Economy, Business And Markets

Reserve Requirement Cut Could Fuel Instability

Reserve Requirement Cut  Could Fuel InstabilityReserve Requirement Cut  Could Fuel Instability

As debate on the newly-unveiled incentive package by the administration continues, a banking analyst has warned about the possible economic instability as the reserve requirement rate of banks is reduced, the news website reported Wednesday.

The cut in reserve requirement could redirect the flow of funds into speculative activities and trading by commercial banks like in the recent past leading to an unstable and risky economic environment, Mohsen Tabatabaie Mozdabadi, a lecturer at the Iran Banking Institute, affiliated to the Central Bank of Iran, said.

Recalling the past experiences, he said “Short-term policies have never had a significant impact on the economy and at times also intensified the problems.”  He called on the government to focus on structural reforms instead of taking refuge in stopgap solutions.

The instructor recommended policymakers to place export incentive schemes on top of their agenda that can stimulate demand and reduce bulging inventories of most, if not all, manufactures.

“The administration seems reluctant to publicly acknowledge that it has switched to expansionary policies. But in reality that is the case, which could undermine efforts to curb inflation”, he said.

He warned that the banks are not in good shape to implement such policies and urged the government to tackle the issue of piling up non-performing loans to boost the lending power of commercial banks.

The government unveiled its much-anticipated incentive package on Saturday indicating a policy shift to more quantitative easing. The plan which aims to pump more liquidity into the economy beset by a long and painful recession, envisages a cut in reserve requirement ratio from 13 to 10% based on the banks’ performance. The decision is expected to increase liquidity in the banking sector, lower interest rates and increase bank resources.