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BID TO BOOST CREDIT

Iran's economy has stagnated as consumers wait
for sanctions to be lifted and international brands
to arrive.

Iran proposes stimulus to fend off recession

DUBAI, October 18, 2015

Iran's government announced proposals on Saturday to cut interest rates and encourage banks to lend, state television reported, in an effort to boost a stagnant economy after two years of tight monetary policy as inflation slows.

Iran's economy has stagnated since it reached a nuclear deal with world powers in July, as consumers wait for sanctions to be lifted and international brands to arrive. Officials have warned that the economy could experience zero growth or even enter recession this year.

The new package envisages a cut in the central bank's interest rate, an increase in bank facilities to stimulate public demand and a lowering of inter-bank lending rates and the legal reserve requirement, according to a summary shown on state television.

President Hassan Rouhani's government inherited inflation rates of above 40 per cent when it came to power in 2013 and immediately set about tightening fiscal and monetary policy to bring it under control.

Inflation has since fallen to below 15 per cent, giving the government some leeway to loosen policy to help the economy.

Economists said the new proposals might not be sufficient to revive an economy hurt by years of international economic sanctions imposed over Tehran's nuclear programme and by reckless state spending under the previous government of president Mahmoud Ahmedinejad.

"The government is trying to use the banking sector to release some sort of credit into the economy, and through that encourage private sector borrowing for projects," said Mehrdad Emadi, an economist at the Betamatrix consultancy in London.

"(It) doesn't address the fundamental factors that have depressed the economy... It is contingent on the private sector reacting positively to a fall in the cost of borrowing."

The new proposals include a cut in banks' legal reserve requirements to 10 per cent from 13 per cent and a lowering of the inter-bank interest rate to 26 per cent from 29 per cent.

The state television report did not specify how much the central bank's interest rate would be lowered, nor give details about increased bank facilities.

The government will also inject IR75 trillion ($2.5 billion at official rates) into a "reconstruction budget", state television said without providing details.

Iran's annual budget is around IR8,400 trillion ($280 billion). – Reuters




Tags: Central Bank | Iran | Sanctions | Interest rates | Stimulus |

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