July 2009, Nos. 52&53

Banking

“Our artillery is silent, but that of others roars.” This is part of remarks made by Mahmoud Bahmani, governor of the Central Bank of Iran (CBI).

Mahmoud Bahmani, Governor of the Central Bank of Iran (CBI)

He made those remarks in his first press conference in 2009 when explaining the Central Banks package of policies and supervisory measures. He was pointing to senior officials of the ninth government who urge that profit rate of bank facilities should be a one-digit figure.

A reporter asked why Bahmani announced that the package has been passed by the cabinet with no change while he had earlier noted that they had problems with the council of ministers. Bahmani said, “We discussed the package for 50 days and many of our friends in the cabinet believe that the profit rate should be a one-digit figure. It was not easy to get the package approved with no change. We have promised that if the inflation rate became one-digit in the current year, the profit rate would become one-digit too and if inflation rose, we would do the same to profit rate.”

Bahmani then said, “We have silenced our artillery and declared truce. We told them to let the Central Bank to do its job. Therefore, our artillery is silent while that of other still roars.”

Perhaps this is because Bahmani has given them good grounds. Average inflation stood at 24.2 percent last year according to the main model which is accepted by the Central Bank of Iran and inflation in 12 months leading to March 2009 has averaged 25.5 percent. However, according to the accessory model used by the Central Bank, inflation in March 2009 has been 17 percent lower than March 2008. Even if the lower figure were accepted and we assumed that Bahmani has been relatively successful in controlling inflation, any profit rate charged on bank facilities, which is lower than inflation would mean nothing, but an economic rent for those who receive the loans. At the same time, considering a profit rate of 15 percent for depositors (even if inflation in 2008 has been actually 17 percent) will mean a 2 percent loss for depositors.

The Central Bank, however, is supposed to support depositors and if nothing is added to the value of their money, it should not fall either. Anyway, a profit rate below the inflation rate will mean injustice to depositors and ignorance of their primary economic rights. It should be noted that inflation stood at 12.1 percent, 13.6 percent, 18.4 percent and 24.2 percent in 2005, 2006, 2007, and 2008 respectively. According to Pashaeifam, deputy governor of Central Bank of Iran for economic affairs, if subsidies were reallocated, as the government planned, in the current year, the inflation would have soared to 36 percent. Banks should usually give loans at a reasonable rate in order to be able to give a reasonable profit rate to depositors and cover their costs. However, according to what Bahmani has done, profit rate of loans has been below that of deposits. According to some reports, 95 percent of bank resources are provided by depositors and if Iranian depositors took their money out of the banks, they would be in for bankruptcy.

The Governor of Central Bank also noted that profit rate is a function of inflation and no bank should pay more profit than stipulated by CBI. Also, finance institutes which do not comply with CBI regulations will be subject to austere measures and would be outlawed if refrained from receiving permits from CBI. Therefore, observing a 17.5-percent ceiling for profit rate paid on deposits is obligatory for all monetary and finance institutes. The CBI governor also noted that Paragraph 51 of the package empowers the CBI governor to change some paragraphs of the package. He said, “Although I am not to change key paragraphs, but if conditions changed, we will send proposed amendments for a decision by the government’s Economic Commission.”

When asked why he announced that the package has been passed by the cabinet with no change while he had earlier noted that they had problems with the cabinet, Bahmani said, “We argued over the package with the Economic Commission for 50 days and many of its members believe in a one-digit profit rate. It was not easy to get the package passed with no change,” he said.

Oil Stabilization Fund is still a secret!: According to most optimistic estimates, the Oil Stabilization Fund, where surplus oil revenues are despoiled, contains 20 billion dollars. If the Fourth Economic Development Plan law had been carried out, it should have contained 150 billion dollars. However, due to expansionary (and inflationary) policies adopted by the conservative government of President Mahmoud Ahmadinejad, the Oil Stabilization Fund is in dire conditions and since the balance is low, government officials are not willing to give an exact figure on it. Ahmadinejad was the first person to announce the Oil Stabilization Fund information secret. Saudi Arabia has saved 400 billion dollars of its oil revenues. Bahmani refused to reveal the balance of the fund saying, “The Central Bank of Iran manages foreign exchange market, but we are not authorized to reveal the balance of the Oil Stabilization Fund.”

Liquidity down from Rls. 526,000 bn to Rls. 188,000 bn: Bahmani noted that liquidity growth rate has never been below 20 percent in the past three years. He added that liquidity growth stood at 21.6 percent by the end of (the Iranian year) 1382, 39.4 percent by the end of 1383, 34.3 percent by the end of 1384, 39.4 percent by the end of 1385, 27.1 percent by the end of 1386, and 16.1 percent by the end of 1387. Bahmani also said that liquidity stood at 526,500 billion rials by the end of 1382 (March 2004), which has decreased to 188,000 billion rials by the end of 1387 (March 2009) while foreign exchange rate has been floating and every dollar is now being traded for about 10,000 rials.

He maintained that the average inflation rate stood at 24 percent last year, adding, “Although we have injected 600,000 billion rials into banks in order to help industries and that figure has been added to the 92,000 billion rials in bank settlements, liquidity has not increased because we immediately issued bonds with a profit rate of 19 percent and, thus, 79,000 billion rials of idle money was absorbed through those bonds while 49,000 billion rials entered banks.”

As for the profit rate on bank deposits, Bahmani said that since the inflation rate fell to 17.5 percent in March, profit rate on deposits has been reduced from 19 percent to 17.5 percent.