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Iran 1992 Financial Crisis

Iran 1992 Financial Crisis. Angad Mahal, Jingwei Ma, Michael Jackson, Michael Huynh. Background of Iran and the Central Bank.

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Iran 1992 Financial Crisis

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  1. Iran 1992 Financial Crisis Angad Mahal, Jingwei Ma, Michael Jackson, Michael Huynh

  2. Background of Iran and the Central Bank • Type of government – Iran has a democratic-republic government using syncretic politics (different from the typical left/right wing spectrum, there is more of a focus on using elements of both wings). • Who controls the government? There is an elected President, an assembly of experts, local councils, and a Supreme Leader (elected by assembly of experts). Supreme leader is the most powerful position. • “Central Bank of the Islamic Republic of Iran”. At the time of the crisis it was run by Deputy Governor Mohammad Hossein Adeli

  3. Background of Iran and Central Bank (continued) Power and responsibilities of the Central Bank: • Maintaining the value of national currency • Maintaining the equilibrium in the balance of payments • Facilitating trade-related transactions • Improving the growth potential of the country • Issuance of notes and coins • Supervision of banks and credit institutions • Formulation and regulation of foreign exchange policies and transactions • Regulation on gold transactions • Formulation and regulation on transactions and inflow/outflow of Domestic currency(CBI)

  4. Central Bank (continued) Who makes the policies within the bank? • 5 major components of the bank I- The General Assembly; II- The Monetary and Credit Council; III- The Executive Board; IV- The Note Reserve Control Board; V- The Supervisory Board.

  5. Background of Iran and the Central Bank(continued) Difference from other banking systems around the world: • Iran uses Islamic banking which is “Banking by the way of the Qu’ran”. One of the interesting aspects of this is that there is no interest. Instead of interest Iran uses flat rate service charges and outlined/predetermined rates of return when a consumer uses banking services. • Inflation During The Time Period: The average expected rate of return on the above loans was around 14% during this era, however the inflation rates were much higher, averaging around 20%, borrowers on average were benefitting 6% from bank loans.

  6. Nature of the Crisis How did it start? • The war between Iran and Iraq continued for 8 years, 800,000 people died or were injured, economic loss of 500 billion US dollars. • After first 5 years plan, the international crude oil market prices decreased fast • On June 21, 1990 Manjil-Rudbar 7.7 Earthquake and 6.5-magnitude aftershock the following morning devastated the cities of Rudbar, Manjil, Lushan, 700 villages and tons of farmland • $200,000,000 USD in damages; 50,000 deaths and 60,000 injuries; estimated 400,000 left homeless

  7. Data How was the economy affected? • Graph of Iran GDP Annual Growth Rate • The Unemployment rate from 1990-1993 was around 10% • Overall Debt went from 2.7 billion to 7.3 billion from 1990 - 1992 • (EconStats, 2014)

  8. Effect on Imports/Exports, Industry (TradingEconomics, 2014)

  9. National debt and Tax Revenue ( data continued) (WorldBank, 2014)

  10. Exchange Rate Fluctuations • Exchange rate (before and after): At the end of 1991 the exchange rate was 64.59 Iranian Rials per US dollar. By the beginning of 1993 the exchange rate jumped to 1649.00 Iranian Rials per US Dollar. (International Economics, 2014)

  11. 1991-Iran Tries to Decentralize Economy • President Rafsanjani had a goal to transform a highly centralized, heavily subsidized economic system into a decentralized, free-market economy • Believed that the Iranian people should run business in the country and that they could do it better than the government • At the time, Iran had an official rate of exchange where one U.S. Dollar = 70 Iranian Rials. However, the real exchange rate valued 1350 Iranian Rials per U.S. Dollar • The government then introduced a “competitive” rate of exchange • However, this rate was not standardized across the nation and many higher end businesses and hotels still went by the rate 70 Iranian Rials per U.S. dollar • Led to disparities amongst purchasing power across an already suffering nation whose population was growing faster than it was able to create homes, as well as heavily subsidized food imports (LexisNexis Academic, 2014)

  12. The Reformation Period Rafsanjani’s agenda after becoming president also included: • Infrastructure development • Privatizing state enterprises • Foreign Exchange Liberalization • Establishment of free-trade zones • Elimination of subsidies and price controls This reformation period was met with great response from the state. People were seeking post-war reformation and reconstruction. Along the way there were some unanticipated problems, but in the end set up the foundation for Iran’s next president, Mohammad Khatami

  13. Khatami’s reform period When he took office, he was met with a global recession as well as a long-time slump in oil prices

  14. Economic Restructuring Although the conditions were less than favorable, Khatami was at the forefront of serious economic restructuring such as • Unifying the exchange rate • Establishing an Oil Stabilization fund • Authorizing private banks, something not seen since the revolution took them out • Improving the framework of foreign investment • Getting through the global recession and low oil prices • Gaining interest from new foreign investors mainly from the West

  15. Natural Disaster Prevention • Manjil-Rudbar Earthquake - Relief Aid Assistance totaling approximately 36 million was given to Iran. This was the first time in history since the Iran-Iraq war Iran accepted foreign aid. • In 1991, a comprehensive hazard reduction program titled “Iran Earthquake Risk Mitigation Program, “IERMP”, was launched in Iran to prevent catastrophes of this degree in the future (ISGMIT) • Iran is one of the most seismically active countries in the world, being crossed by several major fault lines that cover at least 90% of the country(tasnimnews)

  16. References CBI, 2014. retrieved from http://www.cbi.ir/page/GeneralInformation.aspx EconStats , 2014. - retrieved from http://www.econstats.com International Economics, 2014. - retrieved from http://intl.econ.cuhk.edu.hk/exchange_rate_regime/index.php?cid=25) ISGMIT - retrieved from http://www.isgmit.org/projects-storage/DisasterManagement/Earthquake_Management_Iran_Final.pdf http://iranprimer.usip.org/resource/revolutionary-economy Khatami - retrieved from http://iranprimer.usip.org/resource/revolutionary-economy LexisNexis Academic - retrieved from http://www.lexisnexis.com/hottopics/lnacademic/?verb=sr&csi=6742&sr=HEADLINE%28Iran+Tries+to+Decentralize+Economy%2C+Causing+Widespread+Pain%29%2BAND%2BDATE%2BIS%2B1991-04-09 Manjil-Rudbar Earthquake - retrieved from http://earthquake.usgs.gov/earthquakes/eqarchives/year/1990/, Manjil-Rudbar relief - retrieved from http://reliefweb.int/report/iran-islamic-republic/iran-earthquake-jun-1990-undro-situation-reports-1-14 tasnimnews - retrieved from http://www.tasnimnews.com/English/Home/Single/240312 Trading Economics, 2014 retrieved from http://www.tradingeconomics.com/iran/indicators WorldBank, 2014. retrieved from http://www.worldbank.org/en/country/iran

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