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Economy + Policy E1:R5

Economy + Policy E1:R5

Key Developments

◢ CBI figures show that liquidity is moving from term-deposits to short-term deposits in line with falling deposit rates

◢ The sixth development plan sets an ambitious target of 8% annual growth and stipulates goals for the economic and the public sector


 

CBI Reports Rise in Short-Term Deposits

A report from the Central Bank of Iran (CBI) for the Persian month of Ordibehesht (April 20 to May 20 2016) showed sharp rise in the growth rate of short-term deposits following a decrease in banking deposit rates. The growth rate reached 46.4% y-o-y in Ordibehesht of 1395 (ended on 20 May 2016) up from 37% in the previous month of Esfand (ended March 19 2016). The overall proportion of short-term deposits has seen a 6.1% increase during the first two months of the current Persian calendar year of 1395 (beginning 20 March 2016).

This 6.1% increase in short-term deposits tracks to a 2.2% growth in term deposits and 2.1% growth in liquidity, indicating that a considerable amount of liquidity has moved towards short-term deposit accounts. The value of short-term deposit accounts increased to IRR 3,700 trillion in the month of Esfand of 1394, and IRR 4,580 trillion in the month of Ordibehesht of 1395, up from the previous amount of IRR 2,390 trillion in the same period last year.  This shift has taken place while the value of term deposits reached IRR 4,480 trillion in the month of Esfand of 1394, and IRR 4,580 trillion in the month of Ordibehesht of 1395, rising from IRR 2,550 trillion in the month of Ordibehesht of 1393. As such, the the growth rate in short-term deposits has outpaced other liquidity classifications, including term deposits.

Liquidity also increased by 29.7% when compared to the same period last year (ended 21 May 2014) to reach IRR 10,038 trillion. Money, including cash and demand deposits grew 14.8% in the past year, but contracted 4.7% during the first two months of 1395. Near-money, including short-term deposits, term deposits, and savings accounts also grew by 32.2% compared to that of the past year and 3.4% during the first two months of 1395.

 

 

Currently, the share of short-term deposits, IRR 3,920 trillion, from the total figure of bank deposits of around IRR 10,006 trillion, is 39%. The ratio stood at 37.7% in the month of Esfand of 1394 (ended 19 March 2016). The share of term deposits, standing at IRR 4,580 trillion, from the total figure of bank deposits has also decreased from the former 45.8% in the month of Esfand 1394 to 45.5% at present.

 
 

The policy of decreasing banking deposit rates has led to channeling of the accounts from term deposits to short-term deposits. This trend is expected to continue given that banking deposit interest rates decreased in the month of Tir (21 June-21 July). Consequently, channeling of term deposits to short-term deposit accounts will most significantly influence consumption. Also with relative improvements made in the capital market, at least partial movement of liquidity to this market can be anticipated in the medium term. 

Government Nears Unification of FX Rates

The CBI seems to be more determined than ever to unify FX rates as industry leaders have increased their calls for this key reform. Soon after the signing of the Joint Comprehensive Plan of Action, authorities vowed to unify FX rates, but delays have seen the effort put off until the end of this fiscal year due. Lingering financial challenges prevent easy unification of rates. 

In recent weeks, the government has given a green light to commercial banks to trade foreign currencies at market rates. Moreover, exporters can now sell or deposit the currencies they generate as revenue. In the past, there was no such option for exporters to keep their foreign currencies as deposits. Officials believe that the new policy will make the currency market more competitive, since not only bureau de change but banks can affect the pricing process of foreign currencies especially now that exporters are allowed to deposit their revenue in FX denominated accounts.

The CBI decision is expected to be welcomed by market players as it could lead to an increased supply of the dollar while speculative activity would be largely curbed. Additionally, it could induce Iranian households, who are have accumulated dollars as a store of value, to inject cash into the market.

The supply side is expected to be boosted by the inflow of dollar denominated oil revenues in the coming years, as post-sanctions oil sales increase. Meanwhile, investors may increasingly bring capital into the country in the medium term, as the unification of the FX rates would work in their favor. The only reason that could postpone the government’s decision to unify FX rates is the persisting American sanctions that would make it difficult for Iran’s financial sector to freely interact with global banks.

On the flip side, dollar demand has been in decline recently, since the ongoing recession has reduced imports. This might change in a few months when sanctions are fully removed. In that case, demand for the dollar may increase as a result of a possible hike in the imports of intermediate goods. However, those demands will be addressed from internal resources in the medium term – as long as the demand for raw material has not made a jump.

In the short run, supply and demand for the dollar may have little impact on the currency’s value, since petrochemical and auto companies still use subsidized dollars for their import activity. However, in the long run, the supply and demand process – and not emotional factors – will have a major impact on the currency market.  

6th Development Plan Sets Growth Target

The Sixth Development Plan signed by Mohammad Bagher Nobakht, head of the Management and Planning Organization, was submitted to parliament for review. The MPO set the growth rate target at 8% in the strategic plan. The following is a summary of the Plan’s major points:

Tax revenue, government borrowing and expenditure:

  • No organization can be given a tax holiday during the next five years.
  • Value added tax or VAT to be collected from pollutant companies will have to be spent on environmental activity in the same city.
  • Every foreign contract valued at $10 million or more must be signed only though a limited or international tendering process.
  • The government is to pay the National Oil Company’s debt to the banking system though extra revenue it makes from oil exports.
  • The government is to clear its debt to all contractors through the bond market.
  • The government is to spend 2% of oil and gas revenue in areas that produce oil and gas.

The public sector:

  • All state-run organizations will have to make a list of their lands, building and fixed assets in the first three months of the development plan, so that they may obtain permission from the Ministry of Economic Affairs and Finance should they decide to sell such assets.
  • A 15% reduction in the size of the government itself. the plan seeks to reduce its size in a reasonable way such that all parallel organizations must be merged or closed.
  • A hiring freeze in the public sector to take effect for the duration of the plan.
  • State-run organizations will have to spend 2% of their annual budget on R & D activity.
  • Tariffs, subsidies, and trade
  • The administration will be allowed to increase prices of utilities and energy carriers.
  • The plan will give priority to reforms of the agricultural irrigation and cultivation.
  • The government will cease to support the production of any products that violate approved cultivation and irrigation patterns.
  • Iranian ports can be used by international shipping and ports companies under certain rules.

Public services

  • Education
    • The Education Ministry will be allowed to buy the services provided by the private sector.
    • General education will have to be free of charge for all citizens all throughout the five-year plan.
    • Iranian universities will have the permission to open branches in association with well-known foreign universities.
  • Healthcare
    • All citizens are to be provided with healthcare insurance services by the end of the development plan.
  • Culture and the Arts
    • The Ministry of Culture are to ease regulations, paving the way for further production and distribution of cultural and artistic works.
    • The judiciary and law enforcement arms are to provide security for cultural events, and in the event failure, will compensate all possible losses.
    • The plan urges the IRIB to pay a licensing fee for sports broadcasts.
  • Judiciary
    • The judiciary system will be allowed to hire up to 500 new judges.
    • Twenty prisons are set to be immediately relocated to non-urban areas.
    • The government is to plan a reduction to the number of prisoners throughout the sixth five-year development plan by at least 10% per annum.
    • Sums collected from fines are to be deposited in the treasury and not be used by non-state-run organizations.
  • Military
    • Among other top priorities of the sixth development plan is the development of the country’s missile systems.

While the economic growth target of 8% seems to be elusive, the Rouhani administration has proved that it has been able to identify the key pain points of the Iranian economy and what must be done to weather economic reform. This five-year development plan seems to be a compact, strategic plan, at least as it has been sent to parliament. The question is whether parliament will provide the Rouhani cabinet the mandate to execute the plan or whether political considerations will come into play. 

Financial Markets E1:R5

Financial Markets E1:R5

Financial Markets E1:R4

Financial Markets E1:R4