Iran’s economic policy exacerbating banks’ credit crunch
Published: Wednesday, November 05, 2008
17:00GMT—12:00PM/EST
BANKS – LOANS – ECONOMY – INFLATION
Washington, 5 November (IranVNC)—According to a report today in the Financial Times, Iran’s banks are struggling with credit shortages that have brought them close to insolvency, despite their relative international isolation.
While Iran’s largest banks – Melli, Saderat and Sepah – have been hit with United Nations and international sanctions over alleged links with that country’s nuclear and missile programs, the government’s fiscal policies have imposed even further damage to the sector.
The government has encouraged banks to lend to small businesses and the poor at the state-imposed interest rate of 12 percent, two percent of which it covers, the London-based news website reports. This contrasts with the country’s inflation rate, which according to Iran’s Central Bank, was 24.3% for the 12-month period ending 21 October 2008.
Ramin Pashai’fam, deputy head in charge of economic affairs at the Central Bank, yesterday told the semi-official Mehr News Agency that “80 percent of the inflation rate can be ascribed to the increase in cash in circulation”.
He suggested: “If the cash flow can be controlled, we predict that the inflation rate will drop to 16 percent.”
Iran’s former Central Bank governor, Tahmasb Mazaheri, differed with President Mahmoud Ahmadinejad over policies on interest rates and bank lending. He favored raising interest rates to combat rising inflation rates.
Ahmadinejad has been criticized for his economic policies, which are based on the large infusion of petrodollars into the economy in an effort to create jobs.
The president dismissed Mazaheri last September, and some analysts said that the move may have been part of the government’s attempts to access the Central Bank’s fund and release further low-interest loans.
The large gap between the interest rates and inflation rate has encouraged some borrowers not to repay their debts, the Financial Times reports.
“Banks are fully lent-up after giving loans to people almost for free,” said one Iranian banker, who spoke on condition of anonymity. “Mr. Ahmadinejad believes banks are charity organizations,” he added.
Overdue loans in Iran have increased 75% in three years, to around $17.8 billion, the Financial Times says, according to unofficial figures.
Iran’s economy has been hit hard from the current global financial crisis, which has caused oil prices to fall nearly 60 percent from record highs last summer. Oil revenues account for an estimated 80% of Iran’s foreign currency earnings.
Sources: Financial Times, Mehr News Agency
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