The government believes that higher bank profit rates and costly services are the main reasons why financial resources do not to go into the production sector or activities that create new job opportunities.

The government seems to be convinced that higher bank profit rates are the main reason behind the shrinking number of production activities across the nation. However, barriers in the way of investments in the production sector are a different issue altogether and have nothing to do with the bank profit rates.
Therefore, the recent decision made by the Money and Credit Council to reduce profit rates in the private and state-run banks should be analyzed with greater scrutiny.
According to Karafarin magazine, the decision made by the council could have a lasting impact on the economic structure of the country, but it is not based on scientific or expert opinion.
Money is a commodity and just like other goods has a specific value or price, which is the interest rate. The price of any commodity is determined in the process of supply and demand. However, since the Iranian economy is not based on supply and demand mechanism, the value (price) of money, just like other commodities, is determined by government intervention.
The government believes that higher bank profit rates and costly services are the main reasons why financial resources do not to go into the production sector or activities that create new job opportunities. Therefore, the Money and Credit Council made the decision to reduce bank profits rates with the hope that this would lead to increased investments and more new jobs.

Investment Barriers
As mentioned earlier, investment barriers in the production sector indeed have nothing to do with the profit rate. Since the profit rate on savings account is lower than the rate of inflation, the council decision will lead to a decline in savings in the society Ð just as it happened when the government announced last year that it was unable to sell 64 percent of its participation bonds.
For the record, the government issued participation bonds in a bid to attract investments for major national projects, to make up for its budget deficit and regulate the monetary market and control liquidity. Issuance of participation bonds was seen as a suitable mechanism for slowing down liquidity growth and taming inflation.

Participation Bonds
The government has two ways to meet its growing financial needs; either by issuing participation bonds or selling hard currency. People buy participation bonds to contribute to national development projects. In other words, the government sells these bonds to collect public savings as part of its efforts to reduce liquidity and implement large-scale schemes.
But on the other hand, since the general public does not see the production sector as suitable for investments, people as a matter of habit withdraw their money from banks and invest it in non-productive sectors such as the black market and illegal trade, or with middlemen. This in return exacerbates inflationary pressures on the society.
The other side of the coin is to reduce rates on banking facilities, which is equal for all sectors and is highly profitable, particularly for domestic and foreign trade. Perhaps this is why most of the banking facilities have a tendency to get diverted to these two particular sectors Ð instead of the production sector. Therefore, the production sector does not benefit from policies such as reducing bank profit rates.
In other parts of the globe it is the central banks that determine the profit rate. In doing so, they are independent and take no orders from the government or parliament. So there are very few banks in the world that are still controlled and run by the government. In these countries there is a direct connection between inflation and profit rates.
However, in Iran and in light of the recent decision of the Money and Credit Council, such a connection was severed without further study or research. In other words, account holders in Iranian banks will not only earn no profit on their hard-earned cash deposited into savings accounts, but will also see part of the value of their precious savings evaporate in the coming months for good.

IranÕs private sector has a long way to go.

In economics, capital generally refers to financial wealth, especially the money that is used to start or maintain a business.
The word “capital“ is short-hand for “real capital“ or “capital goods“ or means of production.
Investment or capital accumulation in classical economic theory is the act of producing increased capital. In order to invest, goods must be produced that are not to be immediately consumed, but instead used to manufacture other goods as a means of production.
Investment is closely related to savings, though it is not the same.
In Iran, poor investment security and growing capital flight has constantly been a major predicament. Some $200 billion has exited the country during the past few years when political developments and rapidly-changing economic laws served a blow to investment security in the resource-rich country.

Investment Protection
The Fourth Five-Year Economic Development Plan (2005-2010) has committed the Ministry of Economic Affairs and Finance and the Management and Planning Organization (MPO) to draw a joint bill aimed at protecting investments and individual property rights. The bill also envisages compensation for possible financial losses incurred by instability in economic laws.
But the deadline for drawing up such a vital scheme ran out in March with little progress.
According to the Economic News Agency, a proper definition of individual property rights is still lacking due to unstable economic laws and growing rent-seeking activities.
Investors naturally want their ownership rights to be protected.
Needless to say, the very first step in efforts to protect investors’ rights is to create the necessary legal grounds in accordance with economic wisdom.
But does the Fourth Plan offer these requirements?
Without doubt, the projected rapid economic growth will depend much on investment security.
However, investment security remains missing due to the policy-makers’ inability to make sustainable decisions that do not change with a change in the government.

Private Sector
One of the most important obstacles to creating legal grounds for investments and economic growth is the lack of an institutionalized private sector economy.
If all the decisions made by the private sector need to be channeled through major state decision-making organizations, including the MPO and the Ministry of Economic Affairs and Finance, it certainly means that private sector participation in the economy will remain scarce.
More importantly, the boundaries of state interference in private sector affairs have not yet been drawn, tarnishing the image of the national economy both inside and outside the country.
Although remarks by Judiciary Chief Ayatollah Seyyed Mahmoud Hashemi Shahroudi, who said last month that the government must trust and respect the private sector, warmed the hearts of businesses and industrialists, a long way still remains between what the officialdom says and does.
At a time when private sector hopes that investment security will improve in the country following the public announcement by the top judge, experts say governments in powerful countries stay away from economic activities and leave the field open for the private sector, which is indeed the engine of growth.
In underdeveloped countries, governments take charge of almost all economic affairs and there is little scope for private enterprise or initiative.

Joint Ventures
For foreign investors operating in Iran, the issue of investment security has long been a major concern. On the other hand, they have always complained about the contract modes accepted and used by the oil-rich country.
Some experts and lawmakers believe that joint investment and an amended version of buyback should replace the present contract modes.
Kamal Daneshyar, who heads the Majlis Energy Commission, is of the opinion that joint investment will require foreign investors to earn profit on the basis of investment. This would be different from earlier contracts in which investors benefited from both participation in production and the profits.
“The new method was proposed by a number of experts who worked under the supervision of the Presidential Office and is very comprehensive and interesting,“ he said.
The new contract mode is expected to come into effect soon. However, it has been announced that the previous agreements will remain valid.
Daneshyar said no buyback deal will be annulled in the process of reviewing the terms and conditions of long-term foreign contracts, stressing that some of the deals will only undergo certain modifications.
He said it will be too costly for the national economy to rescind foreign contracts, adding, however, that parliament is determined to study all the deals.
He stressed that no contract will be suspended, adding that the government will only try not to repeat past mistakes in concluding new foreign contracts.