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Cautious Watchers

Cautious WatchersCautious Watchers

The Money and Credit Council gave the Central Bank of Iran the permission to issue 100 trillion rials ($3.4 billion at the official exchange rate) of sukuk or Islamic bonds in a bid to keep a lid on inflationary pressures.

The decision of the council, which is in charge of setting monetary policy and seated by members of the government, parliament and also the central bank, shows the body is still cautious about inflationary pressures and controlling money supply.

Though it is not used by major central banks as a monetary tool, borrowing by the central bank can divert money supply, helping manage inflationary pressures. Using sukuk, the bank can take people’s money which has a more inflationary punch and lend it to banks or hold it.

The Central Bank of Iran has been trying to curb inflation with what the government called “monetary discipline”, in other words stopping profligate government spending and contracting money supply. Consequently, Iran’s inflation has come down from a year-on-year peak of 35 percent in 2013 to 15 percent in 2014, according to the World Bank. This was also facilitated by the appreciation of the rial, the decline in global prices for key staples, and the easing of international sanctions.

But recently the MCC has moved to ease monetary policy. Last week, it raised the cap on mortgages by 140 percent to $24,000, in an attempt to stimulate Iran’s moribund housing market. The week before, it lowered the cap on lending and deposit interest rates by at least 200 basis points to 24 and 20 percent respectively, to boost business lending. Both decisions have come under severe criticism by renowned economists.

 Not Yet

With the new permit the council is reserving a quick response option for contracting money supply while embarking on an expansionary monetary policy.

“Monetary data show that currently there is no need for issuing sukuk by the central bank,” said Peyman Ghorbani, vice governor of the central bank. “The central bank constantly monitors monetary data and will issue sukuk whenever necessary.”

The council permitted the central bank to issue up to 100 trillion rials of Mosharekat sukuk in the year that started March 21, 2015. It has allowed the central bank governor to decide on the sukuk’s interest rate, maturity and buyback fine.

But borrowing by the central bank is not a clever decision. The central bank’s last issuance of sukuk was in February 2014, when the bank sold 22 trillion rials ($767.8 million) of six-month sukuk with 23 percent interest.

Mosharekat contracts are one of the 14 forms of Islamic contracts. sukuk are being offered on many of these contracts across Islamic countries. But, there are only three forms of sukuk currently on offer in Iran: Mosharekat, Ejare and Morabehe.

Financialtribune.com