The minister of industries, mining and trade has finally got his way on foreign exchange overdue debts owed mostly by Iranian manufacturers.
Foreign exchange debtors have been given three months to repay their debt, the central bank announced on Monday.
According to the announcement, borrowers will have to repay their debts at the exchange rate of the day they got the loans, and not at current exchange rates in rials. This is a significant concession to borrowers as the rial has depreciated over 60% during the past three years, significantly increasing their debt in rial terms.
The matter has been most pressing on Industries Minister Mohammad Reza Nematzadeh's mind, who continuously put pressure on the central bank to adopt its current stance towards the non-performing foreign exchange loans owed to commercial lenders.
Nematzadeh said the 2012 foreign exchange crisis had more than tripled the liabilities of Iranian companies, which mostly relied on domestic revenue, forcing them to default on their obligations.
The minister said the solution to this situation would be a haircut for creditors, as businesses would not be able to repay their debt under the current circumstances. The continuation of the Gordian knot would block debtors from securing new financing to revive their businesses, further worsening their debt servicing prospects, and in turn lock commercial bank assets in non-performing loans dragging them toward insolvency.
Now Nematzadeh's championing of smaller industries has borne some fruit. The central bank's directive, though not perfect on all counts, kills two birds with one stone.
Firstly, it will lighten the debt burden on businesses, in support of whom Nematzadeh wrote a letter to the Money and Credit Council—body in charge of setting monetary policy—small and medium manufacturers who manage to repay part of their liabilities be removed from the blacklist of debtors with overdue claims, allowing to secure new financing at lower costs.
Secondly, it will give lenders liquidity to pursue other avenues of investment, increasing their profitability.
Furthermore, the good and the bad will be separated, and the central bank can move forward and deal with debtors who miss the three-month window through lawsuits.
The private sector was hit hardest, by the recession that stemmed from the previous government's mismanagement. Such businesses lack lobbies and leverage over the government compared to state-owned companies, which make the bulk of the Iranian economy, but are run inefficiently.
Nematzadeh rightly believes smaller businesses, which make up Iran's actual private sector, need further support, due to their limited financial clout and greater vulnerability to economic shocks. Helping them get back on their feet would boost the Iranian economy and more importantly alter its makeup for the better.
