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Time to Restructure Financial System
Economy, Business And Markets

Time to Restructure Financial System

With the fourth largest proven oil reserves in the world, Iran's economic policies have become subservient to its oil revenues, stifling growth and productivity in other sectors of the economy – a condition called the Dutch Disease.
However, an economics professor in Tehran believes sustainable development is achievable under certain conditions. He says time is now ripe for restructuring the financial system.
"If the right policies are applied, Iran can achieve sustainable growth but it has a long way to go," said Hassan Dargahi on Monday, addressing the 25th Annual Conference on Monetary and Exchange Rate Policies in Tehran.
"The first prerequisite to stabilizing the Iranian economy is coordinating economic policies, including fiscal and monetary policies," he added.
In Iran, fiscal policy has always overshadowed monetary policy, leading to wild foreign exchange rate volatility and high inflation. This has also exposed Iran to economic shocks. Furthermore, the central bank has always tried to keep nominal foreign exchange rates stable, as opposed to stabilizing real foreign exchange rates.
"This, in turn, has damaged both the industry by making Iranian goods uncompetitive and the inflation policy," Dargahi said.
"To fix the situation, Iran needs to restructure its financial system," he suggested.
First, the government should act counter-cyclically, that is, saving during the booms. To stabilize government revenues, all the income from oil sales should be deposited in the National Development Fund of Iran or the country's sovereign wealth fund. The NDF should then provide the government with the cash it needs and use the rest of oil revenues to support private enterprises.
"Giving oil revenues to NDF also compels the government to better plan out its fiscal policy and gives the central bank more autonomy in setting monetary policy, helping it curb inflation," the academic said.
He added that the NDFI and the central bank's roles in the economy should be redefined to put Iran on the path to sustainable non-inflationary growth.

Right Decision
Deputy Governor of the Central Bank of Iran Akbar Komijani on Monday threatened banks and financial institutions with "strict measures" if they violate the directive approved by the Money and Credit Council last month on interest rates, saying that the regulator intends to publicize the names of wrongdoers.
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.
Addressing the two-day conference, Komijani defended the MCC's decision, saying that "given current economic conditions, the policymaker could not let the market determine the rates."
He also advised people to be cautious about the high deposit rates offered by certain financial institutions, saying that "these entities may take high risks to pay the high interests," IRNA quoted him as saying.
Some banks and financial institutions offer deposit rates higher than those set by the regulator to attract more capital. The central bank has recently been pressing them to stick to the regulations but in the absence of disciplinary steps, many of the institutions, mostly uncertified, continue to offer illicit deposit rates.

Lower Inflation
Komijani said CBI will continue its policy to curb inflation and regulate the foreign currency market, noting that inflation directly affects the currency rate.
Inflation reached more than 40 percent in October 2013 but it is now hovering at 15 percent. CBI says the reduction was a result of its wise monetary policy and claims it will manage to tame it further.
"Inflation will fall to 14 percent by the end of this fiscal year," Komijani said, adding that the forex market which had been very volatile up to 2013 has now calmed down thanks to lower inflation.

Rising Debt
On banks' debt to CBI, he said the money commercial banks borrowed from the central bank in the last year has been among major factors of the 22.3-percent rise in money supply.
The money supply had earlier been predicted to increase 23-25 percent, but in practice it only grew 22.3 percent, according to central bank data.
Komijani blamed the former administration for adopting policies that increased money supply in later years. He added that the wrong policies of the previous administration "put banks into financial troubles and made them borrow from the central bank."
Another reason behind the massive debt of banks to CBI was participatory bonds whose maturity date was at the end of last fiscal year (March 2015). "So, to meet their commitments, banks were obliged to borrow more from the central bank, a process that led to accumulated debts."
Komojani hoped that the CBI would resolve the problem.
"The CBI has conducted credit policies to raise capital for small and middle-sized enterprises to help them repay their loans. This will help banks recover some of the non-performing loans or NPLs," he said.

 

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