JOURNAL ARTICLE

Economy Iran Investment Monthly

Published at (Feb. 28, 2013)

Banks' Resource Management ⁽ⁿ⁾ Improves ^(vrb) in ^(prepos.) 2012

A^(art) study of^(prepos.) historical^(adj) statistical data^(obj) published^(vrb) by the^{(art) -} Central Bank of Iran (CBI)⁽ⁿ⁾ from^(prep) 2010-2012 suggests^(vrb) that^(demos), after ^(prep) years ⁽ⁿ⁾ of ^(prep) battling^(vrb) with mounting⁽ⁿ⁾ loans-to-deposits ratios, the^(art) Iranian banking system might have finally^(adv) found^(v) an^(art) applicable^(adj) resource management strategy⁽ⁿ⁾ to^(prepos) alleviate^(vrb) the^(art) inflated ratio⁽ⁿ⁾. According to this^(demos) study, in^(prepos) 2010 the^(art) ratio⁽ⁿ⁾ in^(prepos) question⁽ⁿ⁾ had reached^(vrb)  to^(prep) 112%, implying^(vrb) that^(demos) the^(art) value⁽ⁿ⁾ of^(prepos) loans⁽ⁿ⁾ issued^(vrb) by^(prepos) banks⁽ⁿ⁾ in^(prepos) that^(pn) year⁽ⁿ⁾ was^(vrb) approximately^(adv) 1.12 times more than what their^(poss) deposit reserves permitted^(vrb). But^(conj) in^(prepos) the^(art) two years that^(demos) followed^(vrb) , this^(demos) ratio⁽ⁿ⁾ dropped^(vrb) down to^(prepos.) 110% and^(conj) 100% respectively^(adv). The^(art) ideal figure ⁽ⁿ⁾ would be^(adj) 80%.

Part of^(prepos.) this^(demos)  accomplishment results⁽ⁿ⁾ from^(prepos) the^(art) CBI's new policy⁽ⁿ⁾ that^(demos) restricts^(vrb) the^(art) CBI⁽ⁿ⁾ from^(prepos) granting^(vrb) further^(adv) credit lines⁽ⁿ⁾ to other banks⁽ⁿ⁾ in^(prepos) what^(pn)  the^(art)  head of the CBI⁽ⁿ⁾ calls^(vrb) "excess credit"⁽ⁿ⁾ . Previously^(adv), these^(det) other banks⁽ⁿ⁾ would compensate^(vrb) the^(art) shortages resulting^(vrb) from^(preos) loans-to-deposits imbalances⁽ⁿ⁾ through^(prepos) excess borrowings from^(prep) the^(art) Central Bank⁽ⁿ⁾. This^(demos) not only added^(vrb) further^(adv) liabilities⁽ⁿ⁾ to^(prep) the^(art) Central Bank's balance sheet ⁽ⁿ⁾, but ^(conj) also fueled^(vrb) Iran's liquidity^(adj) problem⁽ⁿ⁾ further^(adv).

According to^(prepos) the^(art) CBI⁽ⁿ⁾, the^(art) new policy⁽ⁿ⁾ is^(vrb) not just limited^(adj) to^(prepos) the^(art) credit lines⁽ⁿ⁾ between^(prepos) the^(art) CBI⁽ⁿ⁾ and^(conj) other banks⁽ⁿ⁾; it^(nomi) even requires^(vrb) the^(art) banks⁽ⁿ⁾ to^(prepos) limit^(vrb) or^(conj) fully^(adv) suspend^(vrb) their^(poss) lines of^(prep) credit⁽ⁿ⁾ to^(prepos) customers⁽ⁿ⁾ until^(prepos) their^(poss) accounts⁽ⁿ⁾ are balanced^(vrb). In addition^(conj) ,banks⁽ⁿ⁾ are obliged^(vrb) to^(prepos) recollect^(vrb) all of^(prepos) their^(poss) receivables outstanding ^(adj) within^(prepos) a^(art) reasonable^(adj) period of time⁽ⁿ⁾.

Mahmood Bahmani⁽ⁿ⁾, the head of the CBI⁽ⁿ⁾ , claims^(vrb) that^(demos) his monetary^(adj) organization⁽ⁿ⁾ is satisfied^(vrb) with^(prepos) the^(art) outcome of^(prepos) this^(demos) approach so far. Based on the^(art) published report⁽ⁿ⁾ , the amount of bank's debt⁽ⁿ⁾ to^(prepos) the^(art) Central Bank⁽ⁿ⁾ has declined^(vrb) by^(prepos) IRR 108 trillion⁽ⁿ⁾ since^(prepos) August 2012. It^(pn) is anticipated^(adv) that^(demos) persisting^(vrb) with^(prepos) this^(demos) policy⁽ⁿ⁾ will reduce^(vrb) the^(art) point-to-point indication rate⁽ⁿ⁾ and liquidity over time⁽ⁿ⁾. However^(conj) , government authorities⁽ⁿ⁾ believe^(vrb) that the^(art) positive^(adj) changes^(vrb) in^(prepos) bank's loan⁽ⁿ⁾ to^(prepos) deposit ratios⁽ⁿ⁾ will not impact^(vrb) the county's liquidity in^(prepos) the short term  ^(adj).

Iran's(ⁿ) Liquidity Woes(^vrb) Continue

Monthly(^adv) statistical assessments (ⁿ) conducted(^vrb) by(^prepos) the(^art) Central Bank of Iran (CBI) ⁽ⁿ⁾ for^(prepos) November 2012 continue to^(prepos) show increases^(vrb) in^(prepos) liquidity levels in^(prepos) Iran's⁽ⁿ⁾ economy. From a^(art) monthly^(adv) point-to-point perspective, the^(art) CBI ⁽ⁿ⁾ assessment sees^(vrb) a^(art) 2.2% jump^(vrb) in^(prepos) November 2012's cash levels compared^(vrbs) to^(prepos) the^(art) preceding^(vrb) month. This^(pn) implies^(vrb) an^(art) IRR 90 trillion increase in^(prepos) liquidity since October^(adv) , and^(conj) an^(art) IRR 720 trillion⁽ⁿ⁾ growth since April 2012^(adv) . In other words, during November 2012, this^(pn) monetary variable⁽ⁿ⁾ grew^(vrb) by IRR 12.5 billion in^(prepos) each hour and^(conj) IRR 3 trillion in^(prepos) each^(det) day. By the^(art) end of^(prepos) November, total liquidity had approximately^(adv) climbed^(vrb) to^(prepos) IRR 4,240 trillion.

One of^(prepos) the^(art) most^(adv) important^(adj) factors that^(det) triggered^(vrb) Iran's⁽ⁿ⁾ liquidity problem is the^(art) significant amounts of^(prepos) borrowing^(Vrb) from the^(art) CBI⁽ⁿ⁾ by other banks, as^(conj) discussed^(Vrb) earlier in^(prepos) Economy Overview⁽ⁿ⁾. The^(art) banking system in^(prepos) Iran⁽ⁿ⁾ has constantly^(Adv) been under^(prepos) pressure^(vrb) from^(prepos) the^(art) government⁽ⁿ⁾ to loan out large^(adj) sums of^(prepos) money to industries in^(Prepos) order to promote^(vrb) production and^(Conj) development in^(Prepos) the^(Art) country⁽ⁿ⁾. The^(Art) amount of^(prepos) these(^pn) loans often exceeded^(vrb) the^(Art) banks' reserves, and^(Conj) banks⁽ⁿ⁾ would in turn borrow^(Vrb) the^(Art) shortage^(adj) from the^(Art) CBI^(n). The^(Art) CBI⁽ⁿ⁾ itself^(pn) was also under pressure from the^(Art) authorities to credit^(Vrb) these^(pn) banks⁽ⁿ⁾ in^(Prepos) order to support^(Vrb) the^(Art) government's⁽ⁿ⁾ plans to promote^(Vrb) domestic^(adj) production^(n).

In addition^(Conj), the^(Art) introduction of⁽ⁿ⁾ the^(Art) subsidy reform program, and^(Conj) the^(Art) monthly^(Adv) cash handouts to Iranian citizens⁽ⁿ⁾ as^(Conj) a^(Art) substitute for eliminating^(Vrb) food and^(Conj) energy subsidies, has also impacted^(Vrb) liquidity levels in^(Prepos) the^(Art) country^(n). The(^Art) Iranian government⁽ⁿ⁾ has encountered^{(past-participle)} many^(Det) difficulties in^(Prepos) making^(Vrb) these(^pn) payments, mainly^(adv) due to an^(Art) unprecedented^(Vrb) cash crunch resulting from the^(Art) drop(^Vrb) in^(Prepos) its^(pn) oil sales and^(Conj) challenges^(Vrb) in^(Prepos) repatriating^(Vrb) oil money. Therefore^(Conj), a^(Art) substantial portion of^(prepos) these^(pn) payments were generated^{(simple-past)} through^(prepos) hefty borrowings from the^(Art) Central Bank⁽ⁿ⁾. The^(Art) persistence of the^(Art) banking debt⁽ⁿ⁾ , the^(Art) government's⁽ⁿ⁾ budgetary woes, its(^Pn) diminishing^(Vrb) foreign reserves and^(Conj) the(^Art) devaluation of⁽ⁿ⁾ the^(Art) Rial, as well as^(Conj) the^(Art) government's⁽ⁿ⁾ mounting debt to the CBI⁽ⁿ) for making these^(pn) subsidy payments, have all worsen Iran's⁽ⁿ⁾ liquidity position in^(Prepos) the^(Art) past few years^(Adv).

However(^conj), the(^art)CBI(ⁿ) claims that it(^pn) has taken some(^det) actions to(^prepos) control the(^art) current situation(^adj). According to the(^art)  latest(^adv) statistical^(adj) report⁽ⁿ⁾ by the(^art)  CBI(ⁿ⁾, for the(^art)  first time since August(^adv) 2012 the(^art)  monthly^(adv) growth of liquidity in(^prepos) November(ⁿ) was less than the(^art)  preceding month(ⁿ). As shown in the(^art)  figure below, in November(ⁿ) 2012 cash levels grew^(vrb) only 2.2%, whereas September and October(ⁿ) 2012 experienced^(vrb) some(^det) of the(^art) highest^(adv) increases^(vrb) in this monetary(^adv) variable since April 2012(^adv) , by jumping (^vrb)2.7% and(^conj) 3.1% respectively^(adv). Additionally(^conj), the(^art)  8- month growth rate of cash levels stood substantially(^adv) lower(^adv) than the(^art) 7-month data⁽ⁿ⁾ .

Analysts argue that these(^pn)developments are largely(^adv) ascribed to the(^art) stricter liquidity(^adv) regulations imposed^(vrb) by the(^art)  Central Bank(ⁿ) since June 2012(^adv). The(^art)  new regulation has introduced^(vrb) new policies such as restricting the CBI's(ⁿ) line of credit to other banks and(^conj) issuing^(vrb) IRR 100 trillion worth of one- year bonds that(^det) offer a(^art) yield of 20%. The(^art)  former prohibits excess credit payouts to other banks and(^conj) mandates these (^pn) banks⁽ⁿ⁾ to develop a(^art) sound resource management policy. In other words (^conj), banks are expected to(^prepos) balance their accounts by(p^repos) collecting^(vrb) all receivables outstanding, instead of (^prepos)borrowing from the CBI(ⁿ). The(^art) bond policy has also been successfully(^adv) launched under(^prepos) two phases in September(ⁿ) and(^conj) November(ⁿ).

Nevertheless, (^conj),  these (^pn)developments have not stopped economists from(^prepos) expressing^(vrb) their^(det) concerns^(vrb) about the(^art) current cash levels in(^prepos) Iran's(ⁿ) economy, and the(^art)  CBI's(ⁿ) inefficient(^adj) strategies to control^(vrb) this monetary variable. As shown in the(^art) bar chart below(^prepos), the(^art)  8-month point-to-point cash levels in November 2012(ⁿ) stood higher(^adv) than any(^det) other value recorded for this(^pn) month in (^prepos)the(^art) past four years^(adv). November(ⁿ) 2012's cash level growth was also the(^art)  fourth highest monthly jump(^adv) for this(^pn) variable since^(conj) Mahmood Ahmadinejad's presidency(ⁿ) commenced^(vrb) in^(prepos) 2005.

According to some(^det) economists(ⁿ), the(^art)  bond policy mentioned earlier(^adv) can also be criticized for returning relatively(^adv) high yields (20%) over(^adv) a relatively(^adv) short period of time (one year). In addition(^conjunctions), some^(det) experts(ⁿ) argue that(^det) this(^pn) course of action only alleviates the(^art) problem in the short-term(^adv). When(^pn) the (^art)CBI(ⁿ) pays out the(^art) bonds' returns^(vrb) next year(^adv), IRR 120 trillion will be injected^(vrb) back in(^prepos) to the(^art) market, and the(^art) economy(ⁿ) will be driven back to the(^art) current  status quo.

Iran⁽ⁿ⁾ to Change^(inf.) its^(pn) Price Base Year

Iran⁽ⁿ⁾ is planning^(vrb) to change^(inf.) the^(art.) base year used to^(prepos.) compute^(vrb) its^(pn) inflation rate^(obj). The^(art) current base year is 2004, but^(conj.) the CBI has announced^{(past-participle)} that from^(prepos.) March 2013, the base year will move^(fut.tense) to^(prepos) the year 2011. This^(det.) would be^(adj) the eighth time that^(det.) the CBI has revised^(vrb) the base year for^(prepos.) calculating the indication rate since^(conj.) 1936. The other points in^(prepos.) history⁽ⁿ⁾ where such a revision have been made^{(past-participle)} were in 1959, 1969, 1974, 1982, 1990, 1997, and finally 2004.

The reason behind these^(det.) changes^(vrb) are the use of Laspeyres index^(sbj) in computing^(vrb) Iran's inflation rate^(obj). As commonly^(adv) accepted by^(prepos.) economists, the Laspeyres index tends to overstate^(inf.) the^(art.) inflation rate. This is because^(conj) the index does not account for^(prepos.) the fact that^(det.) consumers⁽ⁿ⁾ react^(vrb) to^(prepos.) price⁽ⁿ⁾ changes by adjusting the quantities they^(pn) purchase^(vrb).

In addition^(conj.), as markets⁽ⁿ⁾ grow^(vrb) and^(conj) reach out to^(prepos.) a^(art.) larger^(adv) group of consumers⁽ⁿ⁾ , the range of goods and services⁽ⁿ⁾ that^(det.) are available and consumed by^(prepo.) an^(art.) average^(adv) household⁽ⁿ⁾ , changes as well. For example^(conj.) , the CBI states^(vrb) that^(det.) in^(prepos.) the 2004 base year, the number of goods and services included^(vrb) in^(prepos.) Iranians⁽ⁿ⁾' basket of goods was 359, but^(conj.) in^(prepos) the 1997 base year, this^(pn) number⁽ⁿ⁾ was^(vrb) 310. With this in mind, it^(pn) is⁽ⁿ⁾ important that the basket of goods for Iranian households⁽ⁿ⁾ should be^(adj) revised^(vrb) frequently^(adv) and^(conj.) at least every 7 years, in order to^(prepos.) address this^(det.). Otherwise the computations made using this^(det.) index⁽ⁿ⁾ will be misleading^(vrb) .

By^(prepo.) changing^(vrb) the base year⁽ⁿ⁾ to^(prepo.) 2011, the CBI aims^(vrb) to reduce^(vrb) the current inflation level by^(prepo.) 2%. Readjusting^(vrb) inflation⁽ⁿ⁾ by changing the base year has been attempted^{(past-participle)} in^(prepos.) Iran before. In 2006, the CBI computed^(vrb) the inflation rate⁽ⁿ⁾ in two phases. Firstly^(conj,), it^(pn) utilized^(vrb) 1997 as the base year, where an^(art.) inflation rate of 13.6% was reached^{(simple past)}. But^(conj.) the same procedure using 2004 as^(conj.) the base year came to a^(art.) lower^(adv) indication rate of 11.9%.

Iran⁽ⁿ⁾, the 19th Largest^(adv) Auto Manufacturer in^(prepos.) 2012

A recent study by^(prepos) the^(art.) Iranian Students' News Agency (ISNA) ⁽ⁿ⁾ estimates^(vrb) that^(det.), in^(perpos.) 2012, the number of vehicles⁽ⁿ⁾ manufactured in the country had slipped(vrb) below its^(pn) recorded^(vrb) amount in 2011. Under the most optimistic^(adv) circumstances, the number of vehicles manufactured^(vrb) in 2012 is estimated to be approximately^(adv) 1,058,850, whereas the official figure for 2011 was 1,648,505 units.

It^(pn) is⁽ⁿ⁾ expected^(vrb) that^(det.) the^(art.) production⁽ⁿ⁾ cut in 2012 will downgrade^(fut.tense) Iran's position on^(prepos.) the 2012 OICA list of the largest^(adv) global auto manufacturers. In 2011, Iran's auto manufacturing volume jumped^(vrb) 3.1%, a(art.) development that^(det.) awarded^(vrb) the country⁽ⁿ⁾ the 13th spot on the above mentioned list. While^(conj.) the 2012 ranking has not been officially published^(vrb) yet, a rough data comparison between^(prepos.) Iran's 2012 performance with the data available from^(prepos.) other countries⁽ⁿ⁾ indicates^(vrb) that^(det.) Iran⁽ⁿ⁾ will have the 19th spot in 2012, after^(conj.) England, Czech Republic, Turkey, Thailand and Indonesia. Previously^(adv.), these^(pn) nations⁽ⁿ⁾ stood^(vrb) behind Iran⁽ⁿ⁾ on^(prepos.) OICA's 2011 ranking.

(1540 words)

*REMARKS *

n = nouns

pn = pronouns

vrb = verbs

adv = adverbs

adj = adjectives

obj = object

prepos = preposition

conj = conjunction

det = determiners

art = articles

demos = demonstrative

poss = possessive

nomi = nominative

past-participle

future tense

simple past 

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