Iran’s banking crisis to worsen

24 June, 2019 12:00 AM printer

NEW YORK: US sanctions on Iran and their growing impact on the local economy are aggravating the country's banking crisis, forcing Iran to choose between deep reforms or preserving short-term financial stability of its liquidity-deficient financial institutions.

Significant liquidity and solvency problems are posing a "growing risk" to Iran's financial stability, according to a policy brief by the Peterson Institute for International Economics (PIIE). The banking system's problems also stem from the heavy-handed role of the state, banks' often "corrupt" relations with some semi-official corporations and the Central Bank of Iran's ineffectiveness in regulating lenders, it added, report agencies.

"A substantial portion of banks' assets is impaired and their capital positions are very weak," Adnan Mazarei, non-resident senior fellow at PIIE and former deputy-director at the International Monetary Fund, said.

The US administration in November last year moved to reimpose sanctions on Tehran, leading to significant inflation and pressure on the country's economy as crude exports, the main source of income for Iran, fell sharply. Iranian banks, some of the state-related entities and the government officials, were also subject to US sanctions.

Earlier in 2018, the US administration announced unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA), signed by world powers to restrict Iran's nuclear programme in exchange for economic relief. The US move led to pressures on the Iranian rial even prior to the sanctions taking effect. Iran's economy contracted by 3.9 per cent at the end of last year and the IMF expects a further 6 per cent contraction in its gross domestic product in 2019.

Mr Mazarei said, Iran's "precarious" banking system is expected to increase the economy's vulnerability to external factors.

"A worsening of the banking crisis can probably be avoided in the short run, but banking distress will continue to mount, making the system more vulnerable to an external shock - especially if Iran’s oil exports are completely halted or if there is a major military confrontation with the United States - which could lead to much higher inflation and further financial difficulties," he explained.