Interest rates are supposed to be useful financial instruments allowing governments to curb inflation, However, due to its misapplication over the years in Iran it has lost its efficacy as investors are averse to putting money in the stock market, companies face problems getting funds while the banking system is under pressure to keep interest rates between 21% and 22%, and economist said.
“For years officials have reiterated that they will reduce lending rates to help business grow. But what has actually happened is that with lower rates a select few [vested interests] with special access to bank facilities have borrowed to invest in asset markets and in the process pocketed millions during high inflation,” Peyman Mowlavi said.
“This is while the majority of the population, manufactures and stock companies have little if any access to loans with nominal interest rates. Despite the fact that interest rates are [and should be] effective in controlling inflation they are not used as expected in our country and lost their relevance,” Mowlavi was quoted by SENA news agency as saying.
The economic focus, he added, must be taming inflation. “It is well known that higher interest rates results in stagnation in the capital market. Examples can be seen in most countries. In the US, for instance, rising rates moved liquidity into the bond market. It would be hardly surprising if the same happens in Iran.”
Molawi maintains that a key problem is that the government(s) has no real plan of action to tame galloping inflation. “In fiscal 2014-15 and 2017-18 contractionary monetary policies were implemented, albeit haphazardly, by the government that hurt the share market and hammered profits.”
It is worth mentioning that the banking industry and credit institutions do as they please irrespective of government policies, he added.
“Banks have indeed used assorted schemes to raise interest rates. The bottom line is that neither inflation has been tamed nor companies have access to funds.”
What Can Be Done
The economist proposes a three-point strategy that must move in tandem if the government truly intends to save the economy from the deplorable state of affairs.
“The first is a 4-year plan where monetary policies are revisited to bring down inflation to single digits. The second is to get rid, once and for all, of the crippling government-imposed pricing policy, reducing the [unwanted] role of the Ministry of Industries, Mining and Trade in the markets, and eliminating concepts that create and encourage rent-seeking. The last is for the Securities and Exchange Organization to be as fully transparent in everything related to the capital market. The three steps plus a single-rate currency rate and reduced political and social risks can help us gradually rebuild this wrecked economy not in the not too distant future.”
In mid-2020, the Money and Credit Council (MCC), increased the interest rate on one-year maturity deposits by 1 percentage point to 16%. Interest on two-year deposits was set at 18%. Short-term deposits with 3-month maturity the rate rose by 2 percentage points to 12%. The banking regulator announced 14% for six-month deposits, up 3 percentage points while the cap on lending rates was 18%.
Observers say so long as high inflation persists and returns on asset markets make a mockery of the paltry bank interest rates, subtle increase in interest rates will be unimpressive and be balked at by the masses whose life savings are shrinking with no end in sight.
While the CBI claims high interest rates will increase the cost of money for banks, there are valid concerns that low interest rates can and will push the people to shun the banks and look for other safe havens to protect the value of the diminishing rial.
Besides, the mountain of non-performing loans has become a major challenge for lenders, even though the Central Bank of Iran data show that NPLs declined further at the end of last fiscal year (ended in March).
The ratio of NPLs to total loans stood at 6.1% as of March 20, marking the end of the last fiscal year – down 9% on the corresponding period last year.
