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Dr. Ebrahim Sheibani, the Governor
of the Central Bank of Iran |
Managers and officials of the Central
Bank of Iran are grappling with a number of major challenges in the concluding
months of 2005.
The first challenge is their effort at
organizing and controlling money market. The Central Bank of Iran was witness
to activities of certain centers called Garz-al-Hassaneh (interest-free) funds
which embarked on monetary and banking activities and their financial turnover
was quite remarkable. Even supervision over those bodies was delegated to
Islamic Republic of Iran Police. At first, the Cabinet passed ratification
according to strip the police of supervisory powers over those funds and took
steps to organize Iran’s money market by preparing a bill on unorganized money
market. On August 1, 2005, the Central Bank of Iran sent the executive bylaw
of the bill to the government. At present, it is waiting for the bill to be
approved by the government. In that case, the Central Bank of Iran will
enhance its activities in four fields: Garz-al-Hassaneh funds, credit
cooperatives, leasing companies and, finally, money changers.
The Central Bank of Iran has issued a
notice through communiqués addressed to all owners and directors of
Garz-al-Hassaneh funds to fill in their specifications in special forms
released by the bank as a prelude to pave the way for granting permits to
Garz-al-Hassaneh funds. The Central Bank of Iran believes that about 90
percent of Garz-al-Hassaneh funds have not violated regulations and recent
years’ crises is a result of performance of some of them in generating illegal
money. Of course, quantity of such funds is not high, but many big
Garz-al-Hassaneh funds have violated regulations one way or another. The
Central Bank of Iran also is planning to require Garz-al-Hassaneh funds after
notification of the executive bylaw of unorganized money market bill, to
observe a capital adequacy of, at least, 15 percent. Meanwhile, the Central
Bank of Iran is still facing challenges from major and influential funds
including three funds which are affiliated to the police force and other
military bodies. The first of those funds is Qavvamin Garz-al-Hassaneh Fund,
which is operated by the Islamic Republic of Iran Police. Since that fund has
accepted major requirements of the Central Bank of Iran, it is currently
faring properly.
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If price of
such goods as electricity and gasoline are kept down forcefully by the
government and price hike which should happen to general level of prices
at the juncture is carried over to next periods, this will lead to
erosion of production capacity. |
When state-run and private banks of
Isfahan failed to accept the Central Bank’s demands for organizing such funds,
Qavvamin Garz-al-Hassaneh Fund took steps to solve the problem. For this
reason, the fund was granted permits to work as a financial and credit
institute and its violations were treated superficially by the Central Bank of
Iran. However, ownership of Qavvamin Garz-al-Hassaneh Fund, which belongs to
police force, is the main obstacle on the way of granting it a permit to work
as financial and credit institute and despite much publicity on the part of
the fund; such permit has not yet been issued. That is, from the viewpoint of
the Central Bank of Iran, the fund is still considered as a Garz-al-Hassaneh
fund and not a credit and finance institute and it has only agreement in
principle has been issued for Qavvamin Garz-al-Hassaneh Fund.
Officials of the fund should think of
ways to transfer its ownership from the police force to a public joint stock
company through underwriting; so as to remove the main hurdle on the way of
its transformation into a credit and finance institute because public or
state-run bodies are not allowed to establish new finance institutes and this
has not happened thus far. Following suit with Qavvamin, Basijian and
Ansar-ol-Mojahedeen Garz-al-Hassaneh funds, which are run by Basij and the
Islamic Revolutionary Guards Corps, have been seeking permits to work as money
and credit institutes. Therefore, the Central Bank of Iran has been offered
with two applications for the establishment of new financial and credit
institutes called, Mehr (by Basij forces) and Ansar (by Ansar-ol-Mojahedeen).
Since those institutes would belong to peripheral institutions as well as
cooperatives related to Basij force or the Islamic Revolutionary Guards Corps,
it is easier to give them permits, because they can be excluded from public
institutions one way or another. Therefore, required permits will be issued
for those financial institutes before long and they will start to work
alongside Basijian and Ansar-ol-Mojahedeen funds. Another phase of Central
Bank of Iran’s plans is to increase number of authorized money changers inside
the country. Thus far, 170 money changers have been authorized by officials of
the Central Bank of Iran. Due to increased number of foreign travels,
especially those related to Hajj pilgrimage and fraudulent activities of some
foreign exchange sellers, the Central Bank of Iran is planning to increase the
number of authorized money changers to 250 across Iran after notification of
the bill on unorganized money market; so as to prevent repetition of what
happened to Hajj pilgrims in buying forged dollars. It was revealed a while
ago that dollar banknotes whose numbers start with DL or DF and have been
printed in 2003, have been forged.
One of the conditions stipulated by the
Central Bank of Iran for authorizing money changers is having a minimum
capital of 100 million tomans in Tehran and half of that figure in other
cities for partnership companies which can ask for money changing permits.
Organizing leasing companies is another
phase of the Central Bank of Iran’s plans. According to current statistics,
thus far, 250-300 companies have been registered at the Registry of Companies
the initial capital of some of them has been registered at 100,000 tomans.
For this reason, apart from considering
moral and specialized conditions for handing out permits to leasing companies,
the Central Bank of Iran is planning to consider a minimum capital level of
about one billion tomans. Of course, since performance of leasing companies is
quite the opposite of Garz-al-Hassaneh funds, it has caused less concern among
officials of the Central Bank of Iran. In Garz-al-Hassaneh funds, people
deposit money and the fund uses people’s money for granting facilities while
in leasing, the company grants loans or embarks on credit sales with people
paying only a small part of the price of what they buy. At the same time,
survival of leasing companies becomes more important than people’s money.
However, since growth and development of the leasing industry greatly relieves
the domestic banking system, organizing them has become a priority for the
Central Bank of Iran.
Inflation is not only a concern of
senior officials of the Central Bank of Iran, but also a preoccupation for
high-ranking governmental authorities. The new government, whose votes mainly
came from disadvantaged social classes, is well aware that inflation will lead
to dissatisfaction of those classes. Directors of the Central Bank of Iran are
also aware of that. High number of interviews made with and reports issued by
directors of the Central Bank of Iran, who are regularly camera-shy,
substantiates this. Both Ebrahim Sheibani, the optimistic governor of the
Central Bank of Iran, and Akbar Komijani, his economic deputy, have told
student news agency, ISNA, and have written articles in Trend magazine
(official organ of the bank) to the effect that they have tried to adapt
retail index of the spent months of the year with the preceding year to
convince people that inflation rate during the current year is no different
from the preceding year and is even less. Apart from general atmosphere in the
society, which rejects this, people who see something else in their everyday
lives, also pose other questions.
Where will a 35-percent increase in
liquidity during the current year show itself? Interestingly, the Central Bank
of Iran talks about stagnation in housing sector and announces that
composition of investments according to various stages of construction,
indicate that buildings whose construction has begun are dwindling in all
urban areas of the country both in terms of quantity and total buildup area.
Therefore, the number of construction permits issued in Tehran, other big
cities, and other urban areas has been reduced 16 percent, 8 percent and 7
percent, respectively. This point shows that part of liquidity in housing
sector has been added to the liquidity of the country because capital aspects
of the Iranian housing sector reaches far beyond its consumption aspects; that
is, it is part of assets. The high number of residential units in northern and
central parts of Tehran attests to this fact.
Darkness of many stories of high-rises
in Tehran in the night, shows that some of their owners have purchased their
houses as an asset to sell them when market conditions are favorable. Many
people looking for houses are not basically buyers of such units and
stagnation in the housing sector shows that those seeking housing avoid
entering this market and accepting its long-term responsibilities due to lack
of trust in their future revenues and housing speculators are assessing future
conditions of the market.
Now, this liquidity has grown by 35
percent during the current year and is idle in the society until it is
invested somewhere quite accidentally. Therefore, a big danger is threatening
the society and if that liquidity enters any market the result will be
inflation and high prices. However, the liquidity, which is taken into
consideration when appraising assets, is not taken into account when
determining retail sales index by the Central Bank of Iran. Retail sales index
of the Central Bank of Iran is based on sampling consumer goods. During recent
years, due to increased state revenues through oil sales, the government has
been able to control goods market either through imports or through subsidies
and prevent negative effects of burgeoning liquidity on the market.
Apart from foreign exchange rate, which
is deliberately controlled by the Central Bank of Iran, other goods which are
considered capital and other assets such as housing are not immune from
excessive growth of liquidity which is not reflected in the Central Bank of
Iran’s index. Therefore, retail sales index of the Central Bank of Iran can be
criticized for three flaws. Firstly, goods sampling by the bank may not be
accurate enough because sampling done by Iran Statistics Center has shown a
higher figure than the Central Bank of Iran’s sampling during the past years.
The second flaw is not reflecting
liquidity in capital goods and assets in retail sales index because people are
not solely tolerating inflationary pressures from consumer goods, but other
goods impose inflationary pressures on them.
The third weakness is accounting method
used by the Central Bank of Iran. When calculating its own index, the Central
Bank of Iran pays no attention to artificial stability of price of such
important goods as gasoline. If price of such goods as electricity and
gasoline are kept down forcefully by the government and price hike which
should happen to general level of prices at the juncture is carried over to
next periods, this will lead to erosion of production capacity. At the same
time, artificial stability will increase consumption cost and erodes a
capacity, whose rehabilitation will need added resources. When those resources
for rehabilitating production are not supplied, general level of prices will
further increase. All these factors will be manifested in inflationary
pressures imposed on people, which are easily ignored by retail sales of the
Central Bank of Iran.
The third weakness is more of an
ambiguity than a challenge. Kayhan newspaper had recently reported that
ceiling of prizes given by Garz-al-Hassaneh (interest-free) bank accounts to
depositors has been reduced to 25 million tomans. That is, the biggest prize
considered for holders of such accounts will amount to 25 million tomans and
saving has been mentioned as the main reason. The report added that banks will
limit their publicity in this regard and High Banking Council would soon
notify the banks of the decision. The decision aimed at reducing extravagance.
Since the Central Bank of Iran has not denied that report, it seems to be
true. However, there are several questions about the decision which cause such
saving to seem superficial.
