The governor of the Central Bank of Iran said on Monday that a possible reduction of the reserve ratio would lead to an increase in liquidity and inflation.
"A one percent cut in the reserve ratio could cause liquidity to jump up by 4.5 percent," said Valiollah Seif, in a meeting with private sector executives at the Iran Chamber of Commerce, Industries and Mines in Tehran. "If liquidity increases, inflation rate would follow by a slower pace of at least one percent."
Seif warned against the negative impact of such a policy to further lower the reserve ratio arguing that doing so would nullify the government's achievements in curbing inflation.
The government should avoid prescriptive instructions on the reserve ratio in a bid to keep tension from the market.
Mistrust Atmosphere
As the previous administration had for several years refrained from providing official statistics on the state of economy, both experts and ordinary people have developed mistrust toward the CBI, the governor noted.
The previous administration had required the central bank to publish economic statistics only upon receiving the president’s approval, he said. “But now, accurate and reliable statistics are regularly published by the CBI.”
The Rouhani administration has demanded that the central bank publish macroeconomic statistics routinely, Seif said, adding that he has allowed the Statistics Department to publish the data as soon as they are extracted, without even seeking his approval, hoping that it will accelerate the data distribution process.
No Loans for “Quasi-Manufacturers”
As the banking system has limited financial resources, it is required to avoid awarding loans to what the governor has called “quasi-manufacturing units.”
He defined the quasi-manufacturers as fake units that claim to do manufacturing activity to make use of cheap loans.
Seif, who is also the president of the Money and Credit Council (MCC), characterized the current situation with the manufacturing sector to be “unfavorable, as a result of wrong decisions made by the previous government.”
The banking system tends to bring about economic growth by supporting “real production,” he added. To that end, banks should give loans to firms with a less than three debt to equity ratio. The firms are also required to submit to the CBI their financial statements, in order for the bank to be able to distinguish real manufacturing units from the fake ones.
Manufacturing Hit by Lack of Financing
At the same meeting, Head of Iran’s Chamber of Commerce, Mines and Industries, Gholam-Hossein Shafei made remarks on the lack of financing for the manufacturing sector.
“The Lack of adequate financial resources coupled with unstable economic policies are the biggest problems the manufacturing sector is now dealing with,” he said. “According to the statistics released by the CBI, the industry’s and agriculture’s share of banking loans during the past three years, 2012, 2013 and 2014, has been 6.40%, 4.39% and 7.38% respectively. In contrast, the commercial sector has received 5.4%, 4.7% and 5.49% during the same period. This shows that the governmental entities have received a bigger share of banking loans than non-governmental ones.”
He further warned that the manufacturing sector is to be severely harmed, should it turn to what he described as “unproductive and speculative activities”.
Despite the surge in market liquidity and financial institutions, which are basically meant to provide the manufacturing sector with funds, the manufacturing sector is still suffering from lack of financial resources to the extent that it needs to refer to decentralized market, in violation of the CBI regulations, in order to obtain its required financial resources.
“Afraid of the risk embedded in manufacturing, banks prefer to invest on sections with lower possibility of risk,” he underlined.
