Monetary policy is one of the tools that governments use to influence the economy.
Using their monetary authority to control the supply and availability of money, governments attempt to influence the overall level of economic activity in line with their political objectives. Usually the goal is “macroeconomic stability“--low unemployment, low inflation, economic growth, and a balance of external payments.
Monetary policy consists of actions of the central bank that control the supply of money. The primary goal of monetary policy is to maintain the value of the currency, i.e. to prevent inflation.
According to Persian daily Etemad, central banks of the world simultaneously attempt to promote rapid economic growth, and prevent inflation.
The problem is that rapid economic growth requires a high rate of investment, which in turn requires low interest rates and easy lending policies so that businesses can readily and cheaply borrow money for investment. On the other hand, restraining inflation requires slow growth in the supply of money, which in turn requires high interest rates and control over money, so that it is difficult and expensive for businesses to borrow. Clearly it is impossible to have high and low interest rates at the same time. Banks cannot pursue tight and easy money policies simultaneously. Therefore, central banks are constantly balancing the need for rapid growth against the requirement for restraining inflation.
Because of the nature of democratic electoral processes, politicians find it difficult to exercise fiscal restraint. Voters tend to elect politicians who promise lower taxes and increase benefits. Chronic lack of fiscal discipline shifts the primary burden for preventing inflation upon monetary policy. Therefore, central banks around the world most often find themselves in the role of fighting inflation. They are compelled to impose restrictive monetary policies that cause slow economic growth.

Banks will have an open hand to be more selective and choose between projects that are economically viable.

Prescribing a ’tight’ monetary policy as medicine for inflation is counter-productive in the long term. Restrictive policies reduce borrowing and slow growth in the money supply. This creates unemployment, dampens consumer demand, and reduces inflationary pressures -- but only short term. In the long run, monetary restraint actually increases inflation, because it slows investment in the technologies that generate productivity growth.
However, rapid economic growth based on productivity growth is not inflationary. Quite the opposite--economic growth based on productivity growth is deflationary. Productivity growth enables more and better goods and services to be produced at lower cost. Output can grow and profits rise for producers, while prices fall for consumers. Rising profits can be converted into more jobs, higher wages, and/or bigger dividends, while simultaneously falling prices make consumer incomes more valuable. Economic growth based on productivity growth can be very rapid, without producing any inflationary pressures at all.

Fixed
In Iran, the Central Bank of Iran is the highest authority in charge of monetary policies.
The Monetary and Credit Council has approved a plan, initially endorsed by the CBI, on unification of bank lending rates, setting it at a fixed 16 percent.
Ali Qanbari, a member of the council, says the objective is to give economic sections equal opportunities to prosper.
“The fourth five-year economic development plan (which was due to be enforced as of March 2005), is tough on economic monopoly and discrimination and the council’s ratification is to make sure that the plan’s articles are implemented thoroughly,“ he says, adding that making the economy transparent and eliminating rent-seeking and corrupt practices will ultimately spur economic growth.
Specifications of the plan, he notes, is such so as to incur least damages on the macro economy.
According to the official, the government will pay the difference to those sectors which until now were receiving loans at lower rates. “The payment is most likely to be in the form of subsidies.“
Qanbari says public banks will be notified of the executive by-law as soon as it is approved by the Central Bank.
“Private banking should also eventually be covered by the plan otherwise it will cause serious problems for the economy.“

Primary goal of monetary policy is to maintain the value of the currency to prevent inflation.

Concerns
A Commerce Ministry official says the proposed single bank profit rate would put the export sector under great strain.
Deputy Commerce Minister for international trade, Mojtaba Khosrowtaj, says the Monetary and Credit Council had previously set the rate at 13 percent for the export sector.
“The government has announced it has set aside up to $500 million to give as loans to the export sector this year from the Foreign Exchange Reserve Fund,“ he says, expressing concern over harmful effects of the new policy on the sector.
Khowrotaj, however, concedes that the initiative would bring greater financial discipline in the banking system and says to make it a success the government and parliament must work hand in hand to reduce its possible harmful effects on certain sectors.
Parliament says the plan is a bid to attract more public savings and offer extensive facilities to economic sectors.

Restructuring
Managing Director of Bank-e Maskan (Housing Bank) says the plan manifests government’s intention to restructure the banking system and boost its efficiency, though he believes it would ultimately prove a failure.
“The lending rate for the housing sector would fall by 2 percent once the plan is enforced,“ he said, adding that the plan allows banks to grant incentives to projects that have economic justification.
“Banks will have an open hand to be more selective and choose between projects that are economically viable.“

Doomed?
Managing Director of Non-Metal Industries Office of the Ministry of Industries and Mines Hossein Mehrizi says the single rate is likely to cause an increase in the sector’s share of banking facilities by 15 percent.
Hailing the plan which Mehrizi says will do away with discriminatory banking policies the official notes the rate is still higher compared to many countries.
“Presently, production units have to undergo stringent procedures to access banking facilities and the move could be a step forward in easing rigid regulations.“
Head of the Agriculture Engineering Council Abdolghafar Shoja is of the view that the government needs to take precautionary measures to avert damages to the farming sector once the single bank rate policy becomes implemented.
“The state should set aside money for possible payments to sectors likely to suffer financially from the plan,“ he observes.
But a banking expert says the plan is definitely doomed to fail.
Mohammad-Hassan Etezadi believes banking rates should fluctuate in line with inflation, which at present stands as high as 25 percent.
“Banking rates are determined by considering factors such as the actual inflation rate, forex revenues, and other economic variables. The supply and demand market is also taken into effect.“
An expert on exports says services and trade sectors would benefit the most from the fixed rate policy.
Ahmad Hosseini says he is against a fixed banking rate because it stands contradictory to the council’s claim that it supports liberalization of the economy.
He says the council should have instead set the maximum rate at 16 percent and allowed banks to render credits at lower rates to financially weak sectors.

A controlled economy exists only in illusion. No economic system in the world has the capacity to control prices, supply and demand by means of state control.
However, a controlled economy has always been an agenda for many politicians. Many have employed it “for the sake of the general public and the society“ without knowing that the outcome would be adverse.
Politicians often make the mistake of controlling the economy without understanding what aspects of the economy would require their intervention. In fact, they deviate from the main purpose and when all fails, tend to blame the executive body, reported Ravand Eqtesadi.
The key issue in a controlled economy is confusing result with reason. When prices are up, politicians in charge of a controlled economy order reduction of prices without knowing this could discourage producers and bring down product quality. Price reduction needs comprehensive and specific economic policies to help shape a framework for competitive production and distribution channels.
Controlled prices make a mess of relative prices as well as distribution and demand. They also lead to corruption and injustice. Unregulated interference in prices is dangerous in all markets Ðmore so in the money and investment markets. The value of money is the profit rates of banking investment which has to be shared by the investors. Any sudden change in bank profit rates could incur huge losses.
In traditional banking system, bank profit rates depend on inflation. In fact, when inflation rate is high, bank profit rates are also high. Bank profit rates are kept high in an attempt to control inflation rates. In the Islamic banking system, investment rates depend on the amount of investment return. Bank acts as a middleman and takes a share of profits. Investment rate is also shared as per the contract between the investor and the bank.
During the imposed Iraqi war (1980-88) on Iran, the economy used to be controlled and run by government directives. For instance, the emphasis was always on low bank rates, but the result was a public rush for bank loans and other facilities. Yet back then, only those with good connections could get such facilities, thus causing injustice towards the ordinary people. The adverse affect of this practice was the huge financial losses incurred by banks in 1988 Ð some of them went bankrupt and others suffered immensely.
In those days, the emphasis was also on cheap prices of goods and services. Low product prices paved way for increase in demand. But as the supply was inadequate, product rationing or coupons were introduced. Another adverse effect was dual prices for goods and services. The supply and demand curve was also in a “state of shock“ with huge disruptions in the distribution channels thus negatively impacting economic growth rate.
In the First Development Plan the campaign to correct the economic deviations helped to normalize prices to some extent. Plus, there were signs of economic recovery. Inflation rates dropped down to 19 percent from 28 percent. The level of product supply and services went up followed by a boost in production and economic growth of 7.3 percent.
However, in the Second Development Plan, those in favor of a controlled economy forced the government to follow their “controlling“ schemes. A massive army was formed to control prices of goods and services, again with adverse results. The controlled economy increased government expenses, budget deficit and inflation rates - plus a 5-percent drop in economic growth.
The Third Development Plan saw some signs of relief and a 6.5-percent growth. The country is now on track, thanks to the efficient policies devised and implemented by the officials, the government and of course, the private sector. The best thing to do now is to stay on course.