Iran Cuts Farm Lending Rate in Populist 'Social Justice' Move

Gareth Smyth in Tehran, The Financial Times:

Iran's state-owned Keshavarzi agriculture bank yesterday reduced its lending rate to 9 per cent, well below the rate of inflation. The reduction from 13.5 per cent came days after the managing directors of seven state-owned banks, including Keshavarzi, were replaced by the new government of President Mahmoud Ahmadi-Nejad.

The lending rate cut signalled that Mr Ahmadi-Nejad was pressing ahead with his populist agenda of "social justice". READ MORE

Sadeq Khalilian, a deputy agriculture minister, told the official Iranian news agency the ministry would "mix" part of its own resources with the bank's assets to boost lending to farming five- to tenfold.

Mr Ahmadi-Nejad has argued lending rates should be lower than the unified 16 per cent rate - with the exception of agriculture - set in July by the Money and Credit Council, which is headed by the central bank governor.

Iran's lending rates have been high, reflecting inflation put officially by the central bank at 15 per cent for the Iranian year ended March 2005 and at 13.5 per cent for the first six months of this year.

Analysts and bankers warn a sharp reduction in the unified lending rate would need a similar lowering of deposit rates to keep banks in the black, but point out this would wipe out real rates of return.

Karafarin, the private bank, noted in a recent survey that the rate of growth in deposits was already showing signs of slowing by the end of June.

While there are no official figures, few analysts doubt there has been significant capital flight since Mr Ahmadi-Nejad's June election win.

The Tehran stock exchange general index this month fell below 10,000, down from about 12,500 at election time.

Bankers fear Mr Ahmadi-Nejad will challenge plans for banking privatisation and granting greater independence to the central bank. These policies were followed by the previous government of Mohammad Khatami and endorsed by Iran's 2005-2010 five-year plan.

There is also concern over inflationary pressure from schemes such as Mr Ahmadi-Nejad's Compassion Fund, aimed at helping young people find housing, jobs and a marriage partner.

Details of the fund are being debated in parliament, but the president said it should absorb 30 per cent of surplus oil revenues, which are ring-fenced in the Oil Stabilisation Fund, set up under Mr Khatami for infrastructural investment and private-sector developmental loans.