Economy in Iran is worsening

The Institute of International Finance, the IIF, has said that the unstable public finances of Iran are resulting in the deterioration of asset quality in banks. It also indicated that it is causing capital erosion. Garbis Iradian, the IIF’s Chief Economist for the Middle East and Africa region, said: “Continued public payment arrears, connected lending, and poor management of the banking system have weakened the balance sheets of Iran’s banks, underscoring the need for large capital injections, management restructuring, and governance improvements.”

There has been a significant increase in non-performing loans (NPLs) in the past few years and this is because of both sanctions and poor management. Data shows that 13 per cent of loans from last year were NPLs, with the GCC average being 3 per cent. Furthermore, the capital adequacy ratio is following a downward pattern and has gone from 8.5 per cent to 6 per cent since 2012.

Mr. Iradian has indicated that profitability is constrained because of the higher cost of funds. “With local banks confronting limited liquidity and maintaining a cautious lending stance, most private businesses still face difficulties in accessing or servicing loans.”

Iran’s debt amounts to $340 billion as of last year. This is an increase of more than a quarter compared to 2016. This will most likely result in huge write-offs being issued.

Government finances are getting low and the Iranian banks are finding this difficult to deal with. If the Iran nuclear agreement collapses, this will certainly cause a slowdown.

Right now, international banks are hesitant to deal with Iranian banks and businesses, not just because of the country’s economic situation but also because of US dollar clearing restrictions that are still in place. This is a major challenge for Iran while it is trying to establish relationships with international banks.

Sanctions imposed on Iran are also a great impediment to Iran. Even if financial transactions are carried out, they could potentially be subject to these sanctions.

Another issue effecting the economic situation of Iran is the escalating tension between Iran and other regional players. For example, the relations between Iran and Saudi Arabia remain tense and have worsened over the past few years.
The 2015 Iran nuclear deal, agreed between Iran, the Obama administration and other world powers, is facing great uncertainty at the minute. The Forex markets have reacted to this and in response to potential and likely new sanctions by the United States, the spread between the black market and official exchange rates has got much wider. On 15th January, the black market / parallel exchange rate was 43,950 rials/dollar and the official one was 36,511 Iranian rials/dollar.

The country is rocked with instability at the minute following recent protests in which the people made it clear that they will not be accepting that the Iranian regime puts its own aims for regional hegemony before the basic needs of the people. They know that their only hope of change in the country is via regime change.

Source » ncr-iran

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