.4%
and 5.6% in the next quarters respectively,” he said.
Islamic Banking on the Rise
Seif told the conferees Iran has the largest financial system based on
Islamic, or Sharia law. He said Islamic banking assets are now being used by
2 billion people and Iran’s Islamic banking assets account for over 37% of
Iran’s Islamic banking assets are $482 billion, according to Dubai
government data from 2014. That’s more than in Saudi Arabia, Malaysia and
the United Arab Emirates combined.
“The Islamic Republic is among the few countries that have adopted Islamic
banking principles and now some non-Muslim individuals are embracing usury
free banking on moral grounds,” he said.
The CBI chief noted that a long-term vision for the promotion of Islamic
banking is in the making to make Iran a hub of Islamic finance. He also
highlighted the need for upgrading the codes of conduct governing the
Iranian banking system in line with international standards.
Current Iranian banking laws were first ratified in 1983 and remained
unchanged throughout the years. But two recent bills–one concerning banking
laws and the other central banking regulation – is pending the lawmakers’
approval. The bills call for major changes in the banking laws and ensure a
stronger and effective regulatory role for the CBI.
Technical Mechanisms to Cut Rates
Komijani outlined technical mechanisms in three axes for reducing interest
rates. According to him, “influence of the debt market on the money market”,
“inappropriate expansion of investment funds,” and “high interest rates set
by auto manufacturers’ bonds”, have caused interest rates stickiness.
Commenting on organizing investment funds, he said the major part of these
resources are received in the form of deposit, but a small share of the
resources flow into the market and over 70% of them return to the banks. In
this regard it has been decided that the proportion of investment in the
money market and the capital market of these funds stand at 70% and 30%
respectively and in the next stage in order to prevent fluctuations in the
balance sheets of the banks stand at 60% and 40%.
Pointing out that the high participation interest rate by automakers is
another reason for the bank interest rate to stand high, he stressed that
with regard to the approvals of the Money and Credit Council, the interest
the automakers can pay to their customers is about 3% higher than the
interest set for the banking system. Meanwhile, the withdrawal interest rate
should be for a period of one year and the automakers should abide by the
specified formula. Komijani noted that if the automakers act otherwise they
would be deprived of the facilities they are supposed to receive or have
received from the banking system.
Elsewhere he said Iran’s inflation rate is expected to reach 12.2 percent,
with its economic growth standing at 4.6 percent and its liquidity rate at
20.2 percent in the current Iranian calendar year of 1396 (to end on March
20, 2018). He said a look at chronology of economic growth in Iran in the
2012-2016 period shows that it stood at 12.5 percent in 1395 (2016-17) and
the economic growth rate minus oil has been following a positive trend since
the first quarter of the year.
The main reason for growth in Gross Domestic Product (GDP) was growth in
oil, he added.
“Due to international sanctions, we failed to fully utilize the capacity
available by oil but due to achievements gained by the sector, we managed to
take moves forward,” he added.
He said the country gained good growth in the industry and mining sector: It
showed growth rate of 6.9 percent from minus 4.6 percent.
He also put growth in the agricultural sector at 4.2 percent and hoped the
trend will continue this year too.
Banking Sector Indispensable to 8% Growth
Head of the Management and Planning Organization said Iran is aiming for an
average annual growth of 8% over the course of the next five years and to
achieve this ambitious goal, the banking sector needs to extend 1.8
quadrillion rials ($ 57.6 billion ) in credits to private firms. Mohammad
Baqer Nobakht added that the country’s growth target and its commitment to
turn itself into a regional power hub by 2021 are simply a “must” and not
“Financing through the money market takes center stage here and banks as the
most important finical intermediaries should be able to provide 24% of the
resources to businesses in need,” he said in the opening remarks to the
Achieving 8% growth is a tall order for the country emerging from nearly a
decade of punitive sanctions over its nuclear program. While it has
succeeded to regain most of its share in the global oil market, the Islamic
Republic is still facing challenges to attract foreign investment in other
sectors and dispel the fears of major international banks in doing business
Nobakht, a trusted ally of President Rouhani, referred to dismal growth
rates of the past including the minus 6.8% rate when Rouhani took the helm
of the government in mid-2013 with 380 trillion rials ($12.1 billion) of
debt to the banking system alone. While in the three months ending March
20, 2015 the country secured a 2.9% growth, and 4.4% growth for the first
quarter of the current fiscal year (started March 20), most of other periods
have been marked by lackluster performance. The government has set its eyes
on 5% growth this financial year.
Part of the growth target will have to come from investment at about 15.4%,
according to Nobakht. This would require 7.2 quadrillion rials ($230.5
billion) in annual investment. Given the critical status of banks and the
heavy reliance of the country on the banking system for funding, domestic
and foreign investment would provide a breath of fresh air to the economy.
As part of the Sixth Five-Year Economic Development Plan (2016-21), the
government wants to engineer 8% growth, by supplementing banks’ business
lending with 370 trillion rials ($11.8
As part of its plans to revive the economy, the government has also
identified some 7,500 struggling production units, singling them out for 160
trillion rials ($5.1 billion) in new loans.
Nobakht said the 2,000-page plan blueprint is the most carefully-devised
blueprint for its practicality and efficiency. “Some of its articles have
even been clarified down to the operation level.” The sixth plan is now
being reviewed in Parliament.
Alluding to this year’s theme of the Islamic Banking Conference,
“Interaction of Usury Free Banking and International Banking”, Nobakht
acknowledged that long-time isolation had widened the gap between the
accounting and banking standards and those of global banks, calling for
officials and experts to end this disparity.
IFRS Adoption, Risk Management of Banks
Due to the importance of conforming banks’ balance sheets to International
Financial Reporting Standards and establishing risk management departments,
the second and final day of the conference focused on these two issues.
International and domestic banking experts elaborated on ways of reforming
the risk management systems of banks and the necessity of their compliance
to IFRS to connect to the international banking system.
Bank of Iran first released the IFRS-based balance sheet templates in
February and seriously pursued the complete implementation of IFRS and other
international banking requirements such as Basel Accords to improve
financial transparency and the international operations of Iranian banks.