Iran Pulse

Is Rouhani’s economic team about to crack?

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Article Summary
An escalating dispute between Iran’s Central Bank governor and the minister of economic affairs and finance is threatening to crack President Hassan Rouhani’s economic team.

TEHRAN, Iran — A dispute between Ali Tayebnia, the Iranian minister of economic affairs and finance, and Valiollah Seif, the governor of the Central Bank of Iran (CBI), appears to be escalating over how to regulate Iran’s money market in the post-sanctions era. Seif, who has been criticized by conservative media for having been too lenient with the administration, is now coming under fire by fellow moderates for disobeying the Finance Ministry.

On June 6, Tayebnia reiterated his call for further cuts in interest rates, criticizing banks for poor lending practices and for offering “unreasonably high” interest on savings accounts. He also slammed commercial banks for “diverting” their resources to nonproductive sectors, implicitly blaming the CBI for failing to take its regulatory job seriously. The finance minister said he believes that small- and medium-size enterprises must be given priority in receiving loans from the banking system. Big business, he said, should be financed through the capital market, which has seen better returns since the Jan. 16 Implementation Day of the Joint Comprehensive Plan of Action (JCPOA).

The CBI has rejected none of the criticisms made by Tayebnia. Yet Central Bank officials have made the point that change should be gradual and that a top-down approach is bound to fail. As such, the CBI says it will continue efforts to lower deposit rates through cutting the interbank lending rate, which has fallen from 29% last year to 17% at present.

Banks are currently allowed to offer a deposit rate maximum of 18%, while the lending rate is about 22%. Given that the official inflation rate is hovering around 10%, current interest rates could hurt the manufacturing sector, which is in dire need of further cash flow.

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“The CBI plans to further cut interest rates appropriate to inflation,” Seif said on the sidelines of an annual conference on monetary and currency policies held in Tehran in late May. He added, “Given that inflation is approaching single digits, we continue our efforts to decrease interest rates,” though he refused to set a clear target in response to questions by reporters. Seif’s remarks came only days after Tayebnia called for imposing a tax on interest accrued by fixed-term bank deposits — a controversial call that forced both officials to hold an emergency meeting to discuss the issue, Mehr News Agency reported May 29.

Citing Seif, Fars News Agency reported May 28 that the CBI does not agree with a policy of levying tax on interest accrued by bank deposits. However, the news agency quoted Seif as warning financial institutions about offering higher deposit rates than those already set by the regulator. Seif also claimed that the finance minister had agreed with him to give priority to reducing the existing gap between the inflation and bank deposit interest rates, rather than levying tax on interest earned on fixed-term deposits.

In support of his boss, Mohammad Reza Pour-Ebrahimi, a member of the Money and Credit Council, also warned in a recent program aired on state television against the repercussions of any taxation on interest accrued by bank deposits, saying that it will spur more capital outflow from banks to “unauthorized” credit and finance institutes, which are not supervised by the central bank. Among other threats that may appear with any such decision is that the deposits of millions of citizens may be withdrawn from banks and invested in parallel markets, including property and hard currency, making the latter unstable once again.

Such threats, which have been raised by opponents of Tayebnia’s taxation proposal, seem to be genuine. The actual rate of return for Iranian depositors has been negative for the past three decades, as inflation has always been higher than deposit rates offered by banks. This means that depositors have had negative income, meaning their income could not have been taxed. The current situation is the first time in three decades that inflation has stood much lower — nearly 8 percentage points — than the deposit rate ceiling. Many economists believe the reason behind lower inflation in recent years has been recession and not the government’s monetary discipline. This argument appears to make sense, given that the money supply has more than doubled since the current government took office in 2013 — a phenomenon that should normally have led to a hike in inflation.

Nevertheless, it seems that the tide is turning against the CBI governor, who has been in office for nearly three years now. Concerns over Seif’s competence as the monetary policymaker emerged in April, immediately after he told Bloomberg television that his country had gotten “almost nothing” from the JCPOA, arguing that European banks have remained wary of dealing with their Iranian counterparts. Advocates of the nuclear accord did not find his remarks to their liking, and deal critics took the opportunity to further divide the economic team of President Hassan Rouhani.

As Rouhani’s economic team is trying to settle internal disputes in the very last year of the president’s first term, ultraconservative media are losing no time in theorizing why Seif must immediately leave office. Indeed, the ousting of 64-year-old Seif now appears likely — though not any time soon. He and Tayebnia are currently too busy trying to finalize a long-awaited bill that seeks to make radical changes in banking regulations and the central bank’s structure.

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Found in: jcpoa, iranian economy, interest rates, inflation, hassan rouhani, finance minister, deposits, central bank

Alireza Ramezani is a commentator on issues related to the Iranian economy and its business environment. As a strategic communications consultant, he advises financial services firms, startups and automotive companies in Iran. On Twitter: @AlirezaTehran

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