Government Banking and Economic Growth in Iran

One of the measures taken by the 1979 Revolutionary Government of Iran was to denounce the mixed public-private ownership of the banking system of the pre-revolutionary era and implement a full scale banking nationalization and merging scheme. Since then the banking system has been operating under close supervision and scrutiny of the government - exercising its power to impose a variety of restrictions and interferences, including: restrictions on branch expansion, interest rate repression and discretionary credit allocation. This paper is intended to evaluate the impact of the government restrictive and regulatory policies on financial savings, investment, efficiency and economic growth in Iran. The analysis is carried in terms of a model similar to the model implemented by Ketkar (1993). This model is essentially derived from combining McKinnon-Shaw hypothesis with Harrod-Domar growth model via the dynamic adjustment mechanism formulated by Molho. The findings indicate that branch restrictions and also credit ceilings had a negative relationship to economic growth, while the increase in credit to priority sectors (agriculture, industry and construction) had a positive relationship. The effect of interest rate reduction on economic growth in Iran was, however, inconclusive.