Creating stability in banking and monetary policy is the key goal of the Central Bank of Iran (CBI) governor as he seeks to make the economy more predictable.
Valiollah Seif said on Monday, "I am using every opportunity to create uniform standards of conduct within the central bank and the banking system as a whole."
Following these remarks the governor called the decrease of inflation, "the administration's greatest achievement so far," adding that the central bank is closely monitoring the inflation rate.
Headline inflation has come down from over 45 percent last year and is expected to fall below 20 percent for the current fiscal year ending March 20, 2015.
Seif, who spoke at the fourth conference on monetary policy, banking and manufacturing challenges – hosted by the Financial Tribune's sister firm, Donya-e-Eghtesad newspaper – said that regrettably, monthly inflation, the forbearer of headline inflation, has changed direction and has been rising over the past few months.
Year-on-year inflation for the month ending Dec. 21 rose 160 basis points to 16.7 percent from 15.1 percent in the prior month. Inflation y-o-y had reached a record low of 14.4 percent for the month ending Sept. 22.
But Seif said that the CBI "will control money supply" and seek to direct it towards the manufacturing sector. Money supply rose 12.7 percent during the first eight months of the current fiscal year (starting March 21, 2014). This shows a slowdown in money supply increase compared with the same period last year. The figure stood at 15.2 percent in the first eight months of last year.
“We cannot call our current policy a contractionary one, as the money multiplier rose 4.5 percent, leading to an actual rise in money supply, although monetary base slipped 1.6 percent during this period,” said the governor.
$4.1b Dispute
The rise in inflation expectations is partly owed to the increase in money supply as the central bank bought $4.1 billion from the government at the end of the previous fiscal year. The purchase raised money supply but also helped bring the economy out of recession, Seif said.
Seif reaffirmed the government rhetoric on the parliament’s allegations of the withdrawal of $4.1 billion from the National Development Fund of Iran (NDFI) by the government. The sum originated from oil revenues, and when it was transferred to the CBI, “we gave 26 percent of it to the NDFI, 14 percent was given to the National Iranian Oil Company and the rest was given to the government.”
Solid Data
The governor defended his organization’s conduct on financial and economic data saying that he had personally investigated the bank’s conduct during the previous administration. Seif slammed people who allege that the central bank is fiddling with economic data.
“Not a single wrong piece of information has been announced by the central bank,” said the official, “in the worst circumstances the bank halted its data dissemination.”
Seif also added that the CBI’s data gathering has improved significantly. “Before this, only 30 to 40 percent of our banking data was verifiable. Now, the data’s verifiability is over 90 percent.”
Private Sector Financing
The private sector is too reliant on the banking sector and it is struggling with financing, said the head of Iran’s Chamber of Commerce. This is likely to continue as neither the government can finance the private sector via its investment budget nor can the private sector access foreign financing due to financial sanctions.
“We don’t ask [the CBI] to increase powerful money that would lead to inflation hike,” Yahya Al-e Es’haq said, adding, “Rather we want banks to finance the economic activities of merchants and manufacturers that are active in the economy.”
Asked by the Financial Tribune if he thought it possible, given the current economic conditions, for banks to smartly finance manufacturers, as he called for, in the next couple of years, Ale-Es’haq responded that it is feasible as the financial data on these firms are reliable.
Al-e Es’haq outlined the banking system’s challenges into four categories: firstly, the low Capital Adequacy Ratio – the ratio of a banks’ capital to its risk – of commercial banks; secondly, the high level of non-performing loans on their balance sheets; thirdly, the “credit crunch” due to the decline in the banks’ lending power; and last but not least, the disparity between inflation and interest rates.
“It is not anybody’s fault [per se], it is the nature of the situation” that the private sector needs banks. The private sector requires stability in the economy and economic policy for its growth, said Al-e Es’haq.
Seif responded by saying the CBI has moved towards doing so. The central bank directed commercial lenders to only finance firms whose equity is over 25 percent of their assets and have audited books.
“These measures reduce the number of firms who can get financing,” Seif said as “we should let firms fail if they are not generating revenue. These firms should be closed down or restructured into profitable ones.”
The governor also added that their priority is alleviating the cash flow inadequacy of manufacturers and service firms.
Over 2.06 quadrillion rials ($58 billion at market rate) of credit was extended by banks in the first eight months of the current fiscal year, half of which were new loans and the other half was used to refurbish older loans.
Total bank loans are 64 percent of Iran’s gross domestic product, a rare global record, said the governor. Also 88 percent of corporate financing is done via commercial banks, he said echoing Al-e Es’haq’s remarks on the heavy reliance of industries on bank financing.
When questioned on the recent depreciation of the rial the governor said the recent “volatility” in the market was due to seasonal reasons [approaching the end of the year] and that pressure on the rial was likely to subside through January.
“The central bank is closely monitoring the foreign exchange market and it will control volatility if it deems it necessary,” Seif said.
Top Presidential Advisor Masoud Nili, Deputy Governor Akbar Komijani, various commercial bank CEOs and many prominent economists attended the conference organized by economist Mousa Ghaninejad.
