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Iran's central bank governor firm on charting new course
When Tahmasb Mazaheri took over as governor of Iran's central bank in September, he was described as President Mahmoud AhmadiNejad's man, brought in to support populist policies that his predecessor had resisted.
- By Najmeh Bozorgmehr And Roula Khalaf, Financial Times
- Published: 01:09 March 8, 2008
When Tahmasb Mazaheri took over as governor of Iran's central bank in September, he was described as President Mahmoud AhmadiNejad's man, brought in to support populist policies that his predecessor had resisted.
Since then, however, Mr Mazaheri has been seeking to demonstrate his independence and to show that he is bent on following realistic economic strategies.
Already facing intense financial pressure from abroad as a result of US and United Nations sanctions, Mazaheri has been grappling with rising inflation, which has caused popular anger and is set to be a big issue in the parliamentary elections on March 14.
In an interview in the blue-glass high-rise central bank building in Tehran, Mazaheri said that lowering interest rates - the president last year ordered state-owned banks to reduce rates from 14 per cent to 12 per cent, in the name of social justice - was a crucial step for the Iranian economy. But it also had the impact of contributing to the rise in inflation, which peaked at 17.8 per cent in February.
Mazaheri said he was determined to bring down inflation and has been taking measures to curb central bank credits to the banking sector.
Review
Although he would not be drawn on whether the interest rate reduction might be reversed, he said the central bank was now undertaking a review of monetary policy for the next Iranian year, which starts on March 20.
The central bank's challenges, however, have been complicated by the international row over fears that Iran may be seeking to develop a nuclear weapons programme.
A third round of UN sanctions, approved by the Security Council on Monday, called upon member states to exercise vigilance in dealing with several top Iranian banks. Henry
Paulson, US Treasury secretary, said yesterday that the Treasury was pressuring foreign banks dealing with Tehran to respect the sanctions. More harmful to Iran's economy, however, have been the unilateral US financial sanctions, which have prompted a growing number of banks in Europe and the Middle East to end their dealings with Iran.
Businessmen say that opening letters of credit in dollars has stopped, and that letters of credit in euros are also down, forcing companies to turn to smaller banks and middlemen, many of them in the Arab world, willing to secure financing on their behalf.
Mazaheri acknowledges that the sanctions have produced some extra charges and problems. But he insists US "bullying" will not isolate Iran.
"The world is too big and Iran is a very big country," he says. "We have intimate friends who help us when we are in need."
Shunning the dollar
To try to protect itself, Iran has been demanding payment for almost all exports in currencies other than the dollar, and central bank foreign exchange reserves have now been diversified away from the US currency.
"Our banks naturally stopped dealing with the dollar when the US stopped clearing transactions," said the central bank governor.
He played down reports that the US might take steps to impose penalties on the central bank itself, on suspicion that it helps banks circumvent sanctions. He said his institution fully abided by and adhered to international regulations and did the job of a regulator, which includes safeguarding depositors' funds when banks are in trouble.
Despite the pressures from all sides, Mazaheri is not abandoning the project he appears most attached to - modernisation of the banking system.
Unlike much of the Middle East, where banks have been increasingly turning to interest-free financial instruments, considering them more compliant with Islam, Mazaheri wants the Iranian banking system - which now uses a mixture of interest-based and Islamic profit sharing accounts - to deal freely in interest and take advantage of a wide variety of modern financial instruments.
This is not a move away from Islamic banking, he says, arguing that Sharia-based finance bans "usury" rather than interest. "We should avoid usury but welcome interest," he says.
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