Boosting Bank Capital Will Restrain Inflation

A member of the Money and Credit Council says the parliaments' go-ahead for the government to use CBI foreign exchange resources to augment the capital of public sector banks can be effective in reducing the inflation rate.

Financial Tribune- A member of the Money and Credit Council says the parliaments' go-ahead for the government to use CBI foreign exchange resources to augment the capital of public sector banks can be effective in reducing the inflation rate. 

"If the government uses the forex resources, capital of banks will increase by 50 trillion rials ($15.9 billion) and that can help reduce inflation," Gholamreza Mesbahi Moqaddam said in a talk with IBENrediuce A.

Mesbahi Moghaddam's comments come as worries about a return of double-digit inflation mounted in recent weeks as broad money supply has grown exponentially. Inflation dropped to single figures in June after 26 years thanks largely to the government's aggressive disinflationary policies.  

On the latest amendment by the Majlis that allows the government to tap into forex resources, Mesbahi Moghaddam, who also is a member of the Expediency Council, said "this method will be used to increase the capital of banks and to repay government debt."

The senior cleric was pointing to the amendments to the 2016-17 annual budget law that was passed in late August, allowing the government to settle its debts to banks by using the foreign exchange resources of the Central Bank of Iran. 

"I will be glad to see the government debts cleared because when that happens, the factors that constitute the monetary base will improve significantly," Moqaddam added. "This will also help with a further decrease in inflation rate." 

The former lawmaker however warned that unrealistic methods should not be used to "achieve realistic goals."

Through the amendment that was rejected in the past, the government wants to revalue the CBI's forex assets and have the proceeds wired to its coffers. The assets are now owned by CBI because the former government had sold them to the bank. The government was paid in rials for the assets, mostly proceeds from crude oil exports and at varying exchange rates.

Now that rial has lost much of its value in the wake of the 2012 currency crisis that wiped out almost 70% of the value of the national currency within days, the government wants to use the difference in exchange rates to repay its mountain of debts and empower public-sector banks.

The official noted that the current government and its predecessor had proposed the same amendment which was turned down by Majlis "because we were under the impression that it would be illegal."

"Random use of CBI resources will increase exchange rates and the monetary base. If that happens, currency rates would surge and it (use) will not have a legal base."

Meanwhile the CBI's deputy chief for economic affairs says the banking system as the main financier is facing a serious credit crunch.

"As a result of the ballooning non-performing loans, government debt to the CBI, troubled assets in the balance sheets of the banks, the stagnant property market [in which banks have heavily invested] and the inadequacy of the capital buffers of banks, the banking sector that is responsible for 90% of financing businesses is now grappling with a major credit crunch," Peyman Qorbani said in video posted on IBENA.

Therefore in order to revive financing, in addition to corralling foreign finance, "the capital market needs to play a more effective role and pitch in where financing is needed."

At the same time, he added, the roots of the current problems that Iran's banking system is mired in must be fully identified, reviewed and resolved. "In order to do this, the Banking Overhaul Plan was devised and we hope that with the implementation of this plan, the banking industry can reach its full potential of financing the diverse sectors of the economy."

In early June, the Banking Overhaul Plan – designed to reform the inefficient and outdated banking system of the country – was signed into law by President Hassan Rouhani. As the president said, the plan will be centered on economic revival and growth and gears the banking system toward those goals.

Among other things, the plan seeks to get financing for short and medium-term projects back on track, provide a cash cushion to tackle bad loans, promote competition, reorder the money market by regulating the army of uncertified credit and financial institutions and increase banks' lending power by raising their capital.

The CBI official added that without a safe, stable and healthy banking system, a sustainable and reliable system of financing will not be possible. "This in essence will hurt economic growth."

Financial Tribune
Publish Date: Sep 26, 2016