Can Iranian Banks Play a Role in Economic Revival?

One of the conditions for accelerating Iran's economic revival is massive investment, which is contingent upon the activation of banks and the expansion of credit operations. However, in the current situation, large overdue debts and high interest rates, symbolizing the high risk of Iran's economy, have led banks to adopt a contractionary policy, preventing them from playing a significant role in injecting liquidity into the economy. Meanwhile, the government's substantial debt to banks is one of the reasons for banking arrears and the contractionary policies of banks. Although the head of the Central Bank requested banks and credit institutions to provide loans to small and medium enterprises for job creation, increased production, and economic revival at the beginning of this year, the problem remains more or less unresolved. As a result, economic enterprises struggling with liquidity crises face many obstacles in accessing bank loans. According to IRNA, Ali Tayebnia stated on Tuesday, October 27, during a meeting with economic activists in Isfahan's Chamber of Commerce that banks are owed about 100 trillion tomans by the government. This is the latest estimate of the government's debt to the banking system, and it may increase in the future. Valiollah Seif, the head of the Central Bank of Iran, also recently stated: 'On one hand, we have banks that are in a credit crunch, and on the other hand, there are industrial units that need working capital.' This official noted that '45% of the banking system's resources in Iran are locked without yield, adding that these resources are frozen assets and must be considered as all bank resources incur costs.' The Central Bank's reference points to one of the critical bottlenecks for exiting recession. As government and private sector debts to the banking system increase, banks adopt contractionary policies, resulting in the banking system's resources being locked, and with the rise of these debts, their financial risks increase. Given these overdue and massive debts, a significant portion of the country's liquidity is locked, and the banking system cannot play a role in the process of exiting recession. A large part of the current government's massive debts is a legacy of the previous administration and has now become an obstacle to economic revival and employment. The government can pay its debts to banks in two ways: one is issuing bonds, and the second is utilizing oil revenues. The second option is not very likely given the current recession in the oil market. The outlook for the oil market next year is also not very bright. Therefore, the government's only option is to issue bonds. There is consensus that the country's banking and financial system's inability and capital waste within frameworks such as cash subsidy payments and rent-based budgets, which are based on distributing money among power institutions, have prevented the necessary credits for investment and facilitating economic growth. However, this is not the only problem, as the current government is also unable to change the budgeting and financial system and continues the rent-seeking of power institutions, thereby contributing to the continuation of the previous situation. The importance of repaying banks' debts by the government is primarily economic and then managerial, and it is certainly very positive. If the government can repay its debts to these banks, they can, in turn, play a role in the economic growth process by offering loans to the private sector, especially small and medium enterprises. Additionally, the government's success in repaying debts indicates its effectiveness in solving economic problems and enhances its credibility. The government, aware of the limitations of Iran's banking system in financing, has rightly identified that foreign investment could eliminate at least one of the significant obstacles to exiting recession and has announced that there are no barriers or restrictions on foreign investment. However, dual governance and the lack of a clear strategy in foreign policy prevent foreign capital from quickly entering Iran. Naturally, despite international investors' visits to Iran and their interest, a stable political environment is not observed, and capital has not entered Iran, making the government's efforts to solve the investment attraction problem ineffective. Therefore, in such circumstances, the government must first undertake a thorough cleaning and transparency in the budget. There is agreement that many rent-seeking institutions feed off the government's budget without being transparent, accountable, or yielding positive returns. This depletion of resources is one of the reasons for the budget deficit, the government's massive debts to banks and contractors, and ultimately the inefficiency of resources and part of the recession. Experience shows that without such action, even if the government obtains substantial financial resources, a significant portion of it will be wasted, and it will not achieve much success in solving problems. The budget deficit in the previous government led to an increase in the government's debt to the banking system, which has now become an obstacle to accelerating the exit process. The main reasons for this budget deficit, namely populism and paying bribes and rents to power institutions, have continued as two fundamental pillars of financial resource waste and consequently the budget deficit in the current government. However, the problems of Iran's banking system are not limited to the government's overdue debts to banks. Due to the extensive activities of the informal financial and credit sector, which is mainly under the control of military and security institutions and influential figures in the government, and also the widespread corruption in Iran's banking system, it is experiencing difficult conditions.