Iran�s economy is recovering from a deep recession and inflation has fallen from historic peaks. Some believe the recession and the 2012 currency crisis were brought about by the sanctions the United States, European Union and United Nations imposed against Iran over its nuclear energy program. The Rouhani administration, however, believes macroeconomic mismanagement has been the root cause of the hardships.

In a recent interview, former central bank governor Mahmoud Bahmani, has defended the handling of the crisis after sanctions intensified against Tehran. He also gave his views on the current state of the money market.

In 2012 the rial was devalued by around 70 percent in the market. Its value was officially halved against the US dollar overnight. The central bank, unable to control the rial�s misfortune due to being barred from its foreign exchange reserves had to use its limited financial resources to help vital imports like medicine, though in practice rent-seekers used the cheap dollars to import luxury cars among other non-vital goods. As a result, the currency system, after years, broke into a multiple exchange rate system.

Though little success was seen in the handling of the crisis, Bahmani argues that it was he and his team that managed the crisis caused by external pressure.
�Our circumstances were such that we couldn�t do better. Even the current team in the central bank couldn�t do better. If Alan Greenspan [former Federal Reserve chairman] were to become the governor of the Central Bank of Iran, he too couldn�t do better in those times,� Bahmani told Financial Tribune sister publication, Tejarat Farda weekly, drawing hard parallels to describe those conditions.

More proof and investigation is needed to give a fair verdict on this matter. Bahmani provided some evidence to the magazine, but he did not want them in print, the weekly reported.

During his reign, Bahmani was criticized for being too loyal to the former president Mahmoud Ahmadinejad, who was famous for his populist policies.
Bahmani, however, said he �decided on technical issues� but had to comply with the president as legally the bank was his turf. �Which manager doesn�t listen to his superior?� he asked. Now, �I think the central bank�s independence has decreased.�

Bahmani also said inflation has come down as a result of policies he started. Inflation�s downtrend started in the end of 2012 coming down to 30.5 percent from 40 percent highs. �This shows that before we left office, inflation had started its downtrend.�

Shifting to the present, the former governor called the structure of Iran�s money market a �Gordian knot�.

Currently, banks are struggling to find resources as their balance sheets are filled with non-performing loans and frozen assets. While banks� lending power has dried up, demand for loans has risen. The central bank is now forcing banks to cut deposit rates to keep real interest rates low, in a bid to boost business lending.

Last week the central bank lowered the cap on one-year deposits by 200 basis points to 20 percent. The bank also capped lending rates to 24 percent from 27-28 percent.

Bahmani remains pessimistic of the effect of the cuts, saying they would not work in practice. �Banks are starving for money, and they have no alternative but to try and bring in deposits in order to lend. If banks had enough money to operate, they would bring down interest rates and wouldn�t borrow from the central bank, to which they have to pay 34 percent interest.�

Deposit retention periods have fallen to less than 12 months, from 29 months during Bahmani�s time at the central bank. �The central bank is deterring investors from making long term deposits, and people are looking for daily compounded deposits,� he said.

Since Iran�s equity markets are too small and too risky to attract and channel money to businesses, weakening the bank�s resources may prove imprudent, he added.
Bahmani called growing overdrafts from the central bank one of the main hazards of the banking system. �When a bank is borrowing, it means it has no money, so how can we expect it to lower its deposit rates.�

As a solution, the former governor said the repayment of government�s debts to the banking system would be a good starting point, but banks� balance sheets must be restructured.

�We have no other choice but to restructure our banks. If we don�t pay the price for the restructuring now, we would have to pay a higher price next year.� There is no arguing with sense.

By Financial Tribune