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June 2021, No. 97


Election

Stability, Reliability & Security


Politicians who pursue the so-called liquidity to production policy, given the small size and special function of banks reserves with the Central Bank of Iran (CBI) and other assets of the banking system, should generally seek to remove lending from the banking sector. They now have bank credit and transfer it to sectors they believe are more productive. This group of politicians seems to believe that the credit granted by the banking system in its current form does not have the desired productive capacity and job creation, and therefore they want to change it or, in their own words, are in favor of direct liquidity to production. These politicians claim that the banking system allocates more deposits to unproductive affairs (known as brokerage) in order to make higher profits; While it should direct deposit resources more to the productive sectors.

However, such a claim is untrue and a large part of the credit granted by banks in industry, mining, agriculture, electricity, water, gas, transportation and road construction, infrastructure and municipal services, housing, small and medium-sized businesses, the purchase of durable goods by the people, technical and engineering services, working capital of production sectors and the like are invested, but if we also assume such a claim is correct, a simple answer in this regard is that according to the law, the interest-free banking as a depositors client is obliged to allocate the best investment options; Therefore, banks are required to use deposits in the most profitable options.

But a deeper and more serious answer in this regard is that the proponents of the policy of directing bank deposits to production, known as directing liquidity to production, implicitly pursue such a policy because they think that there is a great demand for investment in production sectors but the sources of capital and, the so-called liquidity do not reach the investors of those sectors.

There is ample evidence to suggest the opposite. In other words, there is no serious shortage in the Iranian economy in the field of bank deposits and consequently capital resources. In addition, due to the existence of foreign exchange earnings from the sale of oil and gas, compared to other countries, Iran in terms of access to capital resources is in a better condition. Nonetheless, demand for productive investments (not demand for resources) is very low. One of the important signs of this is the trend of gross domestic fixed capital formation during the last 60 years in the Iranian economy.

Investing in productive activities is long-term, so it requires stability, reliability and security in the macroeconomic and business environments. But in recent decades, the macroeconomic and business environments in Iran have faced chronic instability, uncertainty and insecurity. In such cases, the owners of the savings, instead of investing their resources in productive activities, enter the foreign exchange, coin, real estate, car or real and financial assets markets, or take their money out of the country to get rid of their savings from uncertainty. Keep in mind that this phenomenon manifests itself in the sharp decline in per capita gross fixed capital formation during this period. In other words, in the Iranian economy, the absorption of savings into unproductive activities is not merely a productive activity due to trade, but is the result of chronic instability, uncertainty and insecurity in the macroeconomic and business environments. Business, or the phenomenon that some refer to as speculation and the like, is itself the result of instability, uncertainty, and insecurity in the macroeconomic and business environments, not the cause or the diversion of resources from productive activities.

Therefore, the policy of directing bank deposits to production, known as directing liquidity to production, will not be effective until the great barrier of chronic instability, uncertainty and insecurity in the macroeconomic and business environments is removed from production. It may complicate the problem and lead to a further waste of resources, as it will lead businesses to resort to fictitious investments in productive sectors as a bait to trap allocated resources and as a platform to transfer those resources to unproductive activities. It is even safe to say that the failure of many economic policies adopted in recent decades in Iran in relation to production, including privatization, is rooted in the same chronic instability, uncertainty and insecurity in the macroeconomic and business environments.

Therefore, a good president for the current situation in Iran is someone who can minimize the chronic instability, uncertainty and insecurity in the macroeconomic and business environments in the country, and thus increase the real and not rent-seeking and cunning desire to invest in productive activities. In this way, many of the promises and slogans that politicians make during or outside the elections will be irrelevant, and the ground will be prepared for proper policy-making and the governments focus on matters that are its main task.

 

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  June 2021
No. 97