Iran's financial situation improving, CBI head says

Baku, Azerbaijan, Nov.13

By Dalga Khatinoglu, Temkin Jafarov - Trend:

With the new administration, Iran's financial situation has improved, but not very much, the governor of Iran's Central Bank Valiollah Seif told Trend.

He reminded that when Iran's new administration, headed by Hassan Rouhani, started its work the middle of 2013, Iran was experiencing stagflation, however the country managed to pass through it.

Seif, who arrived to Azerbaijan as part of Iranian delegation headed by President Hassan Rouhani, believes that Iran managed to get out of stagnation, but the liquidity in the country should be decreased to pave the path for inflation's decline.

Iran's inflation rate in mid-2013 was 40.4 percent, while Iran's economy has been contracted by 1.9 percent and 6.8 percent during last two fiscal years respectively. Iran's fiscal year starts on March 21.

Seif said that during last year, Iran was facing both stagnation and inflation.

To eliminate stagnation, the country needed contractionary monetary policy, while these policies are also vital for economic growth.

"We decided to prioritize the inflation problem with decreasing the liquidity growth rate and diverting the existent liquidity to production and industrial sectors," Seif said.

The liquidity rate in Iran is very high, exceeding $200 billion in early October.

Seif said the liquidity growth in the country was 26.5 percent during the current fiscal year, while this figure for the same period in last year was 29.5 percent.

Iranian government succeed to decrease the inflation rate to 19.1 percent in October 2014, but Seif believes that the rate is still high, and needs to be driven down to a single-digit figure. He said Iran's government attempting to lower the inflation rate, will help reduce the inflation rate to 13 percent next year, and to the single-digit figures in 2016.

He also said that Iran's GDP growth during spring was 4.6 percent, which indicates the country passed the stagnation situation after two years.

Low interest rate

The contractionary monetary policy primarily is done by increasing bank interest, while the bank interest rate in Iran was about two times less than the inflation rate during last year.

Seif said Iran should focus on lowering the inflation rate to keep the bank interest rates low to resolve bank's problems.

"It's wrong to keep interest rates high due to high inflation rate. The situation in Iran was abnormal, but we are getting better and with low inflation the bank interest rate should decrease more," he said.

The interest rate for one-year deposits in Iranian banks are averagely about 21 percent.

The amount of bad loans in Iran is about $27 billion, while Central Bank of Iran supervisory chief Hamid Tehranfar said on Sep.23 that the national banks owned and operated 500-600 companies, valued at about $70 billion by the end of the last fiscal year, which is 48-49 percent of their total base capital.

According to the law, the banks are allowed to own companies as much as 40 percent of their base capital in value. The major reason for the interest of Iranian banks in possessing companies is reportedly the huge drop in the value of national currency during the last several years.

Each USD was sold at 11,000 rials (Iran's national currency) in 2011, while this figure soared to 38,000 in mid-2013. A US dollar is sold at 32,000 rials nowadays.

Seif confirmed that the sudden drop in rial's value led to increasing the bad loan amount and bank's intention to possessing the real estate properties.

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