Tat Bank

I am reading the dispatches on Tat Bank, Iran's eighth private bank. The best I can say is that it is going to merge with two recently founded financial institutions to form a new bank called "Mardom Bank". One report speaks of some "irregularities" without further elaboration. Well the positive side of the story is that there is a banking watchdog in Iran. That is comforting, at least partially.

Increasing the Interest Rate

I am not so sure if increasing interest rate will affect M1 in Iran. Still it seems it has been done to encourage people to keep their deposits in the banks. That is being said, I wonder if this means banks are going to charge a higher APR as lenders. One has to wait and to see. All in all currency market seems a bit calmer. Although I do not know if this is due to the government's edicts or its new policy regarding interest rate.
There is one silver line though; Iranian public and media have been talking about economics so much that I think they are going through a crash course on Econ101. I hope this increases the public awareness of market dynamism and shifts in the economy.

Rumor has it

Several Iranian news outlets reported yesterday that it is a strong possibility that Mr. Mazaheri, head of Central Bank of Iran, is going to be replaced by Vice President Parviz Davoudi. Should this change take place it will be the first time that a senior member of government, second only to President, trades his office for the seal of Central Bank. It would also signal Mr. Ahmadinejad’s persistence in pursuing his economic policies and projects, such as merging major public banks, despite all the criticism and objections from all parts of political spectrum in Iran.

Mr. Mazaheri has made it clear that he would not lower interest rates and he would not agree to government’s plan to merge banks. Despite the pressure from the government it seems he has been successful so far to protect banking system in Iran. Many observers believe that the first of the new Majlis is to save the economy. It is most likely that the new Majlis would not remain silent in this matter. Replacing the head of Central Bank would not be as easy as some might have thought.

Saving or Dismantling an Economy?

It is not a secret that President Ahmadinejad does not like the banks. He does not believe in them and considers them and their functions as a threat to himself and a barrier to combat unemployment and to increase production. There is no surprise that his acting minister of economic affairs has introduced a decree to disband all major banks and to replace them with zero interest rate saving funds. These funds can lend money only according to regulations set by the government. Iran’s private banks continue to exist but only as investors. Public banks would stop offering long-term saving accounts, and be banned from offering any service or account with an interest rate.

The government has thought of taking this step although Iran’s supreme leader has approved of privatizing publicly owned banks in Iran by re-interpreting Article 44 of the constitution and although privatization is the focus of currently in place 5 years development plan. This would stop the shares of at least 3 Iranian banks to be offered through Tehran Stock Exchange to the private investors and would send terrifying shockwaves through Iran’s economy. Although this project is nowhere close to implementation, it has horrified many of experts and technocrats in Iran.

Economy has proved to be a challenge no one in the government thought it could be. When President Ahmadinejad despite experts’ arguments and his former minister’s of economic affairs counsel decided to lower interest rates even further no one expected the governor of Central Bank of Iran Mr. Mazaheri to hold his ground. He disinclined to communicate President’s orders to the banks and objected this decision in strongest terms. It is now rumored that his days are numbered. It also is rumored that he has told the President that he would not resign his post.

The debate does not end here. Dr. Tavakoli a prominent conservative and member of parliament and the chair of its research institute told reporters that 46% of short run projects that government has put in place to fight unemployment do not exist. Dr. Jahromi, the minister of labor and architect of President Ahmadinejad’s economic policies denied this report and called it misinformation. It seems except for a few close associates few admire government's economic stand.

In the meantime inflation causes the prices to increase even higher, the prices have reached new heights in real estate market and consumers are squeezed even more in groceries and super markets. One wonders if disbanding the banks would have the effect government expects it to have, or it would intensify the crisis the economy is facing now.

Iran Appointed New UN Envoy

Iran foreign affairs ministry announced that Mr. Khazaei will become Iran's next envoy to the United Nations after Dr. Zarif, whose tenure has come to an end. Born in 1953, Mr. Khazaei served as an MP between 1980 and 1988 and has also worked as an advisor to the executive council of the World Bank.

Opening Iran’s Domestic Market to International Banking

Fars News Agency reports that Iran’s minister of Economic Affairs and Finance announced last week that Iranian government welcomes international banks’ presence in Iranian domestic market. Speaking in a gathering of bank directors he told them that the necessary preparations are completed for international banks to open their branches in Tehran and other Iranian cities. In its latest dispatch Fars News Agency reports that 44 foreign banks have offices in Tehran and most likely they all will be allowed to open branches in Iran to offer consumer level banking services.

This marks a milestone in liberalizing Iran’s economy. For long international banks had been considered as the instruments of international capitalism in Iran by intellectuals and revolutionaries alike. The government absolute control of banking sector had been warranted to protect the country. However Iran’s 2020 vision promises an active private banking sector with dynamic links with global banking community. Reluctant to lose their control of economy neither President Khatami’s reformist administration nor President Ahmadenejad’s radical cabinet was eager to follow this goal vigorously.

It seems it has become a matter of national prestige to expand such ties and to open Iranian domestic market to global banking. Ironically efforts to isolate the country have crowded out those who oppose an open economy in Iran. Currently many parties are motivated to defy these efforts by inviting foreign banks to operate in Iran. If they succeed this will set up the infrastructure of an open economy in Iran by encouraging Iranian policy makers to accept a private banking sector with international ties. And that is ironic.

This note also is avialable on http://freethoughts.org/archives/000837.php#more