Economy, Business And Markets

Interest Rate Cut Has Little Impact on Manufacturing

Interest Rate Cut Has Little Impact on ManufacturingInterest Rate Cut Has Little Impact on Manufacturing

Contrary to some experts hailing the Money and Credit Council’s recent move to decrease interest rate ceilings, an economic expert cast doubt on whether the decision could have a positive impact on the struggling manufacturing sector.

The MCC decreased the deposit rate ceiling (for one-year deposits) from 22 percent to 20 percent and set lending rate at 24 percent, cutting it from 27-28 percent.

Ali Akbar Nikoo Eghbal believes that high-interest loans will push up the production costs, a process that could weaken competitiveness of domestic products versus foreign counterparts and cause inflationary effects.

“Although the cost of financing the production sector is five percent in many countries, the figure is a two-digit number in Iran,” he said, as quoted by IRNA, arguing that the loan interest rate should be in line with the industry rate of return.

The faculty member of the University of Tehran described the interest rate determination process as complicated, noting that it would require expert work through which the economic conditions are well considered.

He believes as long as the banks lack financial resources due to high amount of non-performing loans or NPLs and the government heavy debt, they would be unable to provide the manufacturing sector with low cost loans.

The expert called for providing an effective mechanism to enhance banks’ lending power while criticizing the operations of certain financial and credit institutions that absorb people’s investment by violating regulations and offering high deposit rates.

The central bank has threatened to dissolve unauthorized institutions and tighten supervision. The central bank’s passivity towards them is partly due to the large financial resources they hold. As these institutions hold a large portion of people’s savings, dissolving them could further destabilize Iran’s financial system. Iran has nearly 7,000 unsupervised institutions that are making profit in the money market with impunity.

Citing the central bank statistics, the economist said 31 percent of the banks’ total capital was granted to industry and mine sector in the form of loans over the last Iranian year (ended March 20). “As the minister of industry, mine and trade, Mohammad Reza Nematzadeh, earlier said the figure should be increased to at least 42 percent to help the economy out of recession,” he concluded.