Iran Central Banker says he’s undoing Ahmadinejad policy

Bloomberg

Iran’s central bank Governor Valiollah Seif said he’s reversing policies introduced under former President Mahmoud Ahmadinejad that led to a surge in money supply, to curb one of the world’s highest inflation rates.

Seif, in his first interview with an international news organization since taking office in August, said President Hassan Rouhani’s cabinet has agreed to separate monetary and fiscal policies, giving the central bank more independence. That will allow it to focus on “controlling liquidity and bringing down inflation.”

Rouhani inherited an economy in recession as international sanctions against Iran’s nuclear program weakened its currency and accelerated inflation to about 40 percent in September.

While the central bank will struggle to alleviate the effects of sanctions, analysts at Eurasia Group and the Economist Intelligent Unit have said Seif can resist government policies to provide cheap credit, a policy introduced under Ahmadinejad, which weakened the nation’s banks.

“Under the previous administration, the allocation of credit to many sectors was not based on the analysis of experts,” Seif said yesterday in Washington, where he’s attending the annual meetings of the International Monetary Fund and the World Bank. “There was a housing project for the poor, and a lot of resources were allocated to that, about 40 percent of the liquidity volume.”
Nuclear Weapons

Rouhani came to power in a surprise first-round victory after he pledged to seek a negotiated end to the standoff with Western powers, which accuse the Islamic republic of developing nuclear weapons. Iran says its program is peaceful.

The sanctions will reduce Iran’s foreign-exchange reserves to about $70 billion by the end of this year, according to a study by the research firm Roubini Global Economics and Mark Dubowitz, president of the Foundation for Defense of Democracies.

Of the total, Iran probably only has immediate access to $20 billion, covering less than three months of imports, the study found. About $50 billion is tied up in countries that buy Iranian oil, such as China and Turkey, and can only be spent there under the sanctions regime. The Iranian central bank said in July it had more than $100 billion in reserves. Seif declined to disclose the value of the bank’s holdings.
Facing Stagflation

The rial lost more than half its dollar value in the 12 months before Rouhani’s election in June, though it has since rebounded about 20 percent. “The foreign-exchange market is relatively stable,” Seif said.

The central bank’s main priority is to reduce inflation and money supply, even as the economy is struggling with a recession, Seif said. “We are now facing a stagflation,” he said. “Expansionary monetary and fiscal policies will not help the growth.”

To ease the effect of tighter monetary policy on growth prospects, the central bank is looking “to allocating resources to productive activities” and working to improve the business environment, he said.

The central bank estimates that Iran’s economic growth will be flat in the Persian year that ends in March, compared with a contraction of 5.4 percent in the previous 12 months, he said. The economy may grow 3 percent in the year starting March 2014, he said.