Health of Financial Sector Key to Ending Crisis

Iran’s economy will not emerge out of the recession until the financial system is first pulled out of its current crisis mode, says a former official with the Central Bank of Iran.

“Every economy is divided into financial and non-financial sectors. In Iran the financial sector consists mainly of the banking sector,” Amir Hossein Amir Azad, a former director of the Office for Supervision of Banks and Credit Institutions, said in a talk with Fars News Agency.

“In times of crisis, one approach is that the non-financial sector, namely industries, mines, agriculture and exports, must be rescued for the economy to avert crisis,” Amir Azad said. “The other view holds that the first priority lies with the financial sector and unless the financial sector is not crisis-free, other sectors will continue to suffer.”

It is conventional wisdom in most countries that the financial sector is the key, but “this is not widely accepted in our country.”

Amir Azad opines that the country as a whole does not believe that the banking system needs help at the macro-management level, pointing to bills and regulations that have so far been approved by successive parliaments and governments. “One needs to only glance at them to find that the banks have been hard-pressed to lend while the banking system itself is in dire straits and needs help.”

“If you look at previous experiences of global crisis management, you will note that the priority is and has been the financial sector. But [here] we do not have such a framework as attention is focused on non-financial sectors and then banks are regularly grilled for not lending more.”

  MPs’ Push for Loan Interest Relief

Meanwhile a group of lawmakers sent a letter to President Hassan Rouhani this week, asking the government not to charge interest–including late payment penalties– on overdue loans up to one billion rials ($31,400). The proposal is part of a provision passed by the parliament in the amendment to the 2016-17 Budget Law.  

In the missive, 169 MPs referred to the amendment noting that banks had failed to comply with the loan forgiveness plan. The move, like the original government bill that calls for the repayment of government debts to banks by revaluing central bank assets–has proved highly controversial.    

“Respectfully, considering that in the amendments to the budget law of 2016-17 it was decreed that loans with a ceiling of one billion rials would have their interest provided from the revaluation of the  central bank’s assets should the debtors repay the principal amount, and considering that the provision is only binding until the end of the current fiscal year (March 2017) and the banks have not started executing it yet, we request you to issue an order to accelerate the implementation of the aforementioned provision, “ the lawmakers said, INA reported.  

Over two months ago, lawmakers passed the amendments to the 2016-17 annual budget law. As part of the amendments, the Majlis allowed the government to implement a provision that allows borrowers to be exempted from paying interest and fines pertaining to loans of under one billion rials. The government has since taken no action to execute the provision, prompting a significant number of parliamentarians to write directly to the president,

The budget law amendment–passed two months ago– allows the government to use foreign exchange reserves of the central bank to settle up to 450 trillion rials ($14.1 billion) of its debts to the banking sector.

The other provision states that if debtors return the principal to banks, all penalties pertaining to the interest on loans will be forgiven. Earlier, the spokesperson of the Majlis Planning and Budget Commission, Mohammad Mehdi Mofateh had confirmed that the interest on loans will be reimbursed to lenders from the revaluation of foreign exchange resources of the CBI, and that the fines will be forgiven.

While supporters of the measure point to the fact that many debtors have defaulted on their debt due to long recession and hard economic conditions, opponents argue that it would set a bad precedent for borrowers in the future.

“As cited in the provision, its implementation is based on a directive “that will be approved by the cabinet on recommendation from the minister of economy, the Management and Planning Organization and the Central Bank of Iran, Mofatteh said.

However, there is an ambiguity about whether or not the government is legally obliged to implement the provision, considering that in the official wording of the provision, the government is “allowed” to take action on the loan defaults.

As to who would be eligible for the interest and fine exemptions, the lawmaker said:”Whether applicants who are repaying their loans will also be part of this provision is for the government to decide. The provision is valid until the end of the current fiscal year and the government should make its decision soon.”