Iran’s central bank will be granted more independence under the country’s new government to curb one of the world’s highest inflation rates, Governor Valiollah Seif said.
President Hassan Rouhani’s cabinet has agreed to separate monetary and fiscal policies, leaving the former under central bank control, Seif said in an interview, his first with an international news organization since taking office in August. That will allow the bank to focus on its priority of “controlling liquidity and bringing down inflation,” he said.
Rouhani inherited an economy in recession as international sanctions against Iran’s nuclear program weakened the currency and pushed inflation to about 40 percent in September. “We are now facing stagflation,” Seif said Oct. 12 in Washington, where he was attending the annual meetings of the International Monetary Fund and the World Bank. “Expansionary monetary and fiscal policies will not help growth.”
Iran’s high inflation rate is partly due to “one-off effects, particularly the impact of exchange rate depreciation,” Masood Ahmed, head of the fund’s Middle East and Central Asia department, said in an interview in Washington. He said Iran’s monetary policy must seek to prevent a “second-round set of effects on inflation.”
Granted more independence under Rouhani, the bank can “start doing what central banks do in this sphere,” said David Butter, a Middle East analyst and associate fellow at foreign policy research group Chatham House in London. “Iran is putting out this image, after eight years of having their economic policy being very politicized, that they’ve started to get back to something more rational.”
Seif said that under President Mahmoud Ahmadinejad, credit allocation “was not based on the analysis of experts,” with about 40 percent of all lending diverted toward a housing project for the poor.
Government intervention helped drive non-performing loans as high as 23 percent of all credit in 2010, according to the International Monetary Fund. Seif said the ratio now stands at 15 percent and the central bank is “determined to bring it down” as part of efforts to stabilize the banking system.
Iran’s monetary policy is decided by the Money and Credit Council, headed by the central bank chief.
Seif is part of an economic team assembled by Rouhani following his surprise election victory. He campaigned on a promise of negotiating an end to the standoff with Western powers, which accuse the Islamic republic of developing nuclear weapons. Iran says its nuclear program is peaceful. Two days of talks on the issue between Iran and world powers, the first since Rouhani was elected, are due to start in Geneva tomorrow.
Sanctions imposed by the U.S. and allies have reduced Iran’s oil revenue and cut off its banks from international financial flows. Foreign-exchange reserves will plunge to $70 billion by the end of this year, and Iran only has immediate access to about $20 billion of that, according to a study by research firm Roubini Global Economics and Mark Dubowitz, president of the Foundation for Defense of Democracies.
Seif declined to disclose the value of the central bank’s holdings. The bank said in July it had more than $100 billion in reserves.
He said the foreign-exchange market is “relatively stable.” The rial, which lost more than half its dollar value in the 12 months before Rouhani’s election in June, has since rebounded about 20 percent.
Economic growth will probably be flat in the Persian year that ends in March, after a contraction of 5.4 percent in the previous 12 months, Seif said. The economy may grow 3 percent in the following year, he said.
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