Why Economic Reforms Matter

The Central Bank of Iran has published its latest report on the economic performance of the country for the six months ending Sep. 21. Although the report lacks important data such as the growth rate–the bank has avoided releasing such sensitive data for more than a year– it serves as a grim reminder about the slippery slope  the economy is in once again.

One has to look hard to find a ray of hope in the state of the economy during the first half of the fiscal year: government debts to the banking sector jumped to 2.041 quadrillion rials ($64 billion) -- a 17.4% growth from the beginning of the year in March. A year-on-year comparison shows that a dicier scenario is unfolding with state debts swelling by 26.5%.

However, one category stands out in the midst of the data staring one right in the face and that is the whopping increase in money supply. The broad money (M2) reached a staggering 11.02 quadrillion rials ($243.8 billion). CBI data shows M2 at 5.6 quadrillion rials ($157.8 billion) in the summer of 2013 when Hassan Rouhani was elected president. This suggests that in three years M2 has more than doubled.

Apart from 800 trillion rials ($25.2 billion) that was generated by regulating uncertified credit institutions, the rest of the money supply growth is the direct result of the current administration’s policies. It’s true that the growth in M2 is relatively benign compared to the tenure of Rouhani’s controversial predecessor Mahmoud Ahmadinejad when money supply was used to register annual increases close to 30%.  

It can be fairly claimed that the Rouhani administration is still bearing the brunt of eight years of financial irregularities bequeathed from the go-go years of high oil prices that ended (some say forever) in the summer of 2014 .

  Out With the Old

But it is particularly poignant to know that the Rouhani years were welcomed by respected observers as an end to populist and destructive policies of the past. It comes as a relief that the current administration has by and large abandoned its predecessor’s modus operandi of running the CBI’s printing machines 24/7 and borrowing almost non-stop from central bank coffers.

But it is equally daunting to imagine the havoc the sleeping giant of liquidity would wreak once it reawakens. In a recent interview, Tahmasb Mazaheri, a former CBI chief sounded the alarm on the potential catastrophe the current volume of liquidity can unleash.

According to Mazahari, the better portion of liquidity remains parked in bank accounts thanks to the recession and high interest rates. But think of what can and could happen when savings inevitably find their way out of banks and into the market pressuring demand. This could open the Pandora’s Box of inflation last seen in the dark days of the Ahmadinejad era.

Add to this the shaky status of banks and financial institutions and the high interest rates in spite of low inflation and one is more than convinced that extraordinary action is essential to address them. It is now pretty clear that in any rescue package for the economy, overhaul of the banking system should be front and center. Presidential economic advisor Masoud Nili, who has championed the cause of reforming the ailing banks, has described the industry as a sick patient. The main symptom of the malaise is the credit crunch plaguing the economy. A crisis entrenched in the high volume of bad loans and interest rate price wars perpetrated by the lawless credit institutions.

What the current government can do to avert disaster in its final days is still of utmost importance. Pundits have pointed to an array of measures that are dispensable: the government should do its best to lower the interest rates if it is serious in ending the recession and stem the tide of money supply growth. It should also go back to basics and improve the business climate and the ease of doing business–an index where the country has regressed during the past year according to the World Bank.

Last but not least, the earnest efforts of the government to overhaul the outdated banking sector should be pursued more aggressively to right the wrongs of this most important sector of the economy.