YEAR 2001=1380

SUMMARY OF THE MONETARY AND FOREIGN POLICIES DURING 2000/01

A. Monetary Policies
 

The banking system constitutes the core of the financial sector in Iran and plays a critical role in transmitting monetary policy impulses to the entire economic system. Each year after the approval of government's annual budget by the Islamic Consultative Assembly, the Central Bank present detailed monetary and credit policy to Money and Credit Council for approval. Thereafter, certain core elements of monetary and credit policy need to be approved by the Council of Ministers. This procedure is followed in accordance with article 19 of Interest-Free Banking Act of 1983 which stipulates that short-term credit policies need to be approved by government and long-term credit policies have to be incorporated within the Five Year Development Plan documents and approve by the parliament.
 

According to section (b) of Note 3 of Budget Law for 2000/01 the Central Bank is obliged to design and implement monetary and credit policy on the basis of the mobilized amount of current and investment deposits after the observance of banks legal obligations in a way that the economic growth and inflation targets of the 3rd FYDP could be realized. the main objective of monetary policy is price stability as set out in the 3rd FYDP. Meanwhile, the provision of reasonable liquidity, preference for private sector, orderly development of financial markets and ensuring financial stability are among the targets of the stance of monetary policy for the current year.
 

On the other hand, on the basis of section (c) of the same note, the maximum increase in the outstanding balance of "scheduled facilities" of banks in 1379 was set at Rls. 5400 billion, while banks have to observe liquidity target and other obligations as set out in the 3rd FYDP Act. The share of public and non-public sectors from the increase of facilities was set at 30 and 70 percent of total increase respectively. The distribution of banks scheduled facilities is as follows:
 

The approved monetary policy for the current year has set no ceiling for the facilities extended by banks to non-public sector. However, banks are obliged to observe the Sectoral shares of the increase in the balance of facilities to non-public sector, except for 20 percent of the increase in facilities which would be free from Sectoral allocations. Therefore, the Sectoral shares allocated for the facilities extended by banks to non-public sector will apply only to 80 percent of the increase in facilities. The Sectoral share of facilities by banks during 2000/01 as approved by the Money and Credit Council are as follows:
 
 

In 1379 the rates of return on various term investment deposits remained unchanged. However, to improve competitiveness in the money market, Money and Credit Council approved that the banks are allowed to determine the lending rates within the range applicable for different sectors.
 

B. Foreign Exchange Policies and Regulations
 

One of the major developments in the foreign exchange system of Iran during the year 2000/01  was the elimination of export rate (Rials 3000 per U.S.$). Hence, the exchange system is principally based on oil-notional rate, which is practically applied to budget specified transactions, and non-oil export rate which is used for other purposes. As of the beginning of 1379 the following policies have been implemented: 
 

1- Non-oil exporters are entitled to recieve certificate of deposits after the surrender of forex to their agent bank. Hence, the forex certificate of deposit was substituted for import certificate. These CDs can be used to open letter of credit for import purposes, to be sold either through TSE to other importers or directly to agent banks within three months of the issuance of CDs.
 

2- The manufacturing units are allowed to import raw materials, spare parts and other required equipment against export of their own products, and settle their foreign exchange obligations through this mechanism.  

3- The minimum advance deposit payments for opening letters of credit for import purposes for non-public sector are as follows: 

• Raw materials of pharmaceuticals, medical equipment and inputs for animal husbandary and poultry at 20 percent of the value of import.
• Certain essential goods, stationary, CKD of buses and trucks, imports by National Steel Corporation, and fodders at 40 percent of the value of import.
• Other items at 60 percent.
• For importation by public institutions and ministries under the general budget 100 percent advance deposit payment is required.

5- The exporters who export goods ad services through opening LC's and settle their payments through banking system are exempted form pledging collaterals or advance payments.  

6- According to 2000/01 Budget Low, the following measures were put into effect: 

• The order registration fee was set at Rls. 275 per U.S. Dollar or its equivalent for other currencies; while  buy-back and foreign investment projects, and cultural activities were exempted from order registration fee.
• In order to promote non-oil exports, the government is authorized to rebate the equivalent amount of the consumption tax on goods purchased by foreign travelers at foreign exchange.
• The non oil exports are exempted from any duties.
• In order to promote competitiveness in domestic market, holding other conditions, import of automobiles is permitted in 2000/01.
• Export of handicrafts, except carpet, are exempted from foreign exchange surrender requirements.   

Iranian Banks suffer from a low level of efficiency due to their limitations in effective utilization of their deposits, their inability to terminate excess employees, the absence of competition among their staff, management, and among banks in general, collection difficulties, and their high cost of collecting their suspect and bad debts. On average Iranian banks have attained only a 76% rate of efficiency. Indeed in the banking sector, 85.5% is the highest efficiency rate achieved by the Refah Bank. 

The banking sector's profit ratio to its total assets has been extremely low, indeed in some years the banks have actually produced a net loss. Considering their poor profitability, could we expect banks perform their activities efficiently and maintain an effective role in Iran's economy? 

Limitations due to; employment laws, the existence of complicated regulations in granting certain banking facilities, their inability to collect all the amounts owed to them (receivable), a high rate of bad debts, the absence of competition among domestic banks (since they are all government owned), as well as the absence of competition with foreign banks (currently there are no foreign banks operating in Iran), the low level of competition among the banks' personnel and their management, and the inadequacy of banking services generally offered, etc, are all causes that make the banking business in Iran inefficient. To put it more clearly, in utilizing their factors of production, these service providing institutions, are unable to reach a high level of productivity and service and also due to the combination of factors, they are unable to maximize their profitability by minimizing their expenses. 

Limitations

In utilizing the factors of production, Iranian banks encounter limitations which prevent them from reaching optimum performance, minimizing their cost of production, and correctly allocate their resources.  

Limitations In Utilizing The Deposits

This limitation is primarily due to the application of regulated bank rates in connection to Central Bank's receivable and payable interest rates. Iranian banks are not in a position to determine the rate of return on the loans they extend based on their own benefit and welfare, rather, the "Council of Money and Credit", and the Central Bank, taking into consideration the achievement of their set goals, their ratified plans, and in realizing their objectives in allocating credit to different sectors, as well as in support of particular sectors, will establish certain credits for these sector at an specified rate. In some cases the set rate may be below the rate of inflation in which case the bank will actually incur a loss.  

The rate of inflation in the years 1368-1375 (1989-1996) has averaged 24.8% which exceeded the banks' lending rates to; the industry and mining, construction, agriculture and exports sectors. In 1374 (1995) and 1375 (1996), the commercial sector was the only sector that provided the banks with a rate of return of 0.2% above the inflation rate. It could be said that numerous limitations during 1989-1996 contributed to the low productivity of the banks, and in particular to their technical inefficiencies.  

It is interesting to point out that the inflation trend was worsened in the later years, reaching 26.9% in 1374-1377 (1995-1998) period, while the banks lending rates were not adjusted. In 1399 with the inflation rate at 20.1%, the commercial sector was the only sector that provided the banks with a return rate of 4.9% above the inflation rate.  

In addition, governmental limitations in the areas of allocation of the above mentioned credit facilities to various economic sectors, and fixing of the maximum balances of credits which could be granted by the government, (Central Bank) create difficulties for the banks which in turn effect their productivity. Because of the low lending rate established for the agricultural sector, during the three years from 1370-1372 (1991-1993), banks have provided less facilities to this sector than the limits approved by the government.  

On the other hand because of a higher lending rate to the commercial sector, in 1374 (1995), banks extended facilities that exceeded the government ratified limits to this sector. Such measures indicate that banks have overlooked certain government regulations, and in order to enhance their profitability have adjusted their credit facilities in favor of the more profitable sectors.  

It may also be explained that the banks have not always extended the credit limits set by the government (set by the cabinet and mandated by the Banking High Council) to those sectors which specially enjoy the governments' support, and indeed in most years the banks have extended credit facilities to the commercial and industrial sectors in excess of the ratified limits. In other words banks have steered themselves toward achieving a higher level of productivity.  

Another issue which is indicative of the ineffectiveness of the country's banking system, is the low interest rates offered on bank deposits. Considering that the inflation rate has exceeded the rates offered on deposits, the banks have not been successful in attracting private investors. However Iran's particular economic conditions, "closed markets", and the lack of security in investing elsewhere may encourage some investors to keep their savings in the banks.  

At the same time providing special services to the depositors as well as tax exemption on their realized gains, provide the private depositors with additional incentives. The fact remains that a 1% increase in the interest rate offered by the banks to the depositors, will add up to an amount equal to 3544 billion Rials annually, a figure which would far exceed the extra profit that the banks would realize by attracting the moneys which have either already been taken out of the country or are saved outside of the banks.  

Workforce Limitations

Another factor which affirms the inefficiency of the banking system in Iran, is the policies that govern the hire and fire policies pertaining to the bank employees. While banks are able to fulfill their required staffing needs through hiring new staff, a bank which may have excessive number of staff, can not easily fire the extra personnel. 

According to the Article 177 of the "banks' joint recruitment charter" in the event a bank is no longer in need of services of one or more employees, due to the cancellation of a permanent position/s, and in the absence of a suitable open position/s to reassign such effected employee/s, the employee/s whose position was eliminated would receive full salary and benefits pending the opening of new and appropriate position/s.

According to the same charter under the circumstances that the banks no longer are in need of services of a group of employees, they are obliged to pay their full salary and benefits for a period of 6 months, and 50% of their salary in the following 6 months. Therefore banks are unable to easily fire their excess personnel since they are obliged to pay their salaries for a year, a factor which also exasperates banking inefficiencies. 

Absence Of Competition Among The Banking Personnel

The absence of a competitive attitude among the public employees, which is due to guaranteed salaries and benefits regardless of their level of productivity, lack of fundamental and effective systems of evaluations, and lack of accountability and responsibility with regard to their performance, is prevalent among the employees of the banking sector as they too are public employees. The issue has resulted in the low productivity of their human resources.  

The lack of competitive motivation among public managers, due to the fact that productive managers are not in touch with other efficient domestic or foreign managers, also because there are no effective systems in place to recognize the most efficient managers, has led to a decline in the banking efficiencies. 

The lack of competition among domestic banks, and the absence of foreign banks as potential competitors has meant that Iranian banks have paid little attention to technology and a combination of factors which would have otherwise enhanced their productivity. 

Collection Limitions

Most Iranian banks experience unusually high collection expenses, in collecting on "suspect accounts". This indicates the banks' inabilities in recovering some of their receivables, a factor which also effects their productivity. 

Based on studies made, during 1368-1374 (1989-1995), on average Iranian banks experienced a 24% rate of inefficiency, in other words on average, their efficiency rate stood at 76%. The study further examined various banks rate of efficiency for the same period, and concluded that Refah Bank was the most efficient and that Bank Tejarat was the least efficient bank. 

The various banks' productivity ratings were as follows:  

#1 Refah Bank , #2 Sepah Bank, #3 Melli Bank, #4 Industry and Mines Bank, #5 Mellat Bank, #6 Agriculture Bank, #7 Saderat Bank, #8 Tejarat Bank.  

Among specialized banks, the highest level of productivity was achieved by the Industry and Mines Bank (80%), among large commercial banks, Melli Bank achieved the highest level of productivity (82.5%), and of the 2 smaller banks, Kargaran Refah Bank was the most productive.  

During 1371-1372 (1992-1993), most banks experienced an uncharacteristic higher level of productivity which was due to the change in the method used in their asset valuation. This was because in 1992, the basis for bank asset valuation was increased, and since relevant expenses remained fixed, it improved overall productivity.  

In general, Iranian banks experience a decrease in their efficiency as they expand, and the main reason for this is the fact that in Iran the government (Central Bank) establishes the volume of credit that can be extended by the banks, with the exception of the Melli Bank.  

Most governmental accounts are at the Melli Bank, and most government transactions are conducted through this bank. Therefore without a great deal of payments, Melli Bank possesses huge financial resources which has reduced the interest rate payable by this bank. Even though Melli Bank is a relatively large bank, it is positioned second in efficiency among all banks.  

According to estimates, by minimizing their technical costs, on average banks can reduce their expenses by 13%, while by minimizing their technical and allocation costs they would be able to reduce their overall expenses by 24%. 

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