When President Hassan Rouhani took office in 2013, he promised to put the economy back on track and had no choice but to tackle a hyperinflation, a severe recession and international sanctions that had disconnected Iran’s economy from much of the outside world.
The president tasked the economic members of his Cabinet with finding solutions to two pressing issues: inflation and recession.
The Central Bank of Iran, as the regulator of monetary and financial market, played a key role here. Its governor, Valiollah Seif, was put in charge of curbing inflation and at the same time lifting the economy out of recession.
In an opinion piece in Financial Tribune’s sister publication, Tejarat-e Farda, CBI governor outlined his bank’s policies during the past two and a half years defending his turf and the government’s economic policies.
In his article, published in the magazine’s special edition for the Iranian New Year (beginning March 20), Seif starts by saying that the government’s primary mission has been to bring the policies of the major economic policymaking bodies into harmony while strictly following “monetary and financial discipline”—something that the previous government is often criticized for ignoring it.
“Decreasing international tensions through negotiations and the ultimate lifting of sanctions was another key measure by the government. It injected renewed hope into businesses while instilling calm and stability in domestic markets,” he said.
The bank’s top policymaker singles out taming inflation, bringing stability to the forex market and lowering interest rates as the three major highlights of CBI’s plans.
“The CBI considered curbing inflation as its most important priority while trying to boost economic growth,” he said.
“Controlling liquidity growth and trying to correct liquidity’s composition were CBI’s two key measures in trying to curb hyperinflation. We also tried to bring stability to the forex market, which is vital for shaping people’s inflationary expectations.”
According to the CBI governor, the bank succeeded in lowering the 40% plus inflation in October 2013 to 12.6% in February 2016, which is a milestone in the government’s goal of lowering inflation to “a single-digit”.
Seif states that his bank is against setting interest rates by decree, stressing that deposit and lending rates should be decided in the money market and “in line with macroeconomic realities”.
The senior official points to the direct correlation between the inflation rate and interest rates, saying the considerable decline in inflation necessitated the gradual and calculated lowering of interest rates. He lists a number of measures his bank undertook to prepare the ground for lowering interest rates.
“CBI took on the lenders’ debts, held meetings with indebted bank officials and decreased banks’ capital adequacy ratios. It also entered the inter-bank market actively to help ease the banks’ credit crunch. As a result, lending rate in the inter-bank market was lowered to 19% from the previous 29%,” he said.
He states that these measures cleared the way for the two rate cuts the Money and Credit Council—a decision-making body—authorized during the calendar year. He believes, however, that further rate cuts will be gradually undertaken in the coming year.
Seif states that the government and his bank have always prioritized stimulating economic growth while trying to curb inflation. He points to the “sharp decline in oil prices” as a factor behind slowing growth.
The Economic Incentive Package released by his bank in October 2015 was “the government’s short-term solution for stimulating demand and growth in the period before the lifting of international sanctions”, he added.
“Lowering banks and credit institutions’ capital adequacy ratio to 10% from 13%, providing auto loans, granting loans to production units, issuing credit cards for buying domestically manufactured goods and investing in the interbank market were the components of the stimulus package,” he said, terming the package “successful and well-timed”.
The CBI has been closely monitoring the foreign exchange market and took a number of measures to bring stability to this market while trying to prepare the ground for unifying forex rates in the next calendar year.
Seif points to “controlling volatility in the forex market through the interbank market and authorizing bureaux de change and gradually increasing the official forex rates” as measures to stabilize hard currencies’ market and set the stage for a unified system of forex rates.
The top banker, however, states that a number of other prerequisites are needed for CBI to unify forex rates. He lists “unfreezing of the country’s foreign currency resources/assets, establishing comprehensive correspondent banking relations with international partners and the possibility of receiving short-, mid- or long-term credit from international partners” as prerequisites for unifying forex rates.
Iran’s foreign assets amounting to $32.6 billion were freed in early February.
Seif had said that CBI’s share is $28 billion while $4.5 billion will go to the government.
Settling the issue of the unofficial money market and quasi-lenders in this market has been another priority of the CBI, according to the article.
Seif states that his bank has been successful in countering the activities of these uncertified institutions in the current year.
“CBI will intensify measures to settle the issue of unauthorized lenders in the coming year,” he said.
He points to CBI’s measures regarding the insolvent Mizan and Samen-al-Hujaj institutions, taken over by Bank Saderat and Bank Parsian respectively, saying the two banks have reimbursed the depositors for the major part of their savings.
Next Year’s Priorities
According to Seif, CBI will continue its policy of curbing inflation and enforcing its disciplinary policies in the new year.
“Unifying forex rates to restore stability to the market and supporting non-oil exports” are among CBI’s future priorities.
Improving efficiency and transparency in the money market and striking structural reforms in the banking system are the other top goals of the regulating body. “Reforming the CBI’s structure, assessing the banking system’s health and improving financial supervision in banks” have been and are among the CBI’s measures to reform the banking system.
“Increasing the banks’ capital and resources, establishing asset management companies, heightening CBI’s supervision in the money market, settling the issue of uncertified lenders, reforming banking and monetary laws, upgrading banking laws” are among CBI’s plans for reforming the banking system next year and beyond, the CBI governor said.