The Forum for Partners in Iran's Marketplace
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     

June 2018, No. 87


Banking

A Hard Year for Banking!


Iran must accept this fact and work on plans to achieve an oil-free economy. Turkey could serve as a good lesson.


Dr. Parviz Aghili Kermani, Economist

Sometimes it seems that some of the events that take place in Iran are aimed at preventing reforms. Of course, I suspect that many of these actions are taken not out of ill intentions but due to ignorance. For example, when a country is faced with recession, the governments often try to pursue different monetary policies such as borrowing to generate employment and economic growth. Under the 10th and 11th governments, we observed a sharp drop in oil prices. In such a situation, the government in order to meet the current budget such as salaries and subsidies has on the one hand cut the already tiny development budget and on the other hand increased the taxes. In other words, in addition to the government, private sector companies too have been crippled. It is because the authorities check the companies’ 10-year record for tax collection in order to provide liquidity. In this way, the companies that had managed to continue to operate under recession are faced with unreasonable or unexpected taxes.

It can be concluded that the cause of disappearance of job opportunities and unemployment has been the government’s wrong decisions. This is while when other countries face financial crisis and recession, they act opposite the way Iran does. It should be noted that the world is moving towards tax cuts, because these are the companies that create employment, and therefore the tax should be taken from individuals. For example, those who receive high salaries and high dividends should pay taxes. In this way, the money that remains in companies is just to create employment, and the government should not take that money to meet current expenses. Otherwise, economic growth will fall markedly.

On the other hand, Iran’s banking system has numerous problems. Countries facing similar problems revised their banking structure. But in Iran, a wrong policy is being exercised to keep the price of hard currencies lower than what it is. This policy entails many other problems. In this regard, the Central Bank of Iran (CBI) tried to reform the banking system and somewhat stabilized the interest rate on deposits and loans. Although rating is wrong policy as a whole, banks were gradually accustomed to the new situation, and some of them were catching up. But it was decided overnight to raise the bank deposit interest rates; now, the interest received for loans is less than the interest paid on deposits, as a result of which many banks are facing difficulties.

These wrong decisions, which are taken to solve other crises such as controlling price fluctuations in foreign exchange, increase the banking system’s problems. Of course, it is not possible to correct this system in the short run. Maybe by taking small steps we could expect the banking system and other economic pillars to be in better shape in five years; the private sector would grow in five years and the capital market would be dynamic... And one way to achieve such goals is to have a broad and effective loan market so that companies would not rely solely on the banks to provide liquidity.


Iran needs about $15 to $20 billion for importing essential goods such as wheat, maize, animal feed, medicine and raw materials for industrial and agricultural production.


We need to look at things more realistically. For many years, our country has been run by the oil money but it is approaching the end of the road. Nearly two-thirds of the world’s oil is now used to consume fuel for cars and vehicles. Because of the pollution caused by fossil fuels, the world moves towards elimination of these types of vehicles. For example, China has announced that in 2025, petrol-operated cars would not be allowed to travel in some large cities. If such programs continue, oil consumption will decline and we cannot count on the sales of 2-3 million barrels per day for future deliveries. Extending the use of electric cars and fuel supply from clean and renewable energies will reduce oil revenues.

Iran must accept this fact and work on plans to achieve an oil-free economy. Turkey could serve as a good lesson. In the early years of 1980s, some countries, including Turkey, were almost bankrupt due to rising oil prices. At that time, Turkey’s official currency worth of 30 to 35 liras to one US dollar reached 1.5 million liras against the dollar. The total foreign exchange earnings of the country amounted to $7 billion in 1982, which came from tourism, transfer of Turkish workers income in Europe, and industrial exports. Turkey today has an estimated $180 billion in foreign exchange earnings roughly five times that of Iran’s oil revenues. Most of this amount comes from non-oil exports. We too have no choice but to expand the industrial sector. Iran is not comparable with Arab oil exporting countries because it has a population of more than 80 million people. It is necessary to create jobs in proportion to this population. The government should allow the hard currency find its true value and thus encourage exports. In my opinion, the government should give realistic and practical slogans; for example, emphasis is placed on the issue of single-rate foreign currency that there are no fundamental conditions for the application of this policy in the country. The country is now under international pressure and cannot apply free-economy policies. While I believe 100% in free economy and execution of supply and demand rates in issues such as exchange rates or bank interests but targeting should also take place in these cases.

Iran needs about $15 to $20 billion for importing essential goods such as wheat, maize, animal feed, medicine and raw materials for industrial and agricultural production. The CBI can meet the demand for these commodities at a rate of about 35,000 to 40,000 rials (for one US dollar). The remaining oil revenues amounting to about $20 billion should be made available to the CBI and add to the foreign exchange reserves of the country. On the other hand, an organized foreign exchange market should be launched in the Stock Exchange for example so that exporters and importers of other commodities could trade the hard currency they earn from exports and the currency needed for imports at real prices and according to the supply and demand trends in this market. The CBI too must monitor this market. If the price of a hard currency goes up without justification, the bank could supply some foreign exchange into the market without announcing the timing of the action in advance.

In this case, those who have increased the price of the hard currencies through speculation will lose. Those who are involved in this business will gradually find out that they should not increase the price out of the standard frameworks. The policy of dual foreign exchange rates should continue until the time security is created in basic commodity market.

Anyone who wants to buy a luxury car or wants to take a recreational journey abroad must pay the price of the foreign currency at market value. Under such conditions, people should not receive subsidized foreign exchange. We could go after unification of foreign exchange rate when the conditions of the economy improves and non-oil exports reach the level of imports, namely  $60- $65 billion a year. On the other hand, some criticize the fact that Iran’s economy is bank-oriented, but no economy has had a strong capital market in the early stages of development. Advanced economies too have relied on the bank in the past.

In other words, the formation of stock market in the world is the result of market development in such a way that the producer and the investor manage to eliminate an intermediary called the banking system and directly buy and sell stocks and debt instruments locally. Today big and small businesses have to go to the bank for any amount of loan capital; this is not right. The country’s economic policymakers should strive to develop the debt market. It is also necessary to consider tax credits for encouraging large companies to enter this market.

This does not mean a cut in government revenues. In fact, a little is deducted from the taxes to be paid by companies in future. In return, this is in line with the faster growth of the economy. When competition is created between debt securities and the banking systems liquidity will not increase but the  money circulation will go up. In this situation, inflation is controlled and the economy will be in motion; thus, the government can receive more taxes. Of course, I hope that this tax will be taken not from companies but from individuals. In these circumstances, companies can also expand their activities. Of course, this will not happen overnight. The government should gradually reduce the taxes paid by the companies and teach people to fill out tax declaration forms.

Two issues are very important in 1397 (2018/2019); first is the JCPOA (Joint Comprehensive Plan of Action) which President Trump will decide about it on May 10. The stance taken by the European countries too is very important. In the event of US withdrawal (from the deal), China and Russia will most probably not take negative actions towards Iran. We hope that Europe will follow them. Iran has fulfilled its obligations under the JCPOA and we should see what policy will the other party take vis-à-vis this issue? Before the deal, Iranian banks were not linked to the international system. The transfer of money took place through exchange shops. On one hand, lack of security in the transactions caused big losses to the economic activists; on the other hand, the cost of foreign transactions went up tremendously. After the JCPOA large international banks still do not work with Iran, but small and medium-sized banks are cooperating with our economic actors and this has greatly reduced the cost of foreign transactions.

The next major issue is the decision by the Financial Action Task Force (FATF) to decide whether measures taken by Iran are satisfactory enough for the group to fully delist the country from its non-cooperative list. Iran committed itself to enforce a set of tough standards in its entire financial and banking system.

(The Financial Action Task Force, also known by its French name, Groupe d’action financière, is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering).

Accordingly, all relevant sectors, including the government, the Parliament, the Guardian Council, the banking system, foreign exchange shops, and all institutions involved in the transfer of funds, in particular foreign currency, should contribute to this endeavor. It is also imperative that the entities monitoring money laundering be allowed to report suspicious transactions to the FATF. This issue is very important. Even if there are no problems with the JCPOA but Iran fails to comply with the nine conditions set by FATF and remains on the blacklist, the world’s banks will not cooperate with its banking system; because the presence of Iran on the black list means that the rules on money laundering in the country are not being observed and this can put foreign banks in difficulty and make them sustain penalties. Accordingly, the question of JCPOA and the stance taken by FATF can turn 1397 into a hard year for Iran’s banking system.

 

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  June 2018
No. 87