Economy, Business And Markets

Banking Reform to Rekindle Economy

Banking Reform to Rekindle Economy
Banking Reform to Rekindle Economy

President Hassan Rouhani said Sunday the banking overhaul plan will be implemented before the fiscal year is out in March 2017, calling it “the most important financial and monetary package for fostering the economy.”

The reform plan "will strengthen the banking system and improve the government’s creditworthiness. It also will promote bonds in a way that will help stimulate the economy,” he said, the president’s official website quoted him as saying in a meeting with the economic team of the government.

Last week, Rouhani signed the much-anticipated Banking Overhaul Plan into law, which is seen as a milestone in initiating reforms in the beleaguered banking sector.         

He pointed to the decline in inflation and said, “This should give banks the opportunity to offer loans at lower interest rates.”

A primary goal of the government is to enhance the banking sector’s lending power in order to help local production units in need of credit, the president noted.

“In the past when the oil export revenues were at a peak, banks were forced to lend at rates lower than the inflation rate in order to cushion the problems caused by huge imports,” he said, “That (policy) forced banks to borrow money from the Central Bank of Iran which resulted in higher inflation and a surge in the monetary base.”

Rising inflation made it hard for borrowers to repay their loans, he said. The bad loans and soured assets are now said to be in the range of $25 billion. “They were unable to clear the debts even if they wanted to.”

Reiterating that the economy is too dependent on the struggling banking sector, Rouhani added, “I hope the economy would gradually move toward capital markets.”

The Banking Overhaul Plan, which had been in the making for a year, seeks to tackle the most pressing issues facing sick banks.  Among other things, it seeks to get financing for short and medium-term projects back on track, provide a cash cushion to tackle bad loans, promote competition, reorder the money market by regulating the army of uncertified credit and financial institutions, and increase banks’ lending power through recapitalization.

 Clearing Debts

Rouhani said clarifying the government’s total debt would be a significant step toward boosting the economy. “The government is trying to use Islamic bonds to repay its debts.”

Minister of Economy Ali Tayyebnia said on Sunday the government plans to issue 400 trillion rials ($13 billion) worth of bonds in the current fiscal year that ends in March 2017. The bonds will be issued to help repay government debt to the private sector.

The CBI, Management and Planning Organization, and Ministry of Finance and Economic Affairs are in charge of issuing the Islamic bonds. “The MPO should specifically take care of on-time payment of interests, so that the government can regain its creditworthiness,” the president told the economic committee.

“Repaying government debt to contractors by issuing bonds would ensure economic progress and reduce contractors’ problems,” he said.

Poor development planning also added to the huge pile of debts to contractors. No contract has been signed with the contractors and no repayment deadlines have been set. As such, they have no choice but to wait until the government repays them.

According to Abbas Akhoundi, minister of roads urban development, the latest data puts government debt at 5.4 quadrillion rials ($178.7 billion), which is almost 50% of national GDP. This includes the government’s own debts, debts of government-affiliated companies and money owed by the National Iranian Oil Company.