annual reporten.middleeastbank.ir/uploads/me-bank_annual-report-2013.pdfthis is the bank’s first...

For the Year Ended 20 March 2013Annual Report

Annual ReportFor the Year Ended 20 March 2013

In the Name of God

Table of ContentsManaging Director’s Statement � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 5Chapter 1: Board of Directors’ Report � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 7Chapter 2: Annual Economic Review � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 29Chapter 3: Report of Independent Auditor and Statutory Inspector � � � 63Chapter 4: Financial Statements � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 67Middle East Bank Branches � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 92

Annual Report of Middle East Bank ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ� 5

Managing Director’s StatementI am thankful for the opportunity to be present in the banking arena once again in the form of a new bank. My colleagues and I are honored to be of service to our valued customers, faithful shareholders and our beloved country.Where we have gotten so far would not have been possible without the hard work and dedication of our employees. I thank our customers and employees who graciously overlooked our shortcomings during Middle East Bank’s first few months of operation and supported us all the way. We tried to make sure that our customers are satisfied, our employees work in an environment conducive to learning and pleasant to work in, and our shareholders notice the short-term gains and recognize the long-term worth of their investments. I sincerely appreciate the support of all those who helped in the start-up phase of MEB. This is the Bank’s first Annual Report and covers the five-month operation period from 2 November 2012 through 20 March 2013. To ensure the coverage of our more important activities and proper disclosure and transparency of all conducts of the Bank, we undertook to produce a comprehensive report as an approach to be followed in future years. A notable undertaking during this period was the installation and almost immediate operation of our core banking system, including the provision of general retail banking, corporate banking and electronic banking services. We successfully passed all the required tests and audits and joined the national payment system to provide clients with the national switch services, including cross-bank card payments, real time gross and net settlements, periodic payments and interbank payment services. We joined the National Check Clearing and Settlements Organization and set up our risk management department. Inspection and anti-money laundering units were set up and the international department was established with qualified individuals including trade finance experts and well-educated new bankers. A plan was also drawn up for the proper implementation of the Bank’s corporate governance and in the last days of the year, level-1 (of three levels) license for international activities was obtained.With the support of our shareholders, guidance of our Board of Directors and the dedication and hard work of our untiring employees, I am sure that Middle East Bank will become an exceptional institution quite unique in the Iranian banking scene. I believe the best is yet to come. Thank you and God bless!

Parviz Aghili-KermaniManaging Director

Chapter 1

Board of Directors’ ReportBoard of Directors’ Report to the Annual Ordinary General Assembly of 6/20/2013 � � � 91- Middle East Bank – an Overview � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 102- Performance for the Financial Year Ended 20 March 2013 � � � � � � � � � � � � � � � � � � � � � � � � � � 153- Notable Activities Undertaken during the Period of Report � � � � � � � � � � � � � � � � � � � � � � � � � 184- Risk Management � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 215- Corporate Governance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 226- Members of the Board of Directors � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 247- List of Executive Managers � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 25

Board of Directors’ Report ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ� 9

Board of Directors’ Reportto the Annual Ordinary General Assembly of 6/20/2013

We express our gratitude to shareholders and their representatives for attending the Middle East Bank’s first Annual Ordinary General Assembly meeting for the year that ended on 20 March 2013.Board of Directors herewith presents the Bank’s business activities and the audited financial statements for the year that ended on 20 March 2013. This Report has been prepared in accordance with the requirements detailed in Article 232 (as amended) of the Iranian Commercial Code dated 1347 (1968) and Article 45 of Iran’s Securities and Exchange Organization. Furthermore, the Board of Directors endorses the specifics of the business activities of the Middle East Bank and the presentation of the same to our shareholders and reviewers of this Report, which has been prepared for the above-mentioned period. The Board also confirms that the Report is based on the principles of fair and unbiased reporting in accordance with the Bank’s Articles of Association.Information presented in the Report is a true reflection of the Bank’s activities and its standing during the year and depicts the Bank’s realistic future plans as far as they could be forecasted. No information affecting the Bank’s future business activities, or results the omissions of which could mislead the users, has been withheld from the Report.This Report was approved by the Board of Directors on 27 May 2013.

Khosro Nayebi-Ahranjani, ChairmanParviz Aghili-Kermani, Deputy ChairmanAmir Dadkhah, MemberSeyed Hossein Salimi, Member Javad Javadi, MemberRouzbeh Pirouz, MemberArzesh-Pajouh Investment Company, Member, represented by Majid SafarianGuive Construction Company, Member, represented by Akbar KomijaniIndustrial Investment Company of Iran, Member, represented by Reza Soltanzadeh

ـ� 10 Annual Report of Middle East Bank ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ

1- Middle East Bank – an Overview 1-1 Formation of the BankThe proposed Articles of Association of the Middle East (Khavarmianeh) Bank (MEB) was ratified by the Currency and Credit Council on 17 May 2011. After this major chapter in the course of formation of the Bank, potential founding shareholders were identified and their credentials reviewed and approved by various departments of the Central Bank of the Islamic Republic of Iran (Credit Department, Anti-money Laundering, etc.). This was followed by approval of the wording and format of the public announcement containing the list of founding shareholders. This announcement was placed in two national newspapers. From among the publicly subscribed shareholders, those with an investment of one percent and above had to go through the same clearance process as the founding shareholders, and each step was meticulously performed by various departments of the Central Bank. The Central Bank issued the necessary certificates upon confirming that (i) the four thousands billion Rials deposited in its Accounts Department by the investors of MEB was indeed “own-funds” of the investors and not borrowed and invested amounts; and (ii) the investors were all private sector individuals or firms with no affiliation with the government or state-owned entities. However, since the constitution of the Bank allowed it to be a publicly held shareholding company, it was also necessary to obtain the consent of the Tehran Stock Exchange (TSE) to offer Bank’s shares to the public. TSE independently examined the package and approved it. This process culminated in a certification that all the necessary steps had in fact been taken and properly executed. The above-mentioned detailed activities took about sixteen months.Documents including the Articles of Association duly signed by the founding shareholders, a letter from the Accounts Department of the Central Bank certifying that the initial paid-in capital of four thousands billion Rials was already deposited with that Bank, two letters from the Central Bank and the TSE certifying that all the relevant documentations were in good order and that the company under formation may be registered, were submitted to Tehran Companies Registrar’s Office. After another review at the Registrar’s Office, eventually the new bank was formally registered on 21 August 2012 under registration number 430795 in the name of Khavarmianeh (Middle East) Bank. On 1 November 2012 the Central Bank issued the necessary authorization, allowing the Bank to initiate banking activities under the Non-usury Bank Act of August 1982 and within the rules and regulations already approved and advised by the Central Bank to banks, which may periodically be amended and announced and new rules and regulations that may be enacted, approved, and announced to banks.

Board of Directors’ Report ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ� 11

1-2 Bank Operations The Bank’s operations include the following:Opening current accounts (with checkbooks), savings accounts (with passbooks), and other forms of accounts; accepting investment deposits in accordance with the relevant regulations; issuance of long-term certificates of deposits for general and designated investments in the name of investors or bearer certificates in accordance with the relevant regulations; offering electronic banking services and various electronic cards; seeking facilities, loans and credits from inside and outside of the country with due observance of relevant regulations; granting various types of facilities within the framework of Non-usury Banking Act and other relevant regulations; and other relevant banking activities in accordance with the Articles of Association of the Bank.

1-3 Composition of ShareholdersThe composition of the shareholders – including natural and legal persons – up until 20 March 2013 is as follows:

Shareholders Number of Shares Percentage of Shares

Real Persons >1% 987,663,000 25%

Legal Persons >1% 774,231,970 19%

Other Shareholders 2,238,105,030 56%

Total 4,000,000,000 100%

25%

19%56%

■ Real Persons>1%■ Legal Persons>1%■ Other Shareholders

1-4 Specialized CommitteesSpecialized committees of the Bank are as follow:

Senior Mangers Committee Organization and Procedures Committee


Audit and Internal Control Committee Assets and Liabilities Committee Credit Committee Risk Committee Human Capital Committee Salaries and Bonuses Committee

1-5 Board of DirectorsThe Bank is managed by its Board of Directors consisting of nine members. The members are elected at the General Assembly of the shareholders and term of service is two years for all members. The present board members were elected at the General Assembly of the Founding Shareholders on 5 November 2012. The names of the elected members are registered and published in the Official Gazette.

1-6 Organizational Chart

External Auditors & Inspector

Shareholders General Assembly

Board of Directors

Risk Management Committee Corporate Governance

Compliance Committee

Audit Committee

Compensation CommitteeManaging Director

Advisors

Internal Audit Office

Compliance Office

Anti-money Laundering Office

Economic Research Department

Risk Management Department

International Affairs DivisionFinance Division Logistics & Branch Affairs

Division Credit Division Systems Development & IT Division

Product Development Department

Information Technology Department

Organization & Procedures Department

International Affairs Department Logistics Department

Branch Affairs Department

Credit Department 1

Credit Department 2Investment & Corporate Affairs Department

Finance Department

Deputy Managing Director

Legal DepartmentHuman Capital Department

Communication Department


1-7 Main Areas of Activity and the OutlookMEB operates primarily as a wholesale bank, focusing mainly on corporate clients and specialized credit products. Because of this and the limited number of branches, MEB intends to take the Bank to the premises of its clients and provide their banking needs at their own offices. Accordingly, electronic banking, innovations in distance-banking, physical presence at clients’ offices, and whatever other services that would relieve the clients of the necessity to visit the Bank, are prominent in MEB’s long-term plan. On the liability side, MEB will focus on targeted depositors, cash surplus of its credit customers, capital market, and institutional funds. With specialized marketing techniques, target depositors will be identified and offered the kind of services that are unavailable elsewhere. With this approach, it is anticipated that the relationships between MEB and its customers will become a long-term arrangement. MEB will also focus on capital market, designing new instruments to meet the requirements of capital market participants and institutional investors.

Wholesale BankingMEB operates primarily as a wholesale bank, focusing mainly on corporate clients and specialized credit products. Because of this and the limited number of branches, MEB intends to take the Bank to the premises of its clients and provide their banking needs at their own offices. Accordingly, electronic banking, innovations in distance-banking, physical presence at clients’ offices, and whatever other services that would relieve the clients of the necessity to visit the Bank, are prominent in MEB’s long-term plan. On the liability side, MEB will focus on targeted depositors, cash surplus of its credit customers, capital market, and institutional funds. With specialized marketing techniques, target depositors will be identified and offered the kind of services that are unavailable elsewhere. With this approach, it is anticipated that the relationships between MEB and its customers will become a long-term arrangement. MEB will also focus on capital market, designing new instruments to meet the requirements of capital market participants and institutional investors.

Corporate BankingCurrently, state-owned banks and a large number of private Iranian banks offer a wide range of retail banking services throughout the country. Accordingly, competition in this market is fierce. As a result, MEB is focusing on services to corporate clients by designing credit and banking products that meet the needs of commercial, manufacturing and service industries. This is done by means of tailored products such as issuing specialized deposit certificates and scattered credit products. When regulatory limits do not allow MEB to single-handedly meet all the needs of its clients, limited syndications or bringing in one or two other banks will be adopted; but for larger


requirements, broader syndications will be employed. The primary objective here is to reduce the cost of funds for the clients subject to a reasonable return for MEB. When the clients get better acquainted with MEB approaches and objectives, it is expected that MEB’s associations with its clients will become long-term in nature and mutually beneficial.

Investment BankingInvestment banking has become a complementary service to commercial banking throughout the world. Whether it is investment management for high net worth individuals and institutions, or underwriting of debt, equity and Merger and Acquisition (M&A) for corporate clients, these services are essential to MEB clients. Considering the extent of MEB’s dependence on investment banking services on one hand, and the ceiling on the level of investment by each investor on the other, we have signed a memorandum of understanding with two other privately owned banks to set up such an operation. The required approval by Tehran Stock Exchange has been received, and as soon as we receive the Central Bank’s consent, this bank will be registered. In its first phase of operation, the scope of activities of our proposed investment bank will be on underwriting and asset management. Hopefully, before long we will see interest of foreign investors in this market again, at which time M&A service will be very much needed and that section of our investment bank will become quite active.

Virtual BankingTaking into account the limited geographical presence of the Bank, the utilization of information technology and suitable communications are of great importance for establishing practical relationships with our clients. Although MEB does not claim to be a virtual bank, it is nonetheless meeting a significant portion of its clients’ needs and expectations through electronic media. In contrast to the way other banks offer a single online banking platform for all their clients, MEB will tailor its virtual banking services based on the specific needs and requirements of its clients -- or groups of clients -- giving them access to customized menus and windows. An important part of this service is to enable our clients to access a good portion of their banking needs without attending a branch. This is done by building a strong foundation that is rooted in security systems and reinforced by education regarding such safeguards.

Asset ManagementIn today’s modern and international banking arena, absorbing resources through bank accounts and disbursing them through loans are no longer the only available banking tools. Another potentially profitable activity is the management of its clients’ assets –


usually high net worth clients. Rather than investing all of a client’s resources in bank deposits, sometimes creating a portfolio of shares, bonds and even real estate may be more attractive to the client. The bank can then manage the portfolio or advise the clients on how to manage their assets and educate them on management methods that result in the growth and productivity of their portfolios. The bank earns proceeds from managing its clients’ assets much like the international standards prevalent in today’s banking industry. This is usually based on the type and volume of assets, as well as the nature of the client, and is calculated as a percentage of each client’s “Assets under Management”.

Financial InstrumentsOne of the ways to strengthen the Bank’s standing as it develops and protects its clients’ interests is to capitalize on opportunities that arise from the use of financial instruments, such as deposit certificates, within the legal framework put forth by the Central Bank. MEB’s focus in this arena is primarily directed toward financial instruments that are traded within secondary markets that incorporate high liquidity for its clients. The strategic outlook on this matter lies in the Bank’s belief that the provision of highly liquid products beyond regular banking products will increase MEB’s ability to absorb resources and improve its relationships with its clients. For this purpose, MEB intends to utilize and take full advantage of financial instruments based on debt instruments such as participating bonds, or sokuk (Islamic bonds) and deposits (deposit certificates).

2- Performance for the Financial Year Ended 20 March 2013 2-1 InvestmentsA summary of investment performance in companies’ shares are presented in the following two tables:

Companies Listed in Tehran Stock Exchange (in Million Rials)

Description Purchase Price Current Price Dividend Profits�from�Transaction Net�Profit

Net Investment 74,580 71,113 6,775 4,478 7,786

Unlisted Companies

Company’s Name Number of Shares Paid-upCapital (%)

Purchase Price (in Million Rials)

Dadehpardazane Simaye Aftab* 30,000,000 35 10,500Total 10,500,000,000

* This company will develop and implement a new generation banking system for MEB and also support the system thereafter.


2-2 Select Information on Bank’s Finance (Main Company)Year Ended 20/3/2013

Operating Activities (in Million Rials)

Total Revenue 1 543,121

Net Income from Operation 2 482,551

Non-Operating Income3 949

Net Income after Tax 408,080

Net Cash Flow from Operations (2,893,029)

Balance Sheet Items at Year End (in Million Rials)

Loans 2,575,223

Fixed Assets 549,011

Other Assets 2,466,357

Total Assets 5,590,591

Deposits 856,911

Other Liabilities 325,600

Total Liabilities 1,182,511

Paid-in Capital 4,000,000

Total Equity 4,408,081

Rates of Return

Return on Equity4 19%

Return on Assets4 15%

Capital Adequacy Ratio5 105%

Per Share Figures

Number of Shares Outstanding at AGA 4,000,000,000

Earnings Per Share (Rial) 102

Last Price (Rial) 1,070

Book Value (Rial) 1,000

1. Total of all earnings2. Total of earnings from loans, deposit placements, investments and commissions less interest

paid on deposits and general reserve for doubtful loans.3. Other incomes4. The low return is due to the shortness of the period operation of the Bank.5. The high CAR is due to the large capital base and risk weighting of assets in the early days of

the Bank’s operation.


Profit�from�Outstanding�Loans,�Deposit�Placements�and�Investments�for�the�Period�Ended�20/3/2013 (in Million Rials)

Description Year 1391

Profit on Islamic Contracts 87,010

Default Penalties Received 8

Investments & Deposits 439,790

Interest Paid On Investment Deposits in the Period Ended 20/3/2013

Deposit Accounts – 5 Year Term 11,679

Deposit Accounts (Short Term) 7,810

Deposit Accounts (Special 3 Month Term) 2

Investment Depositors’ Profit Portion 19,492

Revenue Forecast for the Year (in Million Rials) and Per Share

Description ActualYear Ended 20/3/2013

ForecastYear Ended20/3/2014

Interest Income on Loans 87,019 1,849,500Interest Income on Participating Bonds 105,695 329,557Earnings on Investment in Listed Shares 7,705 77,000Interest income on Interbank Placements 107,940 329,557Total (Interest Income and Earnings) 308,359 2,585,614Interest Paid on Investment Deposits (19,580) (1,258,933)Provision for Doubtful Loans (40,041) (204,000)Guarantees and Forex Commissions 15,363 142,500Pre-Start up Expenses 218,450 0Net Operational Income 482,551 1,265,181Other Income 949 0Depreciation (319) (30,000)General & Administrative Expenses (49,691) (224,359)Net Income Before Taxes 433,490 1,010,822Taxes (25,410) (170,316)Net Income After Taxes 408,080 840,506Net Income /(Total Net Income + Earnings) 132% 33%Number of Shares (in thousands) 4,000,000 4,000,000Earnings Per Share (EPS) (Rial) 102 210

Current accounts and other non-interest bearing deposits made up 11 percent of all deposits in the year ended 20 March 2013, and interest bearing deposits -- including short and long term investment deposits -- made up the remaining 89 percent.


Composition of Deposits

89% 11%

■ Intrest bearing deposits■ Non-intrest bearing deposits

Preliminary Interest Rates on Investment Deposits and Statutory Deposit Rate for Year Ended 20/3/2013

Description Interest Rate (%) Statutory Deposit Rate (%)

Year Ended 20/3/2013 Year Ended 20/3/2013

Current Account 0 17

Investment Deposits – Regular Short Term 14, 15, 16, 16.5 15.5

Investment Deposits – Special Short Term (3-M) 16 15.5

Investment Deposit – Special Short- Term (6-M) 17 15.5

Investment Deposit – One Year Term 18 15

Investment Deposit – Regular, Five Year Term 20 10

Investment Deposit – Special, Five Year Term 20 & 21 10

2-3 Transactions with Related PartiesBank clients with common economic interests (shareholders with at least one percent of bank’s shares, or subsidiaries and affiliated companies of the bank) are classified as Related Parties. All transactions with Related Parties, stipulated in Article 129 of Commercial Code, have to be disclosed to the External Auditors. The relevant disclosure report is set out in the accompanying notes.

3- Notable Activities Undertaken during the Period of Report3-1 Human Capital Management

Attracting and retaining a suitable and competent workforce and empowering them for the purpose of fulfilling their designated duties to further the Bank’s interests and goals; Talent discovery and succession planning for each key position in the Bank; Preservation and promotion of the psychological and physical wellbeing of employees, and instilling a positive and spirited outlook in the workforce;


Recruiting 111 competent employees during the period under review, i.e., 1 November 2012 – 20 March 2013; Conducting two comprehensive training programs for new apprentices to further strengthen their competency and self-confidence, with topics including organizational behavior, client-revolving behavior, credit, accounting, resource mobilization, foreign exchange, electronic banking and banking regulations; Conducting three educational programs on banking software systems for of our branch managers, assistant managers and young officer trainees; and Conducting an educational program on advanced behavioral awareness for our mid-level managers.

Human Capital Statistics

■ Bachelor Degrees■ Master Degrees & Ph.Ds■ High School Diploma & Post-Diploma

■ 30-40■ Over 50

■ Under 30■ 40-50

■ Male■ Female

■ Head office■ Branches

56%44%

53%

40%

7%

56%

8% 8%

28%69%31%

Composition of Human Capital by Gender

Composition of Human Capital by Posting

Composition of Human Capital by Education

Composition of Human Capital by Age

3-2 Facilities GrantedA summary of the Bank’s performance in credit facilities during the report period is presented in the following table:

Credit Facilities (Rls� Bn�)

Credit Facilities Guarantees Total

Approved Utilized Approved Utilized Approved Utilized

4,200 2,609 3,900 530 8,100 3,139


3-3 Resource MobilizationDuring the period under review MEB operated only in Tehran but is planning to expand its network to larger economic centers of Iran such as Esfahan, Mashhad, Tabriz, Shiraz, Bandar Abbas and Kerman during its second and third years of operation. In the subsequent years, the plan calls for branches in other large cities and representation in one of the free-trade zones. The Bank’s five year plan envisions a total of 20 branches throughout the country. For the period that ended on 20 March 2013, MEB obtained the required Central Bank permits for establishing four branches, namely, Aftab, Nobakht, Niavaran and Iranzamin. These branches are now offering a comprehensive array of banking products and services to MEB clients, taking full advantage of the available banking systems to offer retail banking and virtual banking services, including online banking, telephone banking and ATMs. Moreover, MEB offers a wide range of ‘specialized’ services and conveniences, including private banking, electronic safe deposit boxes and underground parking in every branch. In addition to local transactions, the Bank also offers foreign currency accounts and transactions.

Summary of Deposit Accounts Resources during the Report Period

Deposit Account Type and Volumes Numbers Million Rials

Quantity %

Volume %

Investment Deposit, Short-Term Account for Individuals 81 133,716 8 16Investment Deposit, Short-Term Account for Businesses 562 295,958 57 34Non-interest Bearing Deposits for Individuals 109 77,565 11 9Non-interest Bearing Deposits for Businesses 163 9,675 17 1Investment Deposit, Long-Term Account for Individuals 1 100,000 0 12Investment Deposit, Long-Term Account for Businesses 29 191,322 3 22Bank Guarantees 36 48,675 4 6Total 981 856,911 100 100

3-4 Information TechnologyInformation Technology has become a prime channel through which the financial products and services are delivered to the clients. We at MEB strongly believe the information and telecommunication technologies are the most efficient and cost effective method of delivering services to our clients. Accordingly, we have allocated considerable resources to the development of this field and continue to support the introduction of new technologies to provide speedy and cost effective service to our clients. In addition to the comprehensive range of products and services we currently offer, we


have embarked on a new undertaking to implement a new generation of banking systems to support our future plans. The new generation banking systems will enable us to shorten the product development life cycle and bring to the market new products and services in a timely and cost effective manner. This shall empower MEB to offer new products and services to its clients ahead of the competition.The new systems should become operational in March/April 2014 and will enable MEB to positions itself atop the competitors in this field.

3-5 Product DevelopmentWe have augmented the strength of our technology group by ensuring that the group works closely and in unison with our product development group. With this alignment, we shall make the best use of business and technology knowledge in developing products speedily and fit for business needs.In line with MEB’s strategy of being a resolutely client oriented organization, the product development group shall continually monitor, gauge and review client satisfaction for our services as well as the business viability of the offered product. It shall likewise make recommendations to enhance/modify these services and products to meet our clients’ needs. The group will also closely observe and monitor products and services offered by the competitors.

4- Risk ManagementMEB’s Board of Directors has direct oversight over risk-related business policies and encourages best practices for defining risk appetite, risk culture, risk management organization, and transparency in risk taking business activities. We feel a responsibility to all our stakeholders and believe it to be our duty to implement the recommendations put forth by Basel Committees. As such, we continually expand our research on the subject and are always seeking the best practices available for risk management. MEB has established a Risk Management Committee (RMC) with the primary responsibility of assessing the business risks that are assumed by the Bank, and reporting them directly to Board of Directors. The Board of Directors sets the policies and limits of risks assumed by the Bank.RMC monitors and reports the overall risk profile of the Bank and helps the Board of Directors with establishing policies and processes for risk limits and controls. RMC relies on an independent Risk Management Department with competent and experienced professionals. Risk Management Department implements the risk policies of the Bank,


and through proper assessment and monitoring, ensures that business activities are within the tolerance limits. The major risks that a financial institution faces are credit risks, market risks, liquidity risks, and operational risks. Credit risk, which is our major concern, arises from the probability of some borrowers not meeting their obligations, resulting in losses to the bank. According to the recommendations outlined in Basel II and Basel III, banks may use their own internal ratings system for credit risk estimation. Here at MEB, we are pioneering a credit rating scheme to rate our clients in relation to other Iranian companies and corporations at large. Our objectives for initiating this scheme are to establish consistent credit extension policies, systematically improve our credit extension policies, and establish a reliable credit portfolio.The Risk Management Department has developed advanced models for credit rating of individual companies and the bank’s credit portfolio. Our credit models allow us to reduce the probability of loss from individual borrowers defaulting on their loans. With the help of these models we determine the appropriate amount of collateral and lending rates based on the financial strength and characteristics of borrowers. The resulting differentiation among the borrowers would allow us to attract the best of clients by our lower collaterals and lending rates.Our automatic credit rating scheme consists of several modules, including a model for rating financial strength, a model for rating general characteristics of borrowers and a model for rating bank relations. The ratings provided by these modules are based on several advanced statistical methods such as Discriminant Analysis, Categorization and Regression Trees, Clustering and k-Nearest-Neighbors. The average vote among these modules determines the credit quality of a corporate client. The results of our automatic credit rating scheme are consistent with our in-house experts’ assessments, which has been very encouraging for further development and refinement of this field.All credit extensions are reviewed by the Risk Management Division for the credit rating of the borrowers. Also, the Risk Management Division monitors the collaterals and lending rates required by the Bank’s multiple credit departments. In the case of major deviations from the set policies, the Risk Management Division takes proper action by reporting to Risk Management Committee and the Board of Directors.

5- Corporate GovernanceCorporate Governance seeks to define rules, instructions, and procedures for decision-making and control of a company in order to control conflicts of interest, ensure conformity


of information for its beneficiaries, and propose a structure within which the company can attain its objectives. This system emphasizes fairness, transparency, responsibility, and accountability of the organization. It includes mechanisms that ensure that the organization’s financing is in line with the objectives of the organization. Furthermore, it ensures and enhances efficiency of the management of the organization’s capital in the long-term.The banking industry is one of the most, if not the most, critical and sensitive sectors in the economic structure of any country. The position of this industry becomes overbearing in developing countries as banks become the dominant financing vehicle for most economic enterprises and providers of financial services to the public through its payment systems. Banks deal with small and large depositors and, due to plurality and diversity of its customers, the scope of the beneficiaries of the banking system is broader than that of other economic enterprises. In addition to continually increasing the wealth and the economic value added of its shareholders and the broader society, MEB has been diligent in considering and securing the interests of its other beneficiaries. In order to achieve success in different fields of its activities, MEB’s Board of Directors is responsible for establishing and overseeing the administrative rules and procedures, as well as the transparency and uniformity of its operations.To this end, the Board of Directors has set up an independent Corporate Governance section that functions directly under the Board and is responsible for such vital tasks as reviewing various operations of the Bank and evaluating risks associated with each, and determining appropriate risk levels that individual operations and the Bank as a whole can afford to assume. Corporate Governance is endowed with the responsibility of making sure that the limits are understood by the employees in each section and are strictly observed. Corporate Governance in our Bank is responsible for effectiveness and efficiency of the Bank’s activities, promoting interaction and coordination between inter-organizational units, and establishing an effectual internal control system within the Bank.In order to ensure that Bank’s performance and day-to-day progression are in line with the goals set by the Board, the following Corporate Governance Committees have been set up: (i) Compliance Committee, consisting of the Chairman, two Non-Executive Directors, and the head of the Compliance Department; (ii) Internal Audit Committee, consisting of the Chairman, two Non-Executive Directors, a retired banker who is also a Certified Public Accountant and a minor shareholder of the Bank, an Advisor to the Managing Director, and the head of Internal Audit Department; and (iii) Compensation Committee, consisting of the Chairman, Managing Director, one Non-Executive Director, and the head of Human Capital Department.


6- Members of the Board of Directors

Khosro Nayebi-AhranjaniChairman of the BoardM.Sc. Accounting, NIOC’s Advanced Institute for Accounting

Parviz Aghili-KermaniDeputy Chairman of the Board and Managing DirectorPh.D. Finance, University of Wisconsin – Madison, USA

Amir DadkhahBoard MemberB.Sc. Mechanical Engineering, Amir-Kabir (Polytechnic) University

Javad JavadiBoard Member and Deputy Managing DirectorM.Sc. Financial Management, Shahid Beheshti University

Akbar KomijaniBoard MemberPh.D. Economics, University of Wisconsin – Milwaukee, USA

Rouzbeh PirouzBoard MemberM.A. International Relations, Harvard University, USA

Majid SafarianBoard Member and Assistant Managing DirectorB.Sc. Accounting, Shahid Beheshti University

Seyed-Hossein SalimiBoard MemberM.Sc. Agricultural Engineering, Utah State University - Logan, USA

Reza SoltanzadehBoard MemberPh.D. Medical Sciences, Manipal Institute of Higher Education, India


7- List of Executive Managers

Parviz Aghili-KermaniManaging DirectorPh.D. Finance, University of Wisconsin – Madison, USA

Javad JavadiDeputy Managing DirectorM.Sc. Financial Management, Shahid Beheshti University

Mohammad-Taghi JamalianAdvisor to the Managing DirectorM.Sc. Business Management, Shiraz University

Alireza EdalatAssistant�Managing�Director,�International�Affairs�DivisionB.Sc. Accounting, Advanced Institute for Accounting

Mehdi NedjatiAssistant�Managing�Director,�Systems�Development�and�IT�DivisionPh.D. Computer Sciences, University College – London, UK

Majid NourmohammadiAssistant�Managing�Director,�Finance�DivisionM.Sc. Financial Management, University of Tehran

Majid SafarianAssistant�Managing�Director,�Logistics�and�Branch�Affairs�DivisionB.Sc. Accounting, Shahid Beheshti University

Morteza BinaAdvisor�to�the�Managing�Director,�Risk�Management�DepartmentPh.D. Signal Processing Engineering, Compiegne University of Technology, France

Jalaleddin JalaliAdvisor�to�the�Managing�Director,�Economic�Research�DepartmentPh.D. Economics, Princeton University, USA


Azadeh Ahmadi-KoushaSenior�Manager,�Finance�DepartmentB.Sc. Accounting, Azad University - Tehran

Vahid AzmoonSenior�Manager,�Branch�Affairs�DepartmentB.Sc. Industrial Management, Azad University – Tehran

Mohammad-Ali DehghaniSenior�Manager,�Credit�Department�2M.Sc. Banking Management, Advanced Institute for Banking

Reza GhezipourSenior�Manager,�Logistics�DepartmentM.Sc. Energy Economics, Azad University – Tehran

Mohsen KarimiSenior�Manager,�Communication�DepartmentM.A. Social Communication, Azad University – Tehran

Mohammad KeshtehgarActing�Senior�Manager,�Organization�and�Procedures�DepartmentM.Sc. Socio-Economic Systems Engineering, Azad University – Tehran

Ali Khalili-SadatlooAdvisor�to�the�Managing�Director,�Legal�DepartmentB.A. Law, University of Tehran

Laleh MehradpaySenior�Manager,�Information�Technology�DepartmentM.Sc. Socio-Economic Systems Engineering, Mazandaran University of Science and Technology

Ehsan RahmaniniaActing�Senior�Manager,�Internal�Audit�OfficeM.Sc. Accounting, Azad University - Tehran


Farzaneh Rajaei-SalmasiActing�Senior�Manager,�Product�Development�DepartmentM.Sc. Computer Engineering, Sharif University of Technology

Hedieh TabriziSenior�Manager,�Credit�Department�1B.A. English Translation, Azad University – Tehran

Hossein Tayefeh-MahmoudiSenior�Manager,�Human�Capital�DepartmentM.A. Education, University of Tehran

Chapter 2

Annual Economic ReviewExecutive Summary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 311� The Real Side � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 342� Economic Sanctions against Iran � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 403� Government Budget and Finance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 404� The Subsidies Reform Program � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 455� Balance of Payments � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 476� Foreign Exchange Market � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 507� Monetary and Credit Policies � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 528.�Prices�and�Inflation � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 579� Capital Market � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 59

Annual Economic Review ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ 31

Executive SummaryDuring the Iranian year 1391 (21 March 2012 – 20 March 2013) the continuation of expansionary monetary and fiscal policies and the imposition of new unilateral sanctions in addition to the tightening of the old ones strained Iran’s economy. As a result the economy ended the year with a high inflation rate, a severely depreciated national currency and probably negative GDP growth rate. New unilateral sanctions forced many countries to cut their oil imports from Iran. New sanctions also extended their reach to the Central Bank of the Islamic Republic of Iran (CBI) and limited Iran’s access to its holdings in foreign banks. Under these sanctions, Iran could only export some oil to certain Asian countries and use its proceeds to import food, medicines and certain services, or keep the funds in those countries. Turkey was also banned from its recent practice of paying for its Iranian gas imports in gold and other precious metals.CBI is the sole source of official statistics on Iran’s economy. At the time this report is being prepared (June 2013), its comprehensive national accounts data do not go beyond the third quarter of the Iranian year 1390 (October-December, 2011). It is thus not possible to present a cohesive report on the economy for the year 1390 (that ended on 20 March 2012), and 1391. This report will, therefore, make what data is available from CBI publications as well as partial data offered by government officials and international organizations such as the World Bank and the International Monetary Fund (IMF) in order to present a more complete picture of the economy in the past year.The Statistical Center of Iran (SCI) in a June 2013 statement reported its estimate of the GDP growth rate in 1390 (2011-2012) at 3.2 percent but the IMF and the World Bank have estimated it at 3.0 percent and 1.7 percent, respectively. Both of these multinational organizations have estimated that Iran’s GDP has contracted by 1.9 percent in 2012.Examination of the GDP components in 1391 indicates that economic sectors have been affected by the sanctions in varying degrees. Manufacturing products have expanded in industries such as petrochemicals, steel, cement and glass, but contracted in industries such as the auto-making that heavily depend on imported raw materials and intermediate goods. Agricultural production has also grown due mainly to favorable rainfalls. The picture is less clear for the oil sector where domestic sources report an average production of 3.7 million barrels per day while OPEC sources estimate it at 20 percent lower than this figure.On the expenditure side, private consumption expanded at 10.1 percent p.a. during the first 9 months of 1390 (last nine months of 2011), most likely as a result of the cash subsidies the government distributed in that year, and that trend is likely to have continued


in the past year. During the same nine months gross domestic capital formation expanded by only 1.2 percent p.a. and, given the expansionary monetary policy and the generally unfavorable business environment, must have contracted for the whole year in 1390 as well as 1391. This is a cause for concern about the continuation of recession.The foreign sector was also negatively affected by the tightening of the existing United Nations and unilateral sanctions and the imposition of the new ones. Oil and gas exports during the first ten months of 1391 amounted to only $57.7 billion as compared to $101.6 billion in the first 10 months of the preceding year, indicating a drop by 43 percent. Petrochemical exports also fell by 33 percent in value during the same 10 months. But the depreciation of the Rial helped boost non-oil exports by 16.1 percent and contract merchandise imports by 17.6 percent. These developments led to a 50.8 percent drop in the current account surplus from $48.1 billion in the first 10 months of 1390 to $23.7 billion in the same period in 1391. A noteworthy development in the foreign sector during the past decade is a radical change in the source of imports to Iran from mostly European countries to Iran’s neighboring countries and Asian importers of Iranian oil. In 1381 (2002-3) the top five sources of imports were, respectively, Germany, UAE, Switzerland, Italy and France but in 1391 (2012-13) they were replaced by UAE, China, Republic of Korea, Turkey and Switzerland.SCI estimates the unemployment rate in 1391 at 12.2 percent, almost unchanged from its estimate of 12.3 percent in 1390. 47.5 percent of the employed were in services, followed by 33.6 percent in agriculture and 18.9 percent in manufacturing sectors.Government budget also suffered from the sanctions as its oil revenues fell by 155 trillion rials in the first 11 months of the year in comparison to the similar period in the preceding year to reach 360.5 trillion rials, and only 56 percent of the planned budget was realized. During the first 11 months of the year almost 90 percent of the budget was spent on current expenditures and only 10 percent was allocated to investments. During the above periods, despite the considerable increases in tax and other revenues, the budget deficit dropped only slightly from 351 trillion Rials to 340 trillion Rials. Reasons for budget deficit include the 44 percent shortfall in oil revenues, 48 percent shortfall in revenues generated from the subsidies reform program and the payment of 500,000 Rials for New Year bonuses to a large number of cash subsidies recipients. These forced the government to borrow from the CBI and the National Development Fund. This method of financing the budget deficit further accelerated liquidity growth and inflation rates in 1391. In the Monetary sector, 1391 experienced a liquidity growth rate of 30.8 percent, mostly as a result of the government’s budget deficit. From 1390 to 1391 the growth rate of the monetary base increased from 11.4 percent to 27.2 percent and the money


multiplier increased from 4.61 to 4.74. On the sources of the monetary base, in1391 net foreign assets increased by 0.9 percent as a result of the decline in oil revenues and, unlike previous years, did not play an important role in the growth of the monetary base. Nevertheless, the persistence of budget deficit and its effects on the banking system -- CBI in particular -- caused a 161 percent increase in government’s net debt to CBI. Banks’ debts to the CBI also increased by 17.5 percent. The government budget deficit was thus mostly financed through the banking system which, in addition to increasing the liquidity growth, exacerbates inflation expectations and concerns about the persistence of stagflation should the decline of oil revenues continue in 1391.Unless the relationship between the government and banks are revised and CBI supervisions are enforced, high levels of commercial bank debts to CBI (mainly excess withdrawals) and high default rates will continue. In the past two year the banking system’s default rate has been around 15 percent in spite of the CBI efforts.In December 2012, current account deposits were about 27 percent higher than in December 2011, signaling readiness to shield against high inflation expectations by shifting funds into markets such as real estate, gold and foreign exchange. In the last month of 1391 compared to the same month of previous year, the consumer price index in urban areas jumped by over 40 percent to register an inflation rate of 31.6 percent in 1391. This was the highest inflation rate in the past 17 years and placed Iran as the country with the 4th highest inflation rate in the world – next to those of Belarus, Southern Sudan and Sudan in 2012. Apart from the government expansionary policies noted above, other causes of this high inflation rate include the tightening of sanctions that limited consumer and intermediate goods imports as well as import-dependent domestic production. The significant depreciation of the rial against major currencies, including 90 percent depreciation against USD, also contributed to the price increases. Negative factors such as imposition of sanctions, high inflation and currency devaluation channeled funds toward the capital market and brought about a 46.8 percent rise in the Tehran Stock Exchange (TSE) index. Main winners were mining companies, refineries, and petrochemical and chemical companies whose stocks grew by, respectively, 114, 211 and 95 percent in 1391. Among the large industries, banking was the only sector that could not keep its shareholders happy since financial sanctions and problems with money transfers caused a 4.1 percent drop in its stocks. Despite the unsatisfactory economic conditions of the past few years, given the incoming president’s emphasis on improving the business environment and Iran’s relations with other countries, it is anticipated that the general economic conditions of the country will improve in 1392.


1� The Real SideThe latest CBI figures on Iran’s GDP do not go beyond the third quarter of 1390 (October-December, 2011), and as such do not present a clear picture of the economy in 1390, or give any information about 1391. This report will, therefore, make use of what is available from CBI publications in conjunction with partial data offered by government officials and international organizations such as the World Bank and the IMF.In recent years, the services sector has had the largest share in Iran’s GDP, followed by oil and gas, manufacturing and mining, and agriculture. The shares of these sectors in Iran’s GDP during 1385-1390 (2006-2011) are shown in Table 1.

Table�1-�GDP�and�Value-added�of�Sectors�in�Current�Prices,�1387-90

(Trillion rials) Share (percent)1387 1388 1389 1390** 1389 1390**

Agriculture 302.2 366.0 437.0 522.7 9.8 11.0Oil 850.6 729.3 977.8 1,266.4 22.0 26.7Manufacturing and Mining 632.3 653.8 837.5 917.4 18.8 19.3Services 1,692.0 1,919.1 2,200.7 2,044.7 49.4 43GDP* 3,477.1 3,688.2 4,453.0 4,751.2 100 100

Source: CBI, 1390 Annual Review* In basic prices and prior to the deduction of imputed bank service charges** First 9 months only

Table 2 presents the growth rates of the GDP and its components from 1385 to 1390 (2006-2011). According to the CBI, I ran’s GDP growth rate stood at 4 percent during the first 9 months of 1390 (March-December, 2011). The SCI estimates the rate at 3.2 percent for the entire 1390 (March 2011-March 2012) but the IMF and the World Bank estimate it at 3.0 percent and 1.7 percent, respectively1. Both of these organizations have estimated that Iran’s GDP has contracted by 1.9 percent in 2012. Iran’s economic growth in 1390, therefore, is estimated to have been between 1.7 and 3.2 percent. As for 1391, the only available data are from the IMF and the World Bank that estimate contraction by 1.9 percent. Overall, it can be concluded that the growth rate of the Iranian economy slowed down in 1390 and probably turned negative in 1391.

Table�2�-�GDP�Growth�Rates�(in�percentages, based on constant 1376 prices) 1385 1386 1387 1388 1389 1390*

Agriculture 4.7 6.4 -11.8 13.5 8.8 4.8Oil 3.6 1.3 -2.0 -3.9 1.9 6.6Manufacturing and Mining 9.4 3.2 5.5 2.8 9.3 4.5Services 6.7 6.0 2.4 2.2 4.0 2.8GDP 6.6 5.0 0.8 3.0 5.8 4.0Source: CBI, 1390 Annual Review* First 9 months only

1. IMF, World Economic Outlook, April 2013; World Bank, Global Economic Prospects, June 2013


Figures on the gross domestic expenditures in Table 3 indicate that private consumption expenditures grew by 10.1 percent during the first 9 months of 1390 (last nine months of 2011), mainly due to the distribution of large cash subsidies by the government which increased household incomes and boosted consumer spending. Government consumption expenditures, however, contracted by 2.8 percent in 1389 and 2.7 percent in the first nine months of 1390.

Table 3 - Gross Domestic Expenditure Growth Rates (in constant 1376 prices)

1385 1386 1387 1388 1389 1390*

Private Consumption Expenditures 6.1 6.8 -4.5 -1.1 1.90 10.1Public Consumption Expenditures 5.8 -8.5 4.1 2.3 -2.8 -2.7Gross Fixed Capital Formation 3.0 6.6 10.9 -0.9 6.9 1.2Gross Domestic Expenditure 6.2 6.4 0.6 4.0 5.9 3.7

Source: CBI, 1390 Annual Review* First 9 months only

As per the objectives of the Fourth Five-Year Development Plan, in order to achieve the target GDP growth rate of 8 percent p.a., gross fixed capital formation has to grow by an average of 12.2 percent p.a. This can also be viewed as the minimum required investment for achieving the target growth rate in the Fifth Five-Year Development Plan. However, the gross fixed capital formation grew by only 6.9 percent and 1389 and 1.2 percent in the first nine months of 1390. The insignificant investment growth and the decline in Iran’s GDP growth rate during the first nine months of 1390 raise concern over Iran’s ability to create adequate employment opportunities in the coming years.

1-1- Agricultural SectorThe share of agriculture in the economy has been increasing since 1387, reaching 11.4 percent in the first nine months of 1390. The 18 percent rainfall growth during the first five months of 91-92 water year (September 2011 - August 2011), and the 2.8 percent rainfall growth in 1390-1391 water year contributed to agricultural production growth to 118 million tons in 1391.2

1-2- Oil and Gas Sector Conflicting data are provided by various sources on Iran’s oil and gas output in recent years. Local authorities estimate Iran’s crude oil production in 1391 at 3.7 million barrels per day (bpd) while OPEC estimates it at around 3 million bpd. Local fuel consumption during the last month of 1391 (February-March, 2012) was about 1.7 million bpd, which

2. Report of the Deputy Governor of the Central Bank for Economic Affairs to the 23rd Annual Conference on Monetary and Foreign Exchange Policies, 26-27 May 2013, accessible at http://www.conf.mbri.ac.ir/conf23


is almost unchanged from the previous year. Further information on oil and gas sector will be presented in the Sanctions and External Balance of Payments sections of this Report.

1-3- Manufacturing and Mining SectorDepending on whether they are foreign currency spenders or earners, different subsector within the manufacturing and mining sector have been impacted by the sanctions in varying degrees. Productions have expanded in industries such as steel, aluminum and glass, but contracted in the like of auto-making that heavily depend on imported raw materials and intermediate goods.3

Petrochemical IndustriesAs demonstrated in Table 4, petrochemicals output experienced a growth of 6.4 percent by weight and 64.3 percent by value in 1390, reaching 42.7 million tons and 111.2 thousand billion rials, respectively. The value of Iran’s petrochemicals export grew by 26.8 percent to reach USD 14.7 billion in 1390.

Table 4 - Performance of Petrochemical Industries (1387-1391)

Year Growth rate (percent)1387 1388 1389 1390 1391 1389 1390 1391

Production (thousand tons) 30,040 34,433 40,175 42,736 41,000 16.7 6.4 -4.1Value of Exports (USD millions) 7,843 9,147 11,559 14,662 * 26.4 26.8 *Value of Domestic Sales (Rls. bn.) 40,056 46,766 67,692 111,244 156,933 44.7 64.3 41.1

Source: CBI, 1390 Annual Review; Majlis Research Center forecasts for 1391 * Data is unavailable

According to the Majlis (Parliament) Research Center, Iran’s petrochemicals output declined to 41 million tons in 1391, mainly due to the tightening of sanctions and challenges Iran faced in the transportation and insurance sectors. This report points out that Iran currently holds 24 percent of the total petrochemicals output of the Middle East region, and once the new development projects come on stream by the end of the Fifth Five-Year Development Plan, Iran should hold 38 percent of the petrochemicals production capacity in the region. Out of Iran’s total petrochemical production of 41 million tons in 1391, about 28 million tons were available for sale, from which 12.2 million tons were consumed locally and the remaining 15.8 tons were exported. Local sale of petrochemical products in 1391 amounted to 156.9 thousand billion rials.4

3. Speech of the Minister of Economic Affairs and Finance at the 23rd Conference on Monetary and Foreign Exchange policies, Tehran, 26-27 May 2013, accessible at http://dolat.ir/NSite/FullStory/News/?Serv=4&Id=2277144. Majlis Research Center, Office of Energy, Industry and Mining, Energy Developments Weekly, No.19, 25/02/1392 (15 May 2013)


�Steel,�Steel�Products�and�Cement�IndustriesAs shown in Table 5, production of raw steel, cement and steel products during the first six months of 1391 compared to the same period in 1390 grew by 9.3 percent, 4.1 percent, and 1.6 percent, respectively. And as for the first six months of 1390 compared to the same period of 1389, these industries growth rates were 15.6 percent, 14.6 percent and 12.5 percent, respectively.

Table�5�-�Productions�of�Steel,�Steel�Products�and�Cement�(in�thousand�tons)

First six months only Change (percent) 1389 1390 1391 1390 1391

Raw Steel 5,960 6,890 7,528 15.6 9.3Steel Products 7,776 8,750 8,890 12.5 1.6Cement 30,864 35,357 36,804 14.6 4.1

Source: Report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2)

Automotive IndustryData on Iran’s car production in recent years is shown in Table 6. Car production in 1391 dropped by 44.5 percent to reach 788.4 thousand vehicles. One of the main reasons for the drop was the financial restrictions brought about by the sanctions that restricted local auto-part manufacturers’ ability to acquire their required parts. In addition, fluctuations of the rial exchange rates and the non-allocation of much needed foreign currency to the automotive industry significantly increased the domestic production costs. On the other hand, the curtailment of business relations between the French car producer Peugeot and Iran-Khodro Company that was induced by the sanctions and other international limitations imposed on Iran, further exacerbated the difficulties of Iran’s automotive industries.

Table�6�-�Number�of�Vehicles�Produced,�1388-1391

1388 1389 1390 1391 Change in 1391 (percent)All Vehicles5 1,424,551 1,603,251 1,651,115 921,380 -44.2Passenger Cars 1,193,240 1,359,593 1,420,612 788,390 -44.5

Source: Association of Iran Vehicle Manufacturers

Construction and Housing SectorTable 7 presents data on construction permits issued for urban areas. During the first six months of 1390, in comparison to the same period of the preceding year, the number of construction permits increased by 9 percent and the total floor space in urban areas increased by 14.9 percent. During this period, total floor space registered in construction permits in different

5. Vehicles include passenger cars, vans, ambulances, minibuses, buses, trucks, tow trucks, and fire trucks


districts of Tehran and other large cities grew by 29.8 percent and 28.9 percent, respectively, which indicate favorable environment for construction in those areas.6 In 1390, 565 thousand housing units were built by the private sector on a total floor area of 74 million square meters, indicating a growth of 2.5 percent and 4.2 percent from the preceding year, respectively.7

The increase in housing prices in the second half of 1391, as well as the increase in the profit rate of construction businesses accelerated the growth of construction permits in the third and fourth quarters of 1391. At the same time, the increase in housing prices was spread from large cities to small and medium urban areas. Accordingly, the performance of the construction permits in these areas has likely increased in the second half of 1391.

Table�7�-�Specifications�of�Construction�Permits�Issued�by�Municipalities�in�Urban�Districts

First six months Change (percent)1389 1390 1391 1390 1391

Number (thousands) 80.3 86.2 94.0 7.3 9.0Total Space (million square meters) 49.5 54.4 62.6 10.0 14.9Average Space (square meters) 616 632 666 2.6 5.4


Table 8 presents data on private investments in various urban constructions during the first half of 1391 and also compares their real and nominal growth rates in this period with those in the first half of 1390. It indicates that in the first six months of 1391 compared to the similar period in 1390, investments in new urban buildings have grown by 2.0 percent in constant prices and 37.8 percent in nominal prices, respectively, to reach 274.6 trillion rials. During this period, the growth rate of nominal investments in Tehran, large cities and other urban areas were estimated at 45 percent, 68 percent and 20.4 percent, respectively.

Table 8 - Private Sector Investment in Construction and Housing (excluding land value)

First six months of the year (Billion rials) Nominal growth rate (percent) Real growth rate (percent)

1391 1390 1391 1390 1391Tehran 69,410.8 42.8 68.0 20.6 24.4Other Large Cities 88,192.0 35.0 45.0 14.0 7.4Other Urban Areas 117,034.9 24.8 20.4 5.4 -10.8All Urban Areas 274,637.6 30.7 37.8 10.3 2.0


A significant development in the housing sector relates to the “Mehr Housing Project”. As seen in Figure 1, from the start of this project in 1386 up to the end of Azar 1391 (December 2012), permits have been issued for the construction of 1,927.8 thousand residential units,

6. Report of the Deputy Governor of the CBI for Economic Affairs (see footnote 2)7. CBI, 1390 Annual Review


of which 1,806.8 thousand units were in different phases of construction. According to an Advisor to the Roads and Urban Development Minister, by the second month of 1392 (May 2013), approximately 600 thousand units had been handed over to homeowners.8

Figure�1�-�Performance�of�Mehr�Housing�Project,�by�Construction�Phase� (From start till end of Fall 1391 (20 December 2012))

947.5

1,399.1 1,562.1

1,806.8

1,927.8

1,800.72,500

2,000

1,500

1,000

500

0

thou

sand

resid

entia

l uni

ts

End of finishing touches phase

End of insulation and drywall

phase

End of framing phase

End of foundation

phase

units with a construction

permit

units with a construction

contract


1-4- Services SectorIn recent years services have accounted for nearly half of Iran’s GDP, standing at 49.4 percent in 1389. The devaluation of the rial against major currencies slowed down foreign travels and boosted domestic tourism. Iran’s Customs Office reports that in 1391, Iranians’ travel abroad has dropped to 18.3 million from 21.7 million in 1390, showing a 15 percent decline. In contrast, the number of travelers to Kish Island has increased by 11 percent and to Qeshm Islands by 9 percent. The banking and insurance sector also experienced increased activity in 1391. 9

1-5- Employment and UnemploymentAccording to the SCI data presented in Table 9, in 1391 economic participation rate stood at 37.7 percent, indicating that 37.7 percent of the 64 million population over 10 years of age were either employed or looking for a job. The SCI has estimated the unemployment rate in 1391 at 12.2 percent, indicating a declining trend from 13.5 percent in 1389 and 12.3 percent in 1390.

8. Iran Students News Agency (ISNA); “Only 50,000 Mehr Housing units have received title deeds”, 24 Ordibehesht 1392 (14 May 2013) 9. Speech of the Minister of Economic Affairs and Finance, (see footnote 3)


Table�9�-�Economic�Participation�and�Unemployment�Rates,�1385-91�(in�percentage�points)

1385 1386 1387 1388 1389 1390 1391Labor force Participation Rate 40.4 39.8 38.0 38.9 38.3 36.9 37.7Unemployment Rate 11.3 10.5 10.4 11.9 13.5 12.3 12.2

Source: SCI, Summary Results of the Workforce Survey Project, 1391

It should be noted that the above-mentioned unemployment rates are based on sampling, which are usually different from unemployment rates derived from general censuses. According to the census of 1390, 3.6 million out of an active population of 24.1 million were unemployed, rendering an unemployment rate of 14.8 percent in 1390 which is much higher than the 12.3 percent derived from sampling. In 1391, 47.5 percent of the employed were in the services sector, 33.6 percent in industries and 18.9 percent in agriculture. The share of the active workforce aged 15 and above with usual work of at least 49 hours per work stands at 40.6 percent, indicating that a large portion of Iran’s workforce work longer hours than standard.

2� Economic Sanctions against IranEconomic sanctions against Iran were first introduced by the United States in 1358 (1979). After Iran’s nuclear file came into the picture, previous US sanctions were tightened and new ones were initiated by the US as well as by the UN Security Council and the EU throughout 2006 and 2007. The imposition of these sanctions were purported to curb Iran’s attempts to obtain nuclear weapons, violation of human rights, and support of political groups in other countries of the region – accusations that have been repeatedly denied by Iran. In 1391 unilateral sanctions against Iran were further intensified and followed by the implementation of the so-called “Iran Freedom and Counter-Proliferation Act” of 2012 as of 1 July 2013 that prohibits large transactions in Iranian rial and rial-denominated instruments. This Act also authorizes the imposition of sanctions on persons who knowingly engage in transactions for the sale, supply, or transfer to Iran of significant goods or services related to the automotive sector of Iran, and bans people in violation of these regulations from entering the United States.

3� Government Budget and FinanceTable 10 summarizes sources and uses of the government budget and indicates that the revenues obtained from sale of crude oil and oil products had a growing trend till the end of 1390 ( 20 March 2011). However, it experienced a significant drop during the


first 11 months of 1391, and as a result the total disposal of capital (non-financial) assets also plunged by 30 percent compared to the similar period in its previous year. On the other hand, taxes grew by 15 percent during the first 11 months of 1391 compared to the similar period in 1390, showing an 80.6 percent realization. From the total government income of 861 thousand billion rials during the first 11 months of 1391, the share of disposal of non-financial assets, tax revenues, other revenues and disposal of financial assets from the total revenue were 42 percent, 38 percent, 13 percent, and 7 percent, respectively. On the uses side, current expenditures constitute 90 percent of total expenses during the first 11 months of 1391, indicating a 9 percent growth compared to the similar period in its previous year. In contrast, acquisition of non-financial assets, which constitutes 10 percent of total expenses, dropped by 52 percent during the first 11 months of 1391 compared to the similar period in its previous year, and the share of acquisition of financial assets has also been insignificant.

Table�10�–�Government�Budget�Sources�and�Uses,�1380-1391�(Rls.�Trillion)

Sources Uses

Year

Revenues Disposal of non-financial�assets Disposal of

financial�assets

ExpensesAcquisition of non�-�financial�

assets

Acquisition of�financial�

assetsTaxes Other revenues Oil

Receipts from sale of movable and immovable

assets

(Current Expenditures)

1380 41.8 11.4 72.0 0.4 3.3 104.0 24.4 0.81381 50.1 12.0 102.6 0.5 47.9 148.3 37.2 27.61382 65.1 13.7 128.2 0.9 55.5 178.3 61.0 24.11383 84.4 19.2 150.4 1.0 80.7 231.9 72.3 31.51384 134.6 65.8 186.3 1.0 83.3 330.9 117.6 22.51385 151.6 79.5 181.9 0.9 161.1 415.8 145.6 13.61386 191.8 106.4 173.5 1.3 156.6 421.3 147.8 60.61387 239.7 139.6 215.7 1.0 246.2 582.7 223.0 36.51388 300.0 166.5 157.8 0.8 220.1 593.8 198.2 53.31389 284.5 99.8 434.5 1.3 63.2 659.3 212.8 23.91390 359.5 185.0 568.3 1.6 60.9 877.7 289.0 8.61390* 284.7 88.2 515.4** 54.9 707.9 178.6 9.41391* 326.7 109.5 360.5** 64.5 782.8 84.0 0.9

Source: CBI Annual Review (for 1380-1390); Report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2) for 1391 statistics* First 11 months only** Includes the sales of oil and oil products as well as the sale of assets

Figure 2 compares current expenses with acquisition of non-financial assets.


Figure�2�-�Comparison�of�Acquisition�of�Non-financial�Assets�and�Expenses,�1380-1391�(Rls.�Trillion)�

1380 1381 1382 1383 1384 1385 1386 1387 1388 1389 1390 1391*

1،000.0800.0600.0400.0200.0

-

ExpensesSource: CBI Annual Review for 1380-90 statistics and report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2) for 1391 statistics* first 11 months

As shown in Figure 3, during the examined years, actual acquisition of non-financial assets (also known as development expenditures) has been lower than its approved amount, a trend which intensified during the first 11 months of 1391. It should be noted that transfer of acquisition of non-financial expenditures to the future would also increase forthcoming expenses since devaluation of the rial against hard currencies, would further increase production costs. In addition, the decline in the share of acquisition of non-financial assets would cease any progress in ongoing projects and the carried out expenses will only cover fixed costs, which in turn, will question the economic justification of projects.

Figure�3�-�Comparison�of�Approved�and�Realized�Non-financial�Assets,�1380-1391�(Rls.�Trillion)�

1380 1381 1382 1383 1384 1385 1386 1387 1388 1389 1390 1391*

500400300200100

0

Realized

Source: CBI Economic Report and Balance Sheet (for 1380-1388 statistics), CBI Annual Review (for 1388-1390 statistics), and report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2) for 1391 statistics* first 11 months

Table 11 summarizes the approved and realized operating balance (the difference between current revenues and expenditures), net disposal of non-financial assets (the difference between disposal and acquisition of non-financial assets), and transaction of financial assets and liabilities (the sum of operating and non-financial balances) from 1381 till the end of the first 11 months of 1391. As shown in the table, the operating balance for the first 11 months of 1391 had a deficit of 340 trillion rials, i.e., a 3 percent decline compared to the similar period in its previous year.


Table�11�–�Comparison�of�Approved�and�Realized�Budget,�from�1381�to�1391�(Rls.�Trillion)�

Year 1381 1382 1383 1384 1385 1386 1387 1388 1389 1390 1390* 1391*

Operating BalanceApproved -73.0 -80.7 -103.7 -144.0 -163.1 -147.7 -331.9 -123.5 -227.6 -287.9 -287.9 -357.4Realized -86.2 -99.4 -128.3 -130.5 -184.7 -123.1 -203.4 -127.2 -275.1 -333.2 -350.8 -340.2Realization(percent) 118.1 123.2 123.8 90.6 113.2 83.4 61.3 103.0 120.8 115.7 121.8 95.2

Net�Disposal�of�Non-financial�AssetsApproved 47.6 44.9 43.4 58.9 7.1 7.6 78.5 -47.4 139.3 241.0 241.0 301.3Realized 65.9 55.2 79.1 69.7 37.2 27.0 -6.4 -39.6 222.9 280.9 336.8 276.5Realization(percent) 138.5 122.9 182.4 118.3 521.9 356.4 -8.1 83.5 160.1 116.6 139.8 91.8

Operating�and�Non-financial�BalanceApproved -25.4 -35.8 -60.3 -85.1 -155.9 -140.1 -253.5 -170.9 -88.4 -47.0 -47.0 -56.1Realized -20.3 -31.4 -49.2 -60.9 -147.4 -105.6 -209.8 -166.8 -77.1 -52.1 -14.0 -63.7Realization(percent) 79.9 87.6 81.6 71.5 94.6 75.3 82.8 97.6 87.3 111.0 29.7 113.5

Source: CBI Economic Report and Balance sheet (for 1381-1388 statistics), CBI Annual Review (for 1388-1390 statistics), and report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2) for 1391 statistics* first 11 months

During the examined period, the operating balance has always been negative, due mainly to unrealistic forecasts of tax incomes and other revenues on one hand and stickiness of current expenditures or their random increase on the other. In spite of having positive capital balances for most of these years10, transaction of financial assets and liabilities has always been negative, and part of this budget deficit has been financed through the sale of government bonds, transfer of the assets of public companies, as well as withdrawals from the Foreign Exchange Reserve or the National Development Fund.

3-1- PrivatizationDespite all the efforts made, the process of privatization in Iran has not been implemented in line with the objectives of true privatization and Article 44 of the Islamic Republic of Iran’s Constitution, and has therefore triggered criticism of the government. Some of the deviations include the transfer of public companies to quasi-governmental companies to clear their debts, which resulted from the government’s increasing debts to the Social Security Organization as well as some retirement funds and public companies. In 1391, the non-governmental sector (i.e., private individuals and companies) had a minor 12

10. The reason for negative approved capital balance in 1388 is due to the non-inclusion of figures relating to the clarification of real energy prices and gasoline imports in the calculation of revenues from sales of crude oil and oil products.


percent share of the 181,052 billion rials transferred shares of public companies, and the remaining 88 percent pertained to clearance of government debts. Clearly this does not comply with the true essence of privatization or Article 44 of the Constitution. Unfortunately, this trend has also continued in the budget bill of 1392 and has allowed the government to transfer the shares, assets and belongings of public companies to settle its debts.

3-2- Budget Act of 1392Table 12 presents the main components of 1391 and 1392 calendar year Budget Acts. Given the economic problems in 1390, which also continued through 1391, such as the non-realization of over 40 percent of the revenues, it seems that the anticipated resources may no longer be accessible in 1392. This will likely exacerbate the existing budget deficit, further reduce non-financial costs, and worsen the economic and living conditions.

Table 12 – Comparison of the 1391 and 1392 Budget Acts (Rls� Trillion)

Budget Act of 1391 Budget Act of 1392Revenues 685 910 Expenses 985 1,210 Disposal of non-financial assets 626 700 Acquisition of non-financial assets 383 560 Disposal of financial assets* 131 70 Acquisition of financial assets 73 80 Total general government consumption 1,441 2,104 Special revenues 200 256 General government consumption 1,641 2,360 Budget consumption of public companies and private institutions affiliated to the government and banks 3,651 5,358

Iran’s total budget consumption 5,103 7,277 Revenues from Subsidies Reform Program 660 500 Credited subsidies* 138 210

Source: Prepared on the basis of statistics provided in 1391 and 1392 Budget Acts and Majlis Research Center reports* 1392 statistics are those of the 1392 Budget Act

3-3- Foreign Reserve Account and National Development FundThe Foreign Exchange Reserve Account was established in 1379 to stabilize the amount of revenues (in foreign and domestic currencies) obtained from the sale of crude oil, to convert the assets derived from the sale of oil into other types of reserves and investment, to reduce the dependence of the government budget on oil exports income, and to strengthen


private sector manufacturers and exporters. From 1379 until 1389, over USD 160 billion were deposited in this account, of which almost 10 percent was allocated to the private sector as facilities and the government spent most of the remaining portion, mainly with the permission of the Majlis.11 It is evident that the Majlis has not been committed to its approved bills and decrees, and the government has also shown an overwhelming tendency towards increasing its own expenses through oil income, and the mere existence of the Foreign Exchange Reserve Account has not brought about financial discipline in the government. One of the main consequences of constant government withdrawals from this account has been an increase in liquidity volume over the past few years. Moreover, government expenses have surpassed its revenues, implying that despite its abundant reserves, the Foreign Exchange Reserve Account has once again faced deficit and these sums have been practically injected to the economy.Due to the weak performance of the Foreign Exchange Reserve Account from the beginning of the Fifth Five-Year Economic Development Plan, the government established the National Development Fund and a portion of oil revenues was arranged to be deposited into this fund for payment to the private sector in the form of foreign exchange (and domestic currency) facilities. In 1389 and 1390 calendar years, 20 percent of Iran’s oil revenues were deposited annually into this account, which increased to 23 percent in 1391, and is supposed to reach 26 percent in 1392. There are no official data available on the revenues and expenses of this fund, however, according to the public media and the Managing Director of the National Development Fund, it was estimated at USD 49.6 billion in the second month of 1392 (April 2013).12

4� The Subsidies Reform ProgramThe Subsidies Reform Program (SRP), also known as the Targeted Subsidies Program, which started in Azar 1390 (December 2011), is one of the most significant programs called for by the Economic Restructuring Program. According to Articles 7, 8, and 11 of the SRP, revenues from the removal of indirect subsidies, forecasted at 660 trillion rials in 1391, were to be distributed as follows: 50 percent to the households, 20 percent to the government and 30 percent to domestic producers. The outcomes of the SRP, however, were different from what had been envisioned. Specifically, only 52 percent of the expected revenues were realized and the government decided to borrow from the Central Bank in order to meet some of its cash subsidy commitments. The budget bill of 1392

11. Majlis Research Centre, “Acquaintance with the Foreign Reserve Account and National Development Fund”, Khordad 1391(June 2012)12. http://www.mehrnews.com/detail/News/2047616


had also forecasted the revenue from the removal of direct subsidies to energy carriers to reach 1200 trillion rials, but due to inflationary concerns, this was not approved by the Majlis’ Planning and Budget Commission. Finally, in the budget bill of 1392, a 500 trillion rials revenue has been estimated from the SRP and direct cash handouts of 455 thousand rials per person (similar to its previous year) has been considered, which constitutes 82 percent of the total revenues of the subsidies amounting to 410 trillion rials. In the meantime, the total shares of the manufacturing, government, and public health sectors add up to only 18 percent (equivalent of 90 trillion rials) of the revenues gained through implementation of the SRP. Therefore, the government approved that in 1392 the price of energy would increase by 38 percent compared to its previous year.

4-1- Implementation Consequences of the First Phase of SRPStatistics on consumption of oil products from 28 of Azar 1389 until the end of Aban 1391 (December 2010 - November 2012) is presented in Table 13. As can be seen, after implementation of the SRP, the consumption of liquid gas, gasoline, kerosene, and gas oil have declined, while the consumption level of heavy fuel oil has increased.

Table 13 – Consumption of Oil Products Before and After the Implementation of the Subsidies Reform Program (million liters per day)13

Before13 After Change ( percent)Liquid Gas 12.8 6.0 -53.0Gasoline 64.3 57.2 -11.0Kerosene 14.0 13.4 -7.2Gas Oil 92.9 91.7 -1.3Fuel Oil 40.7 45.5 11.9

Source: National Iranian Oil Products Refining and Distribution Company

Although factors such as expansionary monetary and fiscal policies and the increase in the value of hard currencies in terms of the Iranian rial have contributed to the inflation rate, the implementation of the SRP has had a twofold impact on these factors. A comparison of inflation rates on the bases of consumer and producer price indices in Figure 6 indicates that the effects of an increase in the price of energy would, with a lag, raise the inflation rate mainly through an increase in the producer price index. Therefore, it is possible that the consumer prices inflation rate that reached its peak of the recent years in 1391, would, as a result of the continuation of expansionary monetary and fiscal policies and the

13. Data in this column refer to the average daily consumption from in the period between Khordad 1388 (June 2009) to Aban 1389 (November 2010).


depreciation of the rial, maintain its upward trend in 1392.The Gini coefficient is measure of incomes distribution, which varies between 0 and 1. A low Gini coefficient indicates a more equal distribution, with 0 corresponding to complete equality, while higher Gini coefficients indicate more unequal distribution, with 1 corresponding to complete inequality. Based on the CBI’s estimation, after implementation of the subsidies reform program, the Gini index in urban regions declined from 0.3800 in 1389 to 0.3740 in 1390. As a result of the inflationary conditions originated from the fiscal and monetary policies as well as the inflationary consequences of cash handouts, tightened sanctions imposed against Iran and foreign exchange rate fluctuations, the welfare situation in practice did not improve in 1391. According to the data published by the CBI, the food sector, which includes the basic needs of the lower income population, has experienced price increases of 45.6 percent in Azar 1391 (December 2012) compared to Azar 1390 (December 2011). Also, the public health sector experienced a 32.6 percent growth during this period. Due to the high importance of these expenses in the consumption basket of low-income households, the growth of these indices indicates a reduction in households’ welfare, especially among the lower-income population.

4-2- Second Phase of SRPImplementation of the second phase of the SRP without a logical and objective support of the manufacturing sector could bring about difficulties for the banking sector in terms of growing financial claims. With the increase in manufacturer’s costs to liberate prices, the company’s survival in the short-run is subject to not complying with their commitments to banks. Financial institutions are therefore exposed to liquidity shortage and the CBI is obliged to inject cash into banks which would lead to liquidity growth and further increase in price levels. However non-implementation of the second phase of the SRP will also increase energy prices and therefore bring about energy demand pressure. Therefore it is better to give this subject matter more time and after the new government takes office an overall agreement can be reached on how best to implement this program.

5� Balance of PaymentsWith the tightening of economic sanctions and the severe devaluation of the Iranian rial against hard currencies, Iran’s balance of payments underwent major changes in 1391. At the time of writing this report, official statistics on the balance of payments are only available for the first 10 months of 1391. Table 14 presents the most important of such


data and compares them with those in the first ten months of 1390, and also presents the statistics for the whole of 1390. As can be seen, the most significant developments in the balance of payments are the declines by USD 43.8 billion in oil exports and USD 11.7 billion in merchandise imports. On the other hand, non-oil exports have increased by USD 3.3 billion. Mainly because of these changes in the first ten months of 1391 compared to the similar period in 1390, the positive balance of merchandise account fell by 51.9 percent to reach USD 26.8 billion and the positive balance of the current account fell by 50.8 percent decrease to reach USD 23.7 billion. According to the Economic Deputy Director of the CBI, foreign currency transactions in 1391 increased CBI’s foreign assets by USD 9.1 billion.

Table 14 - Balance of Payments in 1390 and 1391 (USD million)

1390 1390* 1391* Change (percent)

Current Account Balance 59,383 48,143 23,708 -50�8Goods Account 67,069 55,611 26,762 -51.9

Exports (f.o.b.) 144,874 122,129 81,560 -33.2Oil Exports14 118,232 101,598 57,715 -43.2Non-oil Exports 26,642 20,530 23,844 16.1

Imports (f.o.b.) 77,805 66,518 54,797 -17.6Gas and Oil Products15 5,726 3,186 2,097 -34.2Other Goods 72,079 63,332 52,701 -16.8

Services -8,432 -7,971 -4,212 -47.2Incomes 323 176 711 303.2Current Transfers 423 328 447 36.4

Capital and Financial Account Balance -37,974 -8,027 -12,844 60Errors and Omissions -21,409 -22,587 -2,952 -86.9Overall Balance - 17,529 7,912 -54�9

Source: CBI, 1390 Annual Review, and report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2)* First ten months only

As for the outlook of the balance of payments, the acceleration of the inflation rate could raise the production costs, and thus jeopardize the competitive edge of Iranian exports and lower their profit margins. Some experts believe that the shocks of the July 2013 sanctions on oil exports has already been mostly absorbed and the remaining negative effects are mostly in the areas restrictions on financial transactions and ability to access foreign reserves.

14. Value of crude oil, oil products, natural gas, gas condensates and natural gas liquids (Tariff codes: 2709, 2710 and 2711) exported by National Iranian Oil Company (NIOC), National Iranian Gas Company (NIGC), National Iranian Oil Refining and Distribution Company (NIORDC), petrochemical companies, and others (customs and non-customs)15. Value of oil products, natural gas, gas condensates and natural gas liquids (Tariff codes: 2709, 2710 and 2711) imported by NIOC, NIGC, NIORDC, and others (customs and non-customs)


5-1- Oil and Gas ExportsDuring the first ten months of 1391, the value of Iran’s oil exports amounted to USD 57.7 billion, indicating a 43.2 percent drop from the USD 101.6 billion exports during the similar period in 1390. According to the US Energy Information Administration, the volume of Iran’s exports of crude oil and gas condensates has dropped from 2.5 million bpd in 2011 to 1.5 million bpd in 2012, indicating a 39 percent decrease. This is the lowest level of oil and gas exports Iran has had since 1986 in the midst of the Iran-Iraq war.16 In 2012 Iran’s production of crude oil and gas condensates also fell by about 700,000 bpd, or 17 percent below that in 2011. Mainly as a result of the US and EU-imposed sanctions, Iran’s annual oil income has decreased from USD 95 billion in 2011 to USD 69 billion in 2012. The average price of Iran’s heavy oil reached USD 109.1 per barrel during 2012, showing a 2.8 percent increase from 2011.

5-2- Merchandise ExportsAccording to Iran’s Customs Office statistics, the value of non-oil exports fell by 4.0 percent in 1391 to reach USD 32.5 billion. The sharpest drop took place in petrochemical exports whose share in non-oil exports plunged from 44.5 percent in 1390 to 31.0 percent in 1391, mainly because of the sanctions. Main non-oil exports in 1391 included methanol that was worth USD 1,185 million and value share of 3.7 percent, liquid propane worth USD 1,134 million and value share of 3.5 percent, and oil bitumen worth USD 1,090 million and value share of 3.4 percent.Table 15 presents the main destinations of Iranian exports in 1391 and shows that Iraq, with imports of USD 6,250 million and value share of 19.3 percent, was the main destination for Iranian goods. After that, China and the UAE with total imports of USD 5,501 million and USD 4,213 million from Iran, respectively, stood in the second and third places.

Table 15 – Value of Non-oil Exports17 to Top Five Destinations (USD millions) 1390 1391 Share in 1391 (percent)

Iraq 5,179 6,250 19.3China 5,557 5,501 17.0United Arab Emirates 4,509 4,213 13.0Afghanistan 2,253 2,874 8.9India 2,754 2,607 8.0Other Countries 13,566 11,008 33.9Total 33,819 32,454 100.0Source: Iran Customs Office, Preliminary Foreign Trade Statistics for 1391

16. U.S. Energy Information Administration, “Sanctions Reduced Iran’s Oil Exports and Revenues in 2012”, 26 April 201317. Non-oil exports in this able do not include gas condensates.


5-3- Merchandise ImportsThe value of Iran’s merchandise imports fell by 13.7 percent in 1391 to reach USD 53.3 billion. Top imports in 1391 included durum wheat seed worth USD 2,574 million and value share of 4.8 percent, iron and non-alloy steel in ingots or other primary forms worth USD 2,015 million and value share of 3.8 percent, yellow maize worth USD 1,801 million and value share of 3.4 percent, oil-cake and other solid residues worth $1,532 million and value share of 2.9 percent, and rice worth USD 1,309 million and value share of 2.5 percent. During this year, “transportation machinery and equipment”, “food products and live animals”, and “iron and steel” product groups constituted 63.5 percent of the value of imported goods. Iran’s sources of imports have undergone a major change in recent years. While in 1381 four out of the five top exporters to Iran were European, in 1391 Switzerland was the only one. Germany, with value share of 17 percent in 1381, was the first source of Iran’s imports, but it ranked 6th in 1391 with a value share of 5.3 percent. On the other hand, China, which held the 6th place in 1381 with a value share of 4.7 percent, jumped to the second place in 1391 with value share of 15.3 percent. As a result of such developments, as can be seen in Figure 4, the UAE with 20 percent share was Iran’s major source of imports in 1391, followed by China, Republic of Korea, Turkey and Switzerland.

Figure 4 - Top Five Country Sources of Iran Imports and their Shares

Other Countries41%

Turkey9% South Korea

9%

China15%

United Arab Emirates20%

Switzerland6%

Should the economic sanctions continue, countries that import oil from Iran will only be allowed to barter it with essential goods such as food products and medicine. In such a case major importers of Iranian oil in 1392 will also become the major sources of imports into Iran.

6� Foreign Exchange MarketIn 1391 the Iranian rial depreciated significantly against hard currencies. The value of the USD increased from about 18,000 rials at the beginning of 1391 to about 34,050 rials at the end


of the year, indicating a depreciation of the rial by over 90 percent against the USD. At some point during the year this exchange rate had even reached the unprecedented level of 40,000.To date, the fixed, multiple and managed floating exchange rate systems have been adopted in Iran. Until 1381 a managed floating exchange rate system was in place and several exchange rates existed in the market, causing significant economic problems. Given that despite the wide gaps between high domestic inflation rate and low foreign inflation rates, the rial exchange rate against major hard currencies had remained almost unchanged throughout the 1380s, foreign exchange shortages and a massive depreciation of the seemed inevitable. The first signs of foreign currency troubles appeared in September 2010 when certain countries refused to settle their accounts with Iran. In addition, the imposition of new sanctions gravely impacted the foreign exchange market in 1391 and played a significant role in the continuation of this depreciation.The rial depreciation against hard currencies can be considered from both the supply and demand perspectives. On the supply side, sanctions on oil and gas sectors reduced Iran’s export revenues in late 1390 and throughout 1391, and the sanctions on the banking system and the CBI made financial transactions with overseas difficult and costly, and thus limited foreign currency earnings. Moreover, the allocation of a large portion of the oil revenues to the import of goods and services throughout 1380s prevented foreign currency reserves from growing in proportion to the increase in oil incomes. Additionally, the sanctions on the banking sector limited Iran’s access to even these reduced foreign currency earnings. The demand for foreign currency can be considered from the two perspectives of transactions and speculation. The expansion of the liquidity volume, caused partly by the implementation of the subsidies reform program, has been among the main reasons for the sharp growth in foreign currencies demand and depreciation of the rial in the past two years. Also, further to the tightening of sanctions and appearance of inflationary expectations in 1391, speculative demand for foreign currencies grew in the market. The rising inflation rate and significant depreciation of the rial induced many to convert their rial assets into foreign currencies in the hope of protecting the value of their assets. This exacerbated speculative demand so much that, according to the Governor of the CBI, in November 2012 Iranians kept about USD 18 billion worth of foreign currency in their homes.Another major development in the foreign currency market was the establishment of the Foreign Exchange Transaction Center and the ranking of imported goods for the assignment of foreign currencies at preferential exchange rates. The so-called “non-reference foreign exchange rate” for the USD was first set at 23,622 rials in October 2012 and gradually grow to 24,580 rials by 20 March 2013.18 The creation of this Foreign

18. CBI website


Exchange Transaction Center brought about a three-tier exchange rate system, namely, the free market rate, the official rate and the non-reference rate. The official or governmental foreign exchange rate is set and announced by the CBI on a daily basis and is used by the government and banks for the conversion of their foreign currency holdings into rial.In 1391, the CBI took steps to put the foreign currency market in order. These steps included limiting the offering of foreign exchange to travelers at official exchange rate to between USD 400-1,000, depending on the means and destinations of their travel; and limiting travelers’ currency import and export to USD 5,000. Furthermore, a number of so-called “foreign currency market agitators” were arrested and the purchase and sale of foreign exchange outside the banking system and other authorized foreign exchange centers was declared illegal.

7� Monetary and Credit PoliciesIn recent years, the government’s fiscal expansion helped by marge oil revenues has weakened CBI’s monetary and exchange rate policy-making instruments. Government’s control over the banking sector has also significantly limited banks’ competitiveness and ability to rationally allocate their resources. Significant remaining instruments of improving the performance of the monetary sector include financial discipline and the rationalization of government budget expenditures. One of the major economic management responsibilities in any country is guidance and control of major economic variables such as liquidity, inflation, economic growth and employment -- whose recent data are presented in Table 16. These variables can be influenced by economic policies including fiscal and monetary policies.

Table 16 – Growth Rates of some Macroeconomic Variables (in percentage points)Year GDP Liquidity Growth Inflation Unemployment1381 8.2 30.1 15.6 12.81382 7.8 26.1 15.6 11.81383 6.4 30.2 15.2 10.31384 6.9 34.3 10.4 11.51385 6.6 39.4 11.9 11.31386 5.0 27.7 18.4 10.51387 0.8 15.9 25.4 10.41388 3.0 23.9 10.7 11.91389 5.8 25.2 12.4 13.51390 3.2 19.4 21.5 12.31391 -1.9 30.8 31.6 12.2

Source: CBI for statistics on inflation, GDP growth (from 1381 to 1389) and liquidity; SCI for unemployment rate, GDP growth rate in 1390; and the International Monetary Fund for GDP growth in 1391


Liquidity growth can bring about economic growth. However, due to the improper implementation of monetary policies, recent liquidity expansions have not led to economic growth, and instead have further increased prices levels so much that Iran’s highest inflation rate in the past decade was recorded in 1391. Meanwhile, as indicated in Figure 5 and elsewhere in this report, despite the growth of the liquidity volume in recent years, the economy actually contracted in 1391.

Figure�5�-�Growth�Rates�of�GDP,�Liquidity�and�Inflation�in�1381-91(in�percentage�points)�

1381 1382 1383 1384 1385 1386 1387 1388 1389 1390 1391

50.0

40.0

30.0

20.0

10.0

-

-10.0Source: CBI Annual Review for 1381-90 statistics, and report by the Deputy Governor of the CBI for Economic Affairs (refer to footnote 2) for 1391 statistics

7-1- Liquidity and its Affecting FactorsIran’s liquidity growth is associated with the government’s fiscal and budgetary policies which, through the use of oil incomes, affect the monetary base components. Data in Table 17 show that liquidity has been expanding in recent years and grew by 30.8 percent 1391 to reach 4,609 trillion rials. In 1391 the monetary base and money multiplier expanded by 27.2 and 2.8 percent, respectively.

Table�17�-�Liquidity�and�its�Determinants,�1384-91

Year 1384 1385 1386 1387 1388 1389 1390 1391Monetary base (Rls. Trillion) 220.5 280.0 365.5 539.4 603.8 686.4 764.6 972.9Money multiplier 4.2 4.6 4.5 3.5 3.9 4.3 4.6 4.7Liquidity (Rls. Trillion) 921.0 1,284.2 1,640.3 1,901.4 2,355.9 2,948.9 3,522.2 4,606.9

Source: CBI Economic Trends for 1384-1390 statistics, and report by the Deputy Governor of the CBI for Economic Affairs for 1391 statistics (refer to footnote 2)

On the monetary base side, in 1391 although the net foreign assets grew by 0.9 percent, the reduction in oil incomes prevented it from having a significant role in monetary base growth. The main cause of the accelerated growth in monetary base


was a 161 percent growth in the net indebtedness of the public sector to the CBI in 1391. This was due to factors including the decline in government’s oil incomes and the resulting 8 percent decrease in the government’s deposits with the CBI; the 43.1 percent increase in the public sector’s debt to the CBI and the sustained budget deficit.The government’s strict supervision and control of the banking sector have affected banks’ resources and their indebtedness to the CBI. Due to policies such as providing facilities to SMEs, the Mehr Housing Project and imposing ceilings on credits to economic sectors, banks’ indebtedness to the CBI has increased in recent years. In 1391 it increased by 17.5 percent which, although showing a slight decline from the growth rates in preceding years, still affected the monetary base growth.The change in deposits configuration and their growth rates depend on factors such as the savings accounts interest rate, inflation expectations and macroeconomic policies. During the first 9 months of 1391, the non-sight and sight bank accounts grew by 33.7 percent and 25.9 percent, respectively. The growth in sight accounts implies that asset holders anticipated profit opportunities in markets such as real estate and housing, property, gold and foreign exchange to hedge their assets against inflation.A look at the liquidity composition during this period indicates a decline in the share of money from 23.7 percent in 1390 to 22.7 percent in 1391. Table 18 presents data on some monetary and credit variables.

Table�18�–�Monetary�and�Credit�Variables,�1380-1391�(Rls.�Trillion)�

Year 1380 1381 1382 1383 1384 1385 1386 1387 1388 1389 1390 1391Banks claims on public sector* 138.5 206.2 221.9 235.9 235.6 256.2 280.6 291.5 364.6 553.4 677.6 532.1

Government* 72.2 128.9 143.0 148.7 135.8 160.3 188.7 206.9 284.9 468.9 527.5 509.4Public corporations and institutions* 66.3 77.3 78.9 87.2 99.8 96.0 91.9 84.6 79.7 84.5 150.1 22.6

Central Bank claims on Public sector 82.4 131.6 136.0 132.4 123.2 131.4 131.8 130.3 135.0 222.6 218.9 313.3

Government 64.6 111.6 117.1 111.9 101.3 104.1 97.8 91.4 92.2 173.0 518.9 -Public corporations and institutions 17.7 19.9 18.9 20.4 22.0 27.3 33.9 38.8 42.7 49.6 157.6 -

Banks indebtedness to Central Bank 12.1 24.3 23.5 21.5 35.9 54.9 137.7 239.7 168.9 329.7 418.3 491.4

Banks and credit institutions’ claims on non-public sector*

242.5 327.1 454.8 142.0 865.3 1,226.2 1,663.7 1,866.6 2,137.4 2,929.2 3,524.5 3,917.6

Monetary base 97.2 119.6 133.1 152.0 220.5 280.0 365.5 539.4 603.8 686.4 764.6 972.9Money* 143.0 182.7 217.4 252.6 317.9 280.0 535.7 525.5 601.7 758.7 874.2 976.4Liquidity 321.0 417.5 526.6 685.7 921.0 1,284.2 1,640.3 1,901.4 2,355.9 2,948.9 3,522.2 4,606.9

Source: CBI Economic Trends (for 1380-1390 statistics), and report by the Deputy Governor of the CBI for Economic Affairs for 1391 statistics; (refer to footnote 2)* The 1391 statistic is for the first 9 months only.


7-2- Monetary and Banking Sectors Challenges Administrative setting of bank interest rate, non-competitiveness of a large part of the banking industry, administrative assignment of loans, non-independence of the CBI and the Money and Credit Council that sets monetary policies, dominance of fiscal policies over monetary policies, and the lack of fiscal and budgetary discipline bring about an environment where banks cannot operate efficiently and it is very difficult to rein in inflation and bring about economic growth. This part of the report will study the above-mentioned issues in greater details.

Bank Rates DeterminantsThe most important indicator used to manage liquidity and foreign exchange markets is the efficiency of the financial and real assets markets as reflected in bank interest rates for lending and deposit. Every period during which markets parallel to money and capital --such as foreign exchange, gold and property markets--have had high rates of return (mainly due to economic policies), liquidity has been directed into non-productive activities and slowed economic growth.As presented in Table 19, the real (interest) rate of deposits has mostly been negative during the studied period and due to inflation and execution of instructed interest rates, account holders have practically suffered a loss, though in some years the loans real interest rate has also been negative. This implies that the money obtained from account holders (through taxation) has been paid to loans/subsidies recipients.

Table�19�-�Nominal�and�Real�Deposits,�Loans,�and�Inflation�Rates,�1380-90�(percent)

Year Nominal Rate (weighted average)

Inflation�RateReal Rate (weighted average)

Deposits Loans Deposits Loans1380 12.0 17.4 11.3 0.7 6.11381 12.1 17.3 15.6 -3.5 1.71382 12.2 17.5 15.6 -3.4 1.91383 12.6 18.3 15.2 -2.6 3.11384 12.9 18.5 10.4 2.5 8.11385 11.5 14.5 11.9 -0.4 2.61386 12.9 12.0 18.4 -5.5 -6.41387 14.4 12.0 25.4 -11.0 -13.41388 13.3 12.0 10.7 2.6 1.31389 12.1 17.2 12.4 -0.3 4.81390 15.2 16.2 21.5 -6.3 -5.3

Source: CBI


The High Ratio of Loans Balance to Bank Deposits BalanceIn recent years the ratio of loans balance to bank deposits balance has been close to one and even in 1389 and 1390 it reached above 1. Though the ratio in 1391 dropped to 99.7 percent, in Iran’s banking system where there exists is a Reserve Requirement (RR) as well as precautionary reserves, this ratio should be around 85 percent. The higher level of banks consumptions compared to their resources could be related to excessive withdrawals from the CBI. Overall, due to the government’s interference in the banking system, banks resources and consumption in practice do not have a healthy relationship.

Non-current Claims of the Banking SystemFinancial institutions with deposits and loans interest rates which are generally lower than the inflation rate face high demand for loans. The excessive demand for bank loans and inefficient methods of evaluating bank customers’ credits have caused an unusual increase in the ratio of non-current claims to banks total claims, in such a way that in 1390 and 1391 the noted ratio was about 15 percent. According to the World Bank figures, the average of the mentioned ratio in 2011 among 105 countries worldwide was only 7 percent.19

The 1385 Law on Rationalizing Bank Interest Rates Certain Majlis degrees that have been issued without regards to important macroeconomic variables have weakened money market mechanisms and brought about discord in the market. A case in point is the “law on the rationalization of bank interest rates in accordance with the rate of return in various economic sectors” that has created obstacles on the way of CBI’s achievement of its policy objectives.20 This law obliged the CBI to set a single digit interest rate for loans in all economic sectors before the end of the Fourth Economic Development Plan while the inflation during this period has consistently been at two-digit rates. One of the negative consequences of this law was driving banks towards executing partnership contracts, as banks refused to grant loans to transactional contracts (which had a lower interest rate than that of partnership contracts).

Increase in Banks’ Indebtedness to CBIAs a result of implementation of assigned credit policies, in recent years the liquidity condition of banks and credit institutions has suffered from difficulties, and in order to provide the current liquidity, banks have been forced to use credit lines and withdraw

19. http://data.worldbank.org/indicator/FB.AST.NPER.ZS20. The “Law of the rationalization of bank loan rates in accordance with the rate of return in various economic sectors” requires the government and the CBI to mobilize and allocate bank resources during the Fourth Five-Year Economic, Social and Cultural Development Plan of the I.R. Iran in such a way as to bring down the expected rate of return of bank facilities in contracts with fixed rate of return to single-digit levels by the end of the Plan.


excessively from the CBI. Consequently, the banks indebtedness to the CBI, which is one of the components of the money base sources, has had a growing trend. As presented earlier in Table 18, banks indebtedness to the CBI in the first years of the 1380s experienced a slight growth, but starting from 1385, excessive withdrawal of banks from the CBI has intensified. Banks indebtedness to the CBI in 1389 and 1390 grew by 95 percent and 89 percent, respectively, however due to some positive steps taken by the CBI in 1391 its growth rate declined to 17.5 percent.

Financial and Trade RestrictionsGiven the reduction of Iran’s oil revenues due to the sanctions and the government’s borrowing from the CBI to finance its budget deficit, issues such as high inflation rate, low levels of foreign exchange, and declines in investment, employment and production are to be expected. The continuation and tightening of sanctions against Iran, through reducing oil income and further limiting CBI’s access to foreign exchange, and banks’ inability to exchange trade documents in time, can lead to further increases in transaction costs and credit risks.

8.�Prices�and�InflationThe Consumer Price Index (CPI) in Iran is published by both CBI and SCI but, since they use different consumption baskets and base years, their indices are usually slightly different from each another. According to the CBI statistics, the monthly point-to-point inflation rate has mostly had an upward trend in 1391 reaching 40.7 percent in the last month of 1391 (March 2013) from 23.9 percent in the first month of the year (April 2012). Table 20 presents annual CPI inflation rates in urban areas from 1386 to 1391 as published by the two authorities. The inflation rate calculated by the CBI has been on the rise since 1388 to reach 31.6 percent in 1391. Table 21 shows that the annual inflation rate in the Food, Beverages and Tobacco group -- which constitutes 25.7 percent of the consumption basket of urban households --was 46.5 percent, much higher than the average.

Table�20�–�Annual�Inflation�Rates,�1386-91�(in�percentage�points)Year According to SCI According to CBI1386 17.2 18.41387 25.5 25.41388 9.5 10.81389 13.9 12.41390 26.4 21.51391 31.5 31.6

Sources: SCI and CBI

ـ� 58 Annual Report of Middle East Bank ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــTable�21-�A

nnual�Changes�in�U

rban�Households’�C

PI�and�its�Main�C

omponents,�and�the�W

eights�of�those�Com

ponents,�1382-91�(percent)

Food and B

everages and

Tobacco

Clothing and

Footwear

Housing,

Electricity, G

as and other Fuels

Furnishing, H

ousehold Equipm

ent and Routine H

ousehold M

aintenance and Repair Services

Health

TransportC

omm

unicationR

ecreation and C

ultureEducation

Restaurants

and Hotels

Miscellaneous G

oods and Services

Special Groups

Goods

Services1382

15.07.9

17.77.9

13.710.0

10.86.4

6.614.8

16.711.6

16.8

138315.0

10.517.5

13.214.9

10.07.9

10.913.9

14.215.5

12.716.9

138410.4

12.514.4

12.619.2

6.64.1

9.410.4

11.314.6

9.714.8

138512.9

9.119.1

8.416.3

6.20.3

4.84.8

10.718.8

10.217.5

138619.6

9.922.5

10.611.2

11.10.2

7.23.4

14.017.1

14.719.7

138732.3

16.030.4

22.414.8

13.30.5

9.14.6

22.519.6

24.126.9

138813.2

9.38.1

6.610.2

4.81.1

6.58.4

12.914.5

10.38.6

138922.9

8.49.2

6.712.1

12.60.4

9.512.6

14.323.8

20.37.8

139032.7

15.427.7

12.311.1

21.33.7

14.510.9

17.042.5

39.812.0

139146.5

35.316.9

37.522.0

21.810.0

38.59.8

30.767.7

40.418.8

April

36.124.7

17.620.3

13.412.3

5.528.2

10.723.2

66.133.3

14.9

May

37.625.4

15.521.9

14.112.9

5.627.8

10.623.9

46.931.1

15.7

June35.8

25.314.9

21.913.8

12.72.2

27.810.9

24.345.5

29.615.5

July43.6

26.114.4

21.917.1

12.64.5

28.911.1

24.854.0

34.215.9

August

46.127.1

14.223.2

18.213.6

4.730.9

11.225.8

52.834.3

17.7

September

45.029.2

16.626.3

19.314.7

5.231.8

9.928.4

49.536.2

17.5

October

48.135.5

17.736.0

25.420.1

8.739.9

8.931.1

97.643.1

19.5

Novem

ber53.3

42.018.7

47.727.3

25.19.5

43.78.7

34.592.1

47.820.9

Decem

ber49.9

45.317.3

52.528.0

25.618.2

45.08.1

35.785.2

45.321.2

January48.6

46.117.9

55.928.8

28.218.3

50.38.9

38.082.6

45.321.9

February54.8

48.318.8

60.629.2

42.018.7

52.89.2

39.076.6

51.422.5

March

58.549.0

18.862.1

29.842.2

18.654.4

9.339.9

63.152.9

22.8W

eight26.7

6.732.6

5.96.1

11.52.5

3.11.6

2.22.9

55.045.0

Sou

rce: SCI


According to the IMF, Iran’s high inflation rate places it as the 4th country with the highest inflation rates in the world in 2012 -- following Belarus, Southern Sudan and Sudan.21

Following the sharp increase of domestic energy prices in December 2010 and the non-payment of cash subsidies to manufacturers, the Producer Price Index (PPI) increased rapidly and surpassed the CPI. According to the CBI statistics, the PPI inflation rate reached 34.2 percent in 1390, which was 13 percentage points above the CPI inflation rate. Although statistics on PPI inflation rate has not been published for 1391, data for the first nine months of this year indicate that the PPI inflation rate is declining. The PPI inflation rate for the first 9 months of 1391 was 25.7 percent, which is lower than the CPI inflation rate of 29.1 percent over the same period. The trends of the annual consumer and producer price inflation rates since the 12 months ending in March 2009 are presented in Figure 6.

Figure�6�-�Trends�of�the�CPI�and�PPI�Inflation�Rates,�1387-1391�(percent)

87/1

288

/02

88/0

488

/06

88/0

888

/10

88/1

289

/02

89/0

489

/06

89/0

889

/10

89/1

290

/02

90/0

490

/06

90/0

890

/10

90/1

291

/02

91/0

491

/06

91/0

891

/10

91/1

2

4035302520151050

Source: CBI

Some of the reasons for the high inflation rates in 1391 include the effects of the subsidies reform program; the 30.8 percent liquidity growth; the decline in imports due to the tightened sanctions; and the weakened purchasing power of the rial. High inflation expectations, and thus the increase in speculative demand for goods, gold and foreign exchange are among other inflationary factors in 1391.

9� Capital MarketIn 1391 the Tehran Stock Exchange (TSE) witnessed a 46.8 percent growth; its general price index (TEPIX) that had closed 1390 at 25,905.6, rose to close 1391 at 38,040.8. The year 1391 was a bumpy year for the capital market during which the high inflation and

21. IMF, World Economic Outlook, April 2013, Table A7


currency depreciations impacted many companies’ revenues, especially during the second half of the year. The net effect was generally positive for companies with hard foreign currency revenues and negative for others. Besides, the tightening of the sanctions and their extension to energy exports and financial transactions also negatively impacted the capital market. Table 22 presents various capital market indices and their growth rates in 1391.

Table 22 - Various Capital Market Indices and Market Capitalization at Year-ends 1390 and 1391

1390 1391 Growth rate (percent)General index 25,905.6 38,040.8 46.8Primary market index 21,643.3 30,030.7 38.8Secondary market index 34,348.2 62,839.9 82.9Industrial index 60,191.5 60,811.6 1.0Financial index 105,398.0 154,771.0 46.8Dividend and Price index 20,697.7 32,891.7 58.9Top 50 performers index 1,247.1 1,617.7 29.7Market capitalization (Rls. Trillion) 1,282.5 1,707.5 33.1

Source: TSE

As exhibited in Figure 7 below, the TEPIX passed 27,000 by mid-April, weakened and had a declining trend, reaching 23,787.3 on 8 August 2012, but then started a rising trend to reach 32,018.1 on 21 November 2012, when market capitalization surpassed 1,456 thousand billion rials for the first time.

Figure 7 – Trend of the Main Tehran Stock Exchange Index (TEPIX) in 1391

1391

/01/

1513

91/0

1/27

1391

/02/

0913

91/0

2/19

1391

/02/

3113

91/0

3/10

1391

/03/

2413

91/0

4/06

1391

/04/

1813

91/0

4/28

1391

/05/

0913

91/0

5/21

1391

/06/

0413

91/0

6/19

1391

/07/

0113

91/0

7/11

1391

/07/

2313

91/0

8/03

1391

/08/

1613

91/0

8/28

1391

/09/

1213

91/0

9/22

1391

/10/

0413

91/1

0/17

1391

/10/

3013

91/1

1/11

1391

/11/

2413

91/1

2/06

1391

/12/

1613

91/1

2/28

40,000

38,000

36,000

34,000

32,000

30,000

28,000

26,000

24,000

22,000

20,000

Source: TSE


In early February 2012, some the stocks of companies that had been frozen were reopened and as a result the TEPIX surpassed 37,000. The offering of the Isfahan Oil Refinery stocks, which had been frozen since 16 April 2012, all by itself resulted in a 3.5 percent jump of the TEPIX on 9 February 2013. The TSE closed the year on 18 March 2013, at 38,040.8.A noteworthy capital market development in 1391 was the offering of Put Options for certain stocks. Another major event was the initial offering of 5 percent of the shares of the Persian Gulf Holding Company that was the largest privatization under the new interpretation of Article 44 of the Constitution of the Islamic Republic of Iran. While the maximum value of its shares were estimated at 7,000 rials, they were offered at 9,950 rials and only 11,000 of the 1,239.4 million shares were purchased. At the end those 11,000 trades were voided and the share offering was postponed to 1392, when on 7 April 2013 they were offered at 7,500 rials. More than 55 percent of these shares were purchased by private companies and the rest by individuals.In 1391, stocks of many large companies enjoyed considerable growth. A look at the most profitable industries at the TSE shows that mining companies with 114 percent growth, refining companies with 211 percent growth, and chemical industries (that includes petrochemical and chemical companies) with 95 percent growth, experienced the highest returns. The only large industry whose stocks did not do well was banking the shares of which fell by 1.4 percent, mainly as a result of the extension of sanctions to the banking system and the limitations they imposed on foreign exchange transfers.

Chapter 3

Report of Independent Auditors and Statutory Inspector

Report of Independent Auditors and Statutory Inspector ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ� 65

Chapter 4

Financial StatementsConsolidated�Balance�Sheet�as�on�March�20,�2013 � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 69Consolidated�Income�Satatement�for�the�5�months�period�ended�March�20,�2013 � � � � � � 70Consolidated�Cash�Flow�Statement�for�the�5�months�period�ended�March�20,�2013� � � � 71Balance�Sheet�as�on�March�20,�2013 � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 72Income�Satatement�for�the�5�months�period�ended�March�20,�2013 � � � � � � � � � � � � � � � � � � 73Notes�to�the�financial�statements�for�the�5�months�period�ended�March�20,�2013 � � � 75

Financial Statements ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ� 69

Middle East Bank (Public Joint Stock Company) Consolidated Balance Sheet

as on March 20, 2013

Note 2013

Rls (m)

Assets:Cash 4 22,968Due from Central Bank of Iran 5 139,061Due from other financial institutions 6 431,942Loans 7 2,575,223Participation bonds 8 1,140,000Investments 9 71,567Tangible fixed assets 10 549,366Intangible assets 11 281,118Accounts receivable 12 368,425Other assets 13 1,247Total assets 5,580,917

Liabilities and equity:Customers deposits 14 1,083,215Other deposits 15 48,675Other liabilities and provisions 16 13,334Provision for income tax 17 25,410Staff termination benefits 18 2,115Total liabilities 1,172,749Share capital 19 4,000,000Legal reserve 20 61,216Retained earnings 346,952Parent entity total equity 4,408,168Total liabilities and shareholders’ equity 5,580,917

The accompanying notes on pages 66 to 82 are integral part of these financial statements.


Middle East Bank (Public Joint Stock Company) Consolidated Income Satatement

for the 5 months period ended March 20, 2013

Note 2013

Rls (m)

Income:Interest income 21 87,019Investments and deposits income 22 221,339Interest expenses (19,493)Net interest and investment income 288,865Commission income 23 15,363Pre-operation income 24 218,450Others 949Operating income 523,627

Expenses:Administration and general expenses 25 (41,680)Commission 26 (8,329)Provision for doubtful debts 27 (40,041)Total expenses (90,050)Profit before tax 433,577Income tax 17 (25,409)Net profit for the period 408,168

Consolidated Statement of Retained Profit & Loss


Rls (m)

Net profit for the period 408,168Transfer to legal reserve (61,216)Net�profit�available�for�distribution 346,952



Middle East Bank (Public Joint Stock Company) Consolidated Cash Flow Statement


Note 2013

Rls (m)

Operating Activities:Cash flow from operating activities 29 (2,902,710)Dividends income 11,173Net cash flow from operating activities (2,891,537)Investing activities:Net increase in tangible fixed assets (549,693)Purchase of investments (107,599)Sale of investments 32,564Net cash flow from investing activities (624,728)

Financing activities:Share capital issue 4,000,000Net cash flow (used in) from financing activities

4,000,000

Net increase (decrease) in cash 30 483,735Cash at beginning of the period 0Cash at end of the period 30 483,735



Middle East Bank (Public Joint Stock Company) Balance Sheet

as on March 20, 2013

Note 2013

Rls (m)

Assets:Cash 4 22,968Balances with Central Bank of Iran 5 139,061Due from other financial institutions 6 431,942Loans 7 2,575,223Participation bonds 8 1,140,000Investments 9 81,613Tangible fixed assets 10 549,011Intangible assets 11 281,118Accounts receivable 12 368,425Other assets 13 1,247Total assets 5,590,608

Liabilities and equity:Customer Deposits 14 1,092,993Other deposits 15 48,675Other liabilities 16 13,334Provision for income tax 17 25,410Staff termination benefits 18 2,115Total liabilities 1,182,527

Share capital 19 4,000,000Legal reserve 20 61,212Retained earnings 346,869Total shareholders equity 4,408,081

Total liabilities and shareholders equity 5,590,608

Off balance sheet commitments:Guarantee commitments 28 510,868



Middle East Bank (Public Joint Stock Company) Income Satatement


Note 2013

Rls (m)

Income:Interest income 21 87,019Investments and deposits income 22 221,339Interest expenses (19,580)Net interest and investment income 288,778Commission income 23 15,363Pre-operation income 24 218,450Others 949Operating income 523,540

Expenses:

Administration and general expenses 25 (41,680)Commission 26 (8,329)Provision for doubtful debts 27 (40,041)Total expenses 90,050

Profit before tax 433,490Income tax 17 (25,409)Net profit for the period 408,081

Middle East Bank (Public Joint Stock Company)Statement of�retained�profit�&�lossfor�the�financial�period�ended�March�20,�2013

Net profit for the period 408,081Transfer to legal reserve 20 (61,212)Net profit available for distribution 346,869



Middle East Bank (Public Joint Stock Company) Income Satatement


Note 2013

Rls (m)

Operating Activities:Cash flow from operating activities 29 (2,893,029)Dividends paid -Income taxes paid -

(2,893,029)Investing activities:Dividends received 11,173Net increase in tangible fixed assets (549,329)Purchase of non-current assets (85,080)Net cash flow from investing activities (623,236)

Financing activities:Share capital issue 4,000,000Net cash flow (used in) from financing activities

4,000,000

Net increase (decrease) in cash 30 483,735Cash at beginning of the period 30 -Cash at end of the period 30 483,735



Middle East Bank (Public Joint Stock Company) Notes to the financial statements


1- Background1-1- Middle East Bank (Public Private Joint Stock Company – (“the Bank”) was approved

by the Central Bank of Iran (“CBI”) under approval number 91/184904 in October 2012 and registered with Tehran Registrar of Companies under registration number 430795. in the same month. The Bank also registered with Tehran Stock Exchange in July 2012 and its shares were traded in the secondary market (“ OTC”) in January 2013. The Bank’s Head Office is located in Tehran.

1-2- The Bank’s activities are governed under the provisions of the “Monetary and Banking Law of Iran” of July 1972 and the Non-Usury Banking Law. The Bank is authorized to undertake all the banking activities recognized under the above laws and other CBI monetary and banking regulations.

1-3- The consolidated financial statements comprise the financial statements of the Bank and its wholly owned subsidiary, Dadeh Pardazan Simaye Aftab. The Bank commenced its operation in October 2012 therefore there are no comparative figures.

1-4- The number of staff employed at the year end was as follows:

Parent entity

2013

Staff 111

1-5- The Bank has 4 branches at the year end.

2- Principles of consolidationa) The consolidated financial statements incorporate the assets, liabilities and results of

the subsidiary controlled by the Bank. Subsidiaries are fully consolidated from the date on which control commences and are de-consolidated from the date control ceases. In preparing the consolidation financial statements all intergroup transactions and balances have been deleted.

b) The Bank’s shares acquired by the subsidiary, if any, are recorded at cost in the subsidiary’s accounts and deducted from the Bank’s equity in the consolidated financial statements.




3-�Summary�of�significant�accounting�policiesThe principal accounting policies adopted in the preparation of the financial statements are set out below:

3-1- Accounting conventionThe consolidated financial statements have been prepared under the historical cost convention and in accordance with Iranian Accounting Standards and the CBI’s monetary and banking regulations. Current values have been used where appropriate.

3-2- Foreign Currencies Monetary assets and liabilities are converted at the official exchange rates, advised by the CBI, on a daily basis and exchange differences, if any, are provided in the accounts. Non-monetary assets and liabilities are recorded at the historical exchange rates prevailing at the time of recording transactions in the accounts.

3-3- Investment Long-term investments are valued at cost less than the provision made for any permanent reduction in their values. Short-term liquid investments are valued at the lower of cost and market value at the portfolio level and non liquid short-term investments are valued at the lower of cost and market value of each investment. Dividend from subsidiaries are recognized as income in the year in which payments of dividends are approved in their annual general meetings (AGM’s). Whilst in case of other investments, income is only recognized when approved by the investees’ AGMs held prior to the Bank’s year end.

3-4- Tangible Fixed AssetsTangible fixed assets are stated at cost and depreciated at the rates and bases in accordance with the Iranian Direct Taxation Act of 1988 as amended (the Tax Act) as follows:

Asset Depreciation rate Basis

Buildings and installations 7 % Reducing balanceFixture and fittings (including computer hardware) 10 years Straight lineMotor vehicles 25% & 35% Reducing balanceATMs 10 years Straight lineSatellite installations 3 &10 years Straight line

CPI

PPI




Major repairs and improvements which extend the useful life of assets are capitalized whereas minor repairs are charged to the profit and loss account as incurred.In accordance with the provisions of the Iranian Direct Taxation Act, depreciation is charged from the month following the date when an asset is brought into use. When assets are not used during the year, depreciation is charged at the rate of 30% of normal depreciation.

3-5- Intangible Fixed AssetsIntangible fixed assets are recorded at cost at the time of acquisition. In accordance with the CBI’s guidelines, computer software is depreciated in a straight line basis over 5 years. No depreciation is provided for key money and other intangible assets.

3-6- Revenue Recognitiona) Interest income is recognized on accrual basis and after taking in to account the

likelihood of future cash inflows from such loans.b) Guarantees commission is recognized as income at the time of issuing guarantees.

3-7-�Depositors�Share�of�ProfitUnder the CBI’s regulations, interest income and income from investments in shares and participation bonds are classified as “Participating income” which is divided between the Bank and its depositors proportionate to their resources. In accordance with the CBI’s regulations, the Bank is entitled to receive a commission from depositors based on total interest paid to them. The commission for the period under review was 2.5 %.

3-8-� Classification� of� loans� and� provisions� for� Doubtful� Debts�Classification�of�loansLoans are classified in accordance with the CBI’s regulations and the management assessment of customers’ credit risk and their ability to service facilities. The classification of loan portfolio is as follows:

Loan Principal�&�interest�(PI)�outstanding�in�months Required provision -%

Current PI< 2 0Past Due 2<PI<6 10Outstanding 6<PI<18 20Doubtful PI>18 50 to 100




Provision for bad and doubtful loans Provisions for bad and doubtful debts are provided in accordance with the CBI’s regulations as follows: a) General provision- amounting to 1.5% of the total loan portfolio. b) Specific provision- depending on the severity of the non-performing loans including the

period of irregularity, in compliance with the CBI’s regulations, the Bank is required to provide specific provisions, based on the above classification ranging from 10% to 100% of the shortfall in the balance of each loan after allowing for the value of collaterals and general provision in (a) above.

3-9-�Termination�BenefitsStaff termination benefits are provided at the rate of one month salary and other remuneration for each year of service.

4- CashThe details of cash balances are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Cash in hand 22,968 22,968Cash in hand is insured against robbery, theft and fire

5- Due by the Central Bank of the Islamic Republic of Iran The balance due by the CBI comprises:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Statutory deposit 110,236 110,236Current account 28,825 28,825Total 139,061 139,0615-1- Statutory deposit is calculated at the rates of 10% to 17% of customers’ deposits with long term deposits attracting lower statutory deposit rates.




6-�Due�by�other�financial�institutions�The details of balances due by other financial institutions are as follows:

Consolidated2013

Parent entity

Local Banks Rls (m) Rls (m)

Interbanks Payment System(Shetab) 253,963 253,963Short term deposits 443 443Long term deposits 177,536 177,536Total 431,942 431,942

7- Loans7-1- The details of loans net of provision for bad and doubtful debts are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Mosharekat Madani (civil partnership) contracts 2,666,418 2,666,418Mosharekat Madani (civil partnership) deposits (51,154) (51,154)Provision for bad & doubtful debts (40,041) (40,041)Total 2,575,223 2,575,223

7-2- All loans are due in 1392 (year ended 19 March 2014) 7-3- The analysis of portfolio interest rates is as follow:

Interest rate Rls(m)

27% 1,285,29426% 846,77125.5% 295,44725% 23,63524.5% 98,48324% 25,593Total 2,575,223




7-4 The analysis of loan collaterals is as follows:Type of collaterals Rls(m)

Land, buildings and machinery 434,500Shares 203,000Cheques and promissory notes 1,388,918Participating bonds 300,000Bank deposits 136,000Total 2,462,418No collaterals 204,000Total 2,666,418

8- Participation bondsThe analysis of participation bonds is as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Rial bonds 1,140,000 1,140,000Total 1,140,000 1,140,000

8-1-The bonds attract a tax free interest rate of 20% pa�

8-2-The maturity dates for bonds are as follows:Maturity date Rls (m)

December 2013 500,000January 2016 300,000January 2016 100,000March 2017 240,000Total 1,140,000




9- InvestmentsThe details of investments are as follows:

Consolidated2013

Parent entity2013

Long Term Rls (m) Rls (m)

Unlisted shares 9-1 454 10,500Short Term

Listed shares 9-2 74,581 74,581Provision for decrease in value (3,468) (3,468)Total 71,567 81,613

9-1 The details of long term investments are as follows:Consolidated

2013Parent entity

2013

Rls (m) Rls (m)

Subsidiary - 10,500Others 454 -Total 454 10,500

The Bank owned 100% of share capital of the subsidiary at the year- end. These shares are 35% called up. 9-2 Short term investments are quoted in Tehran Stock Exchange. These shares are valued at the lower of costs and net realizable value.

10-�Tangible�fixed�assetsThe details of tangible fixed assets are given in Appendix “A”.

11- Intangible assetsThe details of intangible assets are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Key moneys 280,321 280,321Software 797 797Total 281,118 281,118




12- Accounts receivableThe details of account receivables are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Staff loan 208,833 208,833Participation bonds interest 22,849 22,849Deposit interest 59,973 59,973Others 76,770 76,770Total 368,425 368,425

Staff loan includes Rls 200,772m being the cost of acquisition of the Bank’s shares, at par value, for the benefit of management and senior staff. These shares are to be transferred to a newly formed legal entity which will hold the shares until such time that they are allocated by the Managing Director to the management and senior staff.

13- Other assetsThe details of other assets are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Consumables 779 779Others 468 468Total 1,247 1,247

14- Customers depositsThe details of customers’ deposits are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Bank cheques and drafts 284,757 282,757Non-interest bearing deposits 87,240 87,240Term deposits 711,218 720,996Total 1,083,215 1,092,993




14-1- The analysis of customers term deposits by maturity and interest rates are as follows:

Type Interest rate% 2013- Rls(m)

Short term < 17% 419,743One year 18% 1535 years 20% to 21% 291,322Total 711,218

15- Other depositsThe details of other deposits are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Guarantees issuing deposits 48,675 48,675Total 48,675 48,675

16- Other liabilities and provisionsThe balance comprises:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Accrued interest -local depositors 4,509 4,509Social security premium 1,979 1,979Accrued expenses 3,565 3,565Others 3,281 3,281Total 13,334 13,334

17- TaxationThe Bank’s tax liability has been calculated on the basis of declared profits.




18-�Staff�termination�benefitsThe details of staff termination benefits are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Balance brought forward - -Paid during the period - -Provision for the period 2,115 2,115Total 2,115 2,115

19- Share capitalThe Bank’s share capital consists of 4,000 million shares of Rls 1,000 each fully paid.

20- Legal reserveIn accordance with the provisions of the “Monetary and Banking Law” and the Bank’s Articles of Association, the Bank is required to set aside 15% of its net profit as legal reserve until the latter is equal to the Bank’s share capital. The movements in the legal reserve during the period were as follows:

Consolidated Parent entity

2013 2013

Rls (m) Rls (m)Balance at beginning of the period - -Transfer during the period 61,212 61,216Balance at end of the period 61,212 61,216


Middle East Bank (Public Joint Stock Company)

Notes to the financial statements


21- Interest incomeInterest income comprises:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Loan interest 87,011 87,011Late payment penalties 8 8Total 87,019 87,019

22- Investments and deposits incomeThe details of investments and deposits income are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Interest on participation bonds 105,695 105,695Statutory deposit interest 64 64Deposits interest- local banks 107,875 107,875Dividends 11,173 11,173Loss on valuation of investments (3,468) (3,468)Total 221,339 221,339

23- Commission incomeThe commission income related to issuing guarantees and discounting promissory notes, etc.

24- Pre-operation incomeIn accordance with the shareholders Statutory Meeting resolution, interest income earned before the granting of the banking license, amounting to Rls 218,450m, is to be transferred to the Bank and be distributed in its first Annual General Meeting.




25- Administration and general expensesThe details of these expenses are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Personnel costs 17,572 17,572Rent 9,756 9,756Others 14,352 14,352Total 41,680 41,680

26- Commission The details of commission expenses are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Share capital tax 8,266 8,266Others 63 63Total 8,329 8,329

27- Provision for bad and doubtful debtsProvision for bad and doubtful debts represents specific provision of 1.5% provided on the balance of loans outstanding at the year-end in compliance with the CBI regulations

28- Off balance sheet commitments The details of off balance sheet commitments are as follows:

Parent entity2013

Rls(m)

510,868

29-�Cash�flow�from�operating�activities�The details of cash flow from operating activities are given in Appendix B.




30- Cash balance at the year end The details of cash balance at the year-end are as follows:

Consolidated2013

Parent entity2013

Rls (m) Rls (m)

Cash 22,968 22,968Current account with CBI 28,825 28,825Due from other financial institution 431,942 431,942Total 483,735 483,735

31- Contingent liabilities and capital commitments31-1-Except for contingent liabilities disclosed in the Financial Statements, there are no other known material contingencies at the balance sheet date.31-2-There were no capital commitments at the year end.

32- Post balance sheet eventsThere was no event after balance sheet date which would require adjustment to the financial statements.

33- Related party transactionsThe details of related party transactions are as follows:Facilities:

Company name Relationship Facilities Amount - Rls (m)

Balance – Rls (m)

Subsudiary’s share capital Related entity 10,500 10,500R. Pirooz BM Loan 28,279 28,279Farzan Tejarat Parmis Co CBM Loan 53,035 51,752Fanawari Asoodeh CBM Loans 7,291 7,291Saham Pooya Brokerage CBM Share trading 85,699 (409)

Purchase of shares 20,154 20,154

CBM= Common Board Member BM = Board Member




34- Capital adequacyThe Bank’s capital adequacy ratios are as follows:

Parent entity2013

Tire I Rls(m)

Paid up capital 4,000,000Legal reserve 61,212Retained earnings 346,869Total tier I capital 4,408,081

Tier II

General provisions 40,041Less: adjustments for 1.25% of Risk weighted assets -Total tier II capital 40,041

4,448,122

Base capital before adjustments Less: Investment in other banks -Base capital 4,448,122

Risk weighted assets 4,231,911

Capital adequacy ratio 105.11%

The CBI minimum regulatory capital adequacy ratio is 8%.

Financial Statements ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ� 89A

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ـ� 90 Annual Report of Middle East Bank ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــA

ppendix “A”

Fixed assets:The details of fixed assets are as follow

s:C

onsolidated

Land

Buildings

Office�furniture�

and equipment

Motor vehicles

TotalC

apex prepaym

entsTotal

Cost:

Rls (m

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ls (m)

Rls (m

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ls (m)

Rls (m

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ls (m)

Rls (m

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Additions

233,77152,711

28,4728,541

323,495226,199

549,694

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ents

Disp

osals

Balan

ce at 20

/03

/20

13

233,77152,711

28,1078,541

323,130226,199

549,329

Depreciation:

Depreciation for the period

30226

328-

328

Ad

justm

ents

Disp

osals

Balan

ce at 20

/03

/20

13

30216

318-

318

Net b

ook

valu

e at 20

/03

/20

13

23

3,7

71

52

,40

92

8,4

46

8,5

41

32

3,1

67

22

6,1

99

54

9,3

66

Fixed assets are fu

lly insu

red ag

ainst fire, earth

qu

ake, etc.


Appendix “B”

Cash�flow�from�operating�activitiesConsolidated

2013Parent entity

2013

Rls�(m) Rls�(m)

Profit before tax 433,578 433,490

Adjusted for:Depreciation 319 319Staff termination benefits 2,115 2,115

Provision for bad and doubtful debts 40,041 40,041

Dividend income (11,173) (11,173)

Loss on share valuation 3,468 3,468Net cash from operating activities 468,348 468,260

Net Increase (decrease) in operating liabilities

Sight deposits 371,997 371,997

Short term deposits 419,896 429,674Long term deposits 291,322 291,322

Other deposits 62,008 62,009

1,145,223 1,155,002

Net increase (decrease) in operating assets

Statutory deposit (110,236) (110,236)

Bonds (1,140,000) (1,140,000)Prepayments (1,064) (1,064)Accounts receivable (367,361) (367,361)Loans (2,615,265) (2,615,265)Other assets (282,355) (282,365)

(4,516,281) (4,516,291)

Cash inflow from operating activities (2,902,710) (2,893,029)


Branch Code Phone No� Fax No� Address

Aftab 1001 88 62 37 5088 62 37 52

88 62 37 58 3 Aftab St., Vanak, Tehran

Nobakht 1002 88 53 74 38 88 53 75 13

88 53 81 73 58 Shahid Arabali (Nobakht) St. , Tehran

Niavaran 1003 22 75 93 9822 75 94 66

22 75 96 16 29 Bahonar (Niavaran) St., Tehran

Mahestan 1005 88 56 16 5688 56 16 57

88 56 16 60 2202 Iranzamin N., Shahrake Ghods, Tehran

Sa’adat Abad 1006 22 38 29 3822 38 29 46

22 38 30 23 2 Sa’adat Abad St., Tehran

Middle East Bank Branches

Middle East Bank3 Aftab St., Vanak, Tehran 19948-34573, Iran

Tel: (+98 21) 4217-8000 Fax: (+98 21) 8862-3759www.middleeastbank.ir [email protected]