The Conference on Monetary and Exchange Rate Polices is annually organized in Tehran by Monetary and Banking Research Institute in cooperation with the Central Bank of Iran and serves as a specialized forum for prominent economists and the top - notch to exchange views on the main contemporary economic issues and make policy recommendations. This year’s conference has been of particular importance as it was held amid the unprecedented stagflation the country is grappling with since post - war days.
The Conference on Monetary and Exchange Rate Polices is annually organized in Tehran by Monetary and Banking Research Institute in cooperation with the Central Bank of Iran and serves as a specialized forum for prominent economists and the top-notch to exchange views on the main contemporary economic issues and make policy recommendations. This year's conference has been of particular importance as it was held amid the unprecedented stagflation the country is grappling with since post-war days.
The two-day conference was held on 15-16 June, 2014 in Summit Conference Hall in Tehran and was widely attended by influential economic figures.
No more trial and error
Mr. Fahad Nili, the director of Monetary and Banking Research Institute and Secretary of the Conference opened the event by presenting a brief report on the importance of the event and preparations made to hold the ۲۴th conference. He noted that the current difficult economic situation and the opportunity provided to redress had left no room for trial and error or hesitation.
He believed laying non-inflationary railroad tracks of the country's economic policies and helping the production locomotive pass through the recession tunnel required ample logic, prudence, knowledge and expertise which could probably be found under the roof of this conference. He underscored the efforts by the Monetary and Banking Research Institute, since the election of the new government, to play an active role in economic policymaking and present the outcomes in the ۲۴th conference. He, then, outlined the main themes of the conference and explained the process through which they were identified. In this respect, he noted that the four main themes were based on the current issues the economy of Iran is facing, namely: developing strategies to end stagflation, identifying non-inflationary solutions for this purpose, reforming banking system and finding ways to effectively finance production.
Inflation to fall below ۲۵% in ۲۰۱۴
As the second key-note speaker at the ۲۴th Conference on Monetary and Exchange Rate Policies, Mr. Seif, the governor of the Central Bank of Iran (CBI) praised the unique opportunity provided by the conference for academics and elites to expound on economic development of the country and considered it a think-tank to review the policies under examination by the government.
Mr. Seif maintained that the main target of the government in ۲۰۱۴ was to reverse the negative economic growth in the recent years and to develop a non-inflationary set of solutions to end stagflation. In this respect, he added that CBI is determined to place strict regulations on monetary base and in parallel, expand the production units' access to banking facilities.
Presenting an overview of the new government's economic performance in ۲۰۱۳, the CBI governor outlined the achievements as enhancing local currency appreciation, creating relative stability in exchange market, reducing inflationary expectations, reducing the depth of recession, and improving the economic prospect of the country. He noted that the achievements, more than anything, were indebted to disciplined orientations of CBI in managing the monetary and credit policies of the country together with government's cooperation in this regard. Mr. Seif provided brief statistics on major economic indices indicating relative economic improvement particularly regarding the declining rate of inflation in comparison to the past two years. According to his report, inflation rate climaxing at ۴۰.۴% in October ۲۰۱۳ dropped to ۳۴.۷% by March ۲۰۱۴ and further declined to ۳۰.۳% in May ۲۰۱۴. In addition, point-to-point inflation rate in May ۲۰۱۴ stood at ۱۶.۶%. The tremendous difference between the average and point-to-point inflation rate in May ۲۰۱۴ is a proof of its declining trend. The trend is expected to continue provided that economic policymakers remain committed to monetary and financial discipline and financial markets stability is maintained. In the meantime, dollar nominal exchange rate in retail exchange market reached an average of ۳۰۸۹۴ IRR in the eleven months ending in May ۲۰۱۴ dropping by ۲.۴% in comparison with the figure in eleven months ending in June ۲۰۱۳. The exchange rate variance has dropped by ۷۶% indicating that the exchange rate market fluctuations in ۲۰۱۲ has been curbed and relatively stabilized. Deceleration of surge in prices as well as significant decrease in the risks involved in productive, commercial and investment-related activities are indicative of such positive development in the exchange rate market. Based on Mr. Seif, CBI has also succeeded to introduce to update the base year to ۱۳۸۳ (۲۰۰۴) from ۱۳۷۶ (۱۹۹۷).
Mr. Seif further added that the balance of international payments and commitment to monetary discipline had improved and inflationary finance methods had been avoided. He maintained that the banks were tasked to finance the working capital of productive units as their top priority. As to CBI roadmap for ۲۰۱۴, Mr. Seif highlighted the following as the main objectives:
Controlling inflationary expectations and replacing them with futuristic approaches in monetary policy making;
Regulating monetary policies, developing new tools to monitor banks reserves, expanding inter-bank markets and their performance;
Developing effective tools to regulate and manage foreign currency reserves optimally;
Empowering policymaking roles of Money and Credit Council
Regulating unorganized monetary market;
Shifting monetary paradigms
Developing Islamic banking roadmap
As to Supreme Leader's instruction to adopt the principals of resistive economy, Mr. Seif announced that CBI had embarked on reviewing the banking system to bring it in line with the said principles. He also added that given the Supreme Leader's emphasis to exhaust and identify different dimensions of the economy of resistance, CBI would unveil a document titled "Resistive Economy Policies in the Banking System" during the ۲۴th conference.
At the end, CBI governor expressed his commitment and determination to mobilize efforts and reduce inflation rate below ۱۵% by ۲۰۱۵ and below ۲۵% in ۲۰۱۴. He further pointed out that all monetary and banking stakeholders in the country were determined to reform and strengthen the financial system of the country in order to stabilize the national and real economy.
Government's economic team, united and determined
The minister of Economy and Finance, Mr. Tayyebnia, opened his speech by highlighting the unprecedented recession the country had been grappling with since ۲۰۱۲. He expressed regret that the sum of unemployment and inflation rate during ۸-year war did not match the current figures for ۲۰۱۲-۱۳. According to him, the main root causes of the recession were Iran's economic structure, dependence on oil revenues, wrong economic policies in the past ۸ years and finally the economic sanctions imposed by the West. Elaborating on the causes, he noted that the study of countries depending on natural resources' revenues including oil revealed that all these countries lacked quality enterprises and suffered low and fluctuating economic growth. Thus, he concluded that the current stagflation was the natural consequence of oil price ups and downs. As to inefficient economic policies in the past ۸ years, the minister explained that the overuse of oil revenues in government spending and the ensuing dependence were the main mistakes committed by the previous government. In addition, resorting to CBI to finance production, failing to adjust the exchange rate to inflation rate and improper implementation of subsidy reform plan were among other shortcomings. International sanctions were considered to be the third driving force of the current stagflation; however, the minister noted that it was not as fundamental as the former factors.
According to the Minister of Finance, the government was determined to end stagflation and in this regard he referred to the unprecedented consensus among the members of the economic team of the president. For the moment, he noted that it was not enough to focus on the inflation rate and the government had to consider a strong strategy to increase production capacity to end stagflation.
He reiterated that the government was determined to reduce the inflation rate to single digit and a set of financial, credit and supply policy packages had been developed to end recession. He pointed out that despite recent progress in the country's foreign policies; the government had developed policies assuming that the sanctions would continue. He believed the new face and language used by the government at the international level had cracked the sanctions and the trend was irreversible.
Mr. Tayebnia noted that stabilizing markets were of prime importance to end stagflation and financing productive units formed a major challenge before the government.
According to him, the main resources for financing productive units are banking facilities, capital market, National Development Fund, external resources or government's budget; however, the banks are grappling with different problems namely lack of capital, and non-performing loans and the government is taking some measures to redress their situation, some of which are awaiting submission to Parliament for approval. Despite recent efforts to equip the capital market through basic market resources, it has failed to play an active role in this regard and lags far behind the ideal situation. "The government has developed certain plans to establish Project Prediction Fund and issue inflation-proof securities", the minister added. As to external resources, the minister announced that $۱۰ billion credit had been attracted to invest in productive projects.
Expounding on the role of private sector in financing development plans, Mr. Tayebnia emphasized public-private partnership as an effective solution. He maintained that the government had submitted a bill to the Parliament to lay the ground for boosting private sector's involvement in managing and implementing development plans.
Improving the business environment, the Minister also announced that an office titled "Business Environment" had been set up in the Ministry of Economy and Finance in order to constantly monitor, report and develop policies for fostering business environment and underscored its determination to remove obstacles on the way of economic activities so as to actualize the concept of resistive economy. He emphasized that the government had to give up its role as the sole big employer.
At the end, the minister hoped that the boost in private sector's presence would contribute to economic productivity and dynamism.
No overnight solution to end recession
Mr. Masoud Nili, senior economic advisor of president, underlined the importance of identifying the main reasons the country sank in recession. He presented a history of Iran's economic growth throughout the years. He noted that Iran entered recession for the first time in post-war years. The economic situation during ۲۰۰۶-۲۰۱۰ laid the ground for today's recession and the results became visible during ۲۰۱۱-۲۰۱۳. The stagflation was then reviewed in four stages: the first shock, penetration and background causes and intensity.
Decreasing oil production and export, stabilizing energy prices, increasing domestic consumption and government's ownership on the supply side of energy were among the main developments in energy market of Iran in the past ۹ years according to Mr. Nili. In the meantime, the exchange market experienced stability and the real exchange rate decreased. Imports increased and domestic production competitiveness decreased. In financial market, interest rates were stabilized, commercial banks' debts to CBI and non-performing loans went up.
Last year, macro economy was stabilized. Inflation was curbed. CBI was relieved of government pressure and monetary base was controlled. The interim nuclear agreement pushed oil production and export up. In the meantime, stabilizing macro-economic policies eased exchange rate fluctuations. As a result, government's budget in ۲۰۱۴ improved in comparison to the previous year. Imports and foreign trade also increased by ۳۷%.
Mr. Nili predicted that most of government revenue would be realized hopefully and added that despite overall economic improvement, the government was facing challenges for financing productive enterprises and household incomes still remained low. He noted that money should not be used as a tool to attack recession and it was important to improve bank-enterprise relations at the same time as banks play a pivotal role in the Iranian economy.
Mr. Nili outlined the main issues feeding the recession as sanctions and the ensuing limitations in financial transaction with the world, decline in government budget and household demand and income, uncertainty discouraging investment on production and financing productive enterprises. It was important to identify a sector or sectors that could act as a factor to push the economy out of recession. To this end, mechanisms should be identified to spread the change to other sectors. Regarding ways to encourage effective demand, Mr. Nili considered export as the soundest driver and noted that as a solution to financing working capital, CBI could improve capital market through various measure for example activating short-term deposits.
President's senior economic advisor expounded on the government's plans for ۲۰۱۴ and said that the government was determined not to rely on CBI to end recession or increase household income by injecting money. In the meantime, the government had on the agenda to develop employment-generating activities by focusing on SMEs and take good care of exchange market not to intensify Dutch Disease.
Mr. Nili reiterated that a policy package was necessary to end recession and considered ending recession more difficult than curbing inflation as it took place at a slower pace, and therefore, required all to walk the road collectively with unanimous consensus over the solutions.
Wrapping his remarks, Mr. Nili hoped that the presented picture, challenges and solutions help the discussions of the conference forward, resulting in practical and concrete policy implications. He also welcomed views of the participants on the topics and possible proposals to improve them.
GDP growing; inflation declining
Delivering a speech on macro-economic developments and national monetary policies, Dr. Komeijani, the vice-governor of the Central Bank of Iran presented latest statistics on the country's economic situation.
According to his report, GDP had experienced a declining trend in the recent years. In the second half of ۲۰۰۱, service sector and industry and mines accounted for the major share of economic growth; however, as of the end of ۲۰۱۰, the two sectors declined in growth relying too heavily on imported intermediate goods. Subsidy cuts on energy carriers and the ensuing rise in their prices also contributed to their decrease.
In the meantime, sudden fall in oil exports and the ensuing decline in its added value, foreign currency fluctuations, international sanctions leading to barriers for importing raw material and intermediate goods paved the ground for GDP to fall negative in ۲۰۱۲ and the first half of ۲۰۱۳. However, GDP's declining trend, which was mainly due to fall in oil revenues, was showing recovery.
In the light of growing positive trend in different industrial groups namely basic metals and non-metal minerals (accounting for ۳۰.۸% of total indicator) and automobile, machinery and unclassified equipment, productive machineries and electrical appliances (accounting for ۲۷.۱% of total indicator), Mr. Komeijani concluded that the future for these industries was promising despite the long way ahead to reach an ideal situation.
As to housing and construction, demands for construction licenses had decreased by ۲.۴% while the total area infrastructure had surged by ۱۶.۴% in ۲۰۱۳. In the meantime, unlike Tehran, private sector's investment in new urban construction project in large cities had increased.
According to CBI vice-governor, a significant part of recession had to be blamed on supply-side problems, some of which are:
Structural shortcomings in industry, mines and agriculture sector
Lack of enabling business environment
Detrimental impacts of international sanctions (exchange rate fluctuations, limited transaction and decline in the imports of raw material, intermediate and capital goods)
Lack of access to production-friendly technology
Decline in investment
Uncertainty ruling over production environment leading to negative economic growth in the past few years
The CBI vice-governor reiterated that adopting demand-side policies and encouraging demand amid limited supply and low elasticity of supply curve pushed inflation rate up. As to the importers' long queue to receive foreign currency, he announced that the CBI would take necessary measures to provide for their access to foreign currency resources particularly for those needing Euro as its provision took longer and incurred losses to importers. Limitations in interacting with foreign brokerages had also doubled losses on the part of producers.
According to statistics on monetary and banking indicators presented by the vice-governor, increase in money multiplier and decrease in money base growth in ۲۰۱۳ in comparison to the previous year indicates a sounder growth of liquidity in comparison to ۲۰۱۲. However, he pointed out that as CBI had purchased $۴.۱ billion from the government resulting in ۱۲.۲% increase in money base in the last month of the Iranian year (March ۲۰۱۴), the combination of liquidity had notably changed in comparison to the previous month (February ۲۰۱۴). As to non-performing loans, Mr. Komeijani presented the relevant statistics as of ۲۰۰۳ and added that despite the increase in figures in ۲۰۱۳, the proportion of non-current debts to banking facilities had declined.
As per his remarks, sticking to the principles of resistive economy, it was essential for CBI to preserve macro-economic stability, decrease inflation rate, sustain budget, stabilize exchange rate and diversify finance resources. The success of modifying energy carriers' prices relied on curbing inflation and exchange rate fluctuations. Despite its declining trend, inflation rate remained too high in comparison to other economies in the world, creating uncertainty in economic decision making which, in turn, slowed down production and investment.
CBI vice-governor reiterated that unhealthy competition in terms of interest rates among banks that had started since early ۲۰۱۴ could increase money costs leading to surge in cost of financing economy. It could also encourage migration of banking resources to non-productive activities with fast ROI, decrease banking deposit durability and create resistance against any efforts to decrease interest rates on banking facilities.
Regulating money market, CBI succeeded to mobilize the banks and credit institutions to cooperate in defining a ceiling for interest rates. It has further developed measures to supervise unauthorized financial institutions and believes the time is opportune to review the components of monetary policies. In conclusion, CBI vice-governor outlined the challenges in monetary policymaking as existing recession, high inflation rate and its ensuing negative impact on economic stability, exchange rate, unauthorized financial institutions, non-performing loans, as well as growing base capital of state banks.
Financial discipline, banking system reform essential to end recession
The minister of Road and Urban Development, Mr.Abbas AKhoundi opened the second day of the conference by focusing on the importance of applying discipline in the financial and banking system of Iran. As a member of the new government's cabinet, Mr. Akoundi reiterated the government's commitment to curb inflation through controlling monetary base instead of relying on imports and foreign currency revenue consumption.
The minister outlined the current malaise of the banking system of Iran as toxic assets, bad debts and capital insufficiency and concluded that they had resulted in lack of economic competitiveness dramatically reducing Iran's global ranking in terms of financial services accessibility (۱۳۷), affordability of loan repayments (۱۳۵) and financing through local equity market (۸۶) and banking soundness (۱۲۱), according to the report published by World Economic Forum for ۲۰۱۳.
Proposing a solution to the said problem, Mr. Akhoundi presented the post-economic crisis US when the government had taken a risk to get involved in restoring the health to the banking system. He noted that such determination was still absent in the country and proposed that certain entities such as National Development Fund could be tasked with renovating the banking system of Iran. He maintained that it was essential to align financial, housing and land systems in order to reach maximum effectiveness.
As his concluding remarks, Mr. Akhoundi raised a number of proposals and requests to the Central Bank in three main areas. As to Mehr Housing project, he called for non-inflationary financing of the project, extending repayment of facilities for three years and avoiding the use of strong money for construction. Secondly, in order to increase financial resources for housing construction, he suggested activating escrow accounts in order to support the pre-buyers and establish various funds for land and construction and sell securities. Finally, the minister called on the central bank to consider certain measures in order to expand mortgage market as a source of revenue. In this respect, he considered the establishment of loan and saving associations and housing savings funds in all banks as well as increasing the ceiling of banking housing facilities by ۵۰% of the value among the effective measures.
Inject money to drive production
Addressing the second day of the 24th Conference on Monetary and Exchange Policies, the minister of Industry, Mines and Commerce, Mr. Nematzadeh, emphasized that it was important to limit liquidity growth and direct it towards production units as a major step to curb inflation.
He maintained that controlling liquidity growth and directing it to production units will not result in inflation, rather given the potential to increase supply and absorb the money in society, it could even lead to deflation.
He noted it was unfortunate that within the past few years, industrial sector was notably underserved financially and accounted for only 37% of banking facilities while service sector assumed the half. He added that he had requested the president to consider a significant increase by 50% and estimated that this year, 150 billion tomans were required to produce 600,000 billion tomans worth of goods.
He noted that major enterprises such as automakers were instructed to redirect all capital invested on non- productive activities towards production. The measure had almost doubled their production output in the past 80 days.
He encouraged the banking system to be more generous in allocating banking facilities to production units and called for expediting decision-making process in economic matters of the country as a single day delay could incur significant losses of billions of dollars to the country.
Concluding his remarks, The Minister presented a set of proposals in order to generate required financial resources for financing production units. In this respect, he invited the National Development Fund to play a more active role in finance and equally allocate 20% of its deposits to industrial and agricultural sectors. He called on the banking system to increase banking facilities to the industrial sector by 50%. At the same time, he noted that the capitals of various banks needed an immediate increase with Tose'eh Saderat and Sana'at-Ma'adan Banks being at the top priority. He welcomed the parliament's readiness to receive the government bill in this regard. Issuing certificates of deposits with reasonable rates for the buyers and depositors was another proposal put forward by the minister to finance the working capital of production units.
Health care costs reduced by ۱۰%
Addressing the conference, Mr. Mohammad Bagher Nobakht, vice-president for Strategic Planning & Supervision, elaborated on the decision-making system and processes in the new government. He noted that the economic system imposed itself on decision making system. According to him, the new government faced numerous opportunities and challenges, or what he called, requirements and choices.
He reviewed the requirements arising from the legal system and classified them into two groups of ultra-level and parallel requirements. The first group of requirements is unchangeable and binding for the government such as the Constitution, ۲۰-Year Vision Document and Supreme Leader's overall policies. The second set is somehow open to government changes and is divided into two sub-categories namely conditional and authorized. The former sub-category arises from the decisions made by the entities working in parallel with the government, open to its proposals for change. The latter concerns intra-government bodies' decision which can be easily modified without obtaining prior permission.
The vice-president noted that certain realities hindered government's scope of maneuver. According to him, migration from the existing situation to the desired one requires planning on the part of government where all areas namely political, economic, social, cultural, etc. should be clearly defined. This will be impossible without clear goal-setting and identifying solutions at strategic and operational levels. In the meantime, it is essential to take Iranian-Islamic model of progress into account.
Expounding on ۲۰۱۴ government's budget, Mr. Nobakht explained that oil revenues accounted for a major part of government's budget, out of which ۱۴.۵% should be allocated to National Oil Company as per Budget Law and minimum ۲۰% to National Development Fund (NDF) as per Supreme Leader's instruction with annual ۲% increase. As the previous government withdrew some amounts from NDF to pay new-year's bonus to people, in ۲۰۱۴, a total of ۳۱% of oil revenue should be dedicated to NDF. In total, only ۵۶% of oil revenues were under government's control.
He further informed the conference that the government had inherited ۲۹۰۶ incomplete development projects requiring ۴۰۰,۰۰۰ billion toman budget. The budget allocation priority was given to those projects with over ۸۰% progress.
According to Mr. Nobakht, it is essential to cut government spending dependence on oil revenues by the end of the ۵th National Development Plan next year and replace it with tax revenue. He added that the prospect to reduce unemployment rate by ۷% by the end of next year remained bleak.
As a new achievement, Mr. Nobakht announced that ۴۸۰۰ billion tomans would be allocated to health care out of the revenue generated from subsidy cuts. The measure reduced health care costs by ۱۰%. In the meantime, free insurance was issued for ۴.۲ million Iranians.
In the past ۳ months, subsidy cuts generated a total amount of ۶۲۰۰ million tomans. The government spent ۱۰۴۰۰ billion tomans in cash for subsidies indicating ۴۲۰۰ billion tomans of deficit. In fact, the government had to allocate ۵۲۰۰ billion tomans to industry and ۴۸۰۰ billion to reduce health care costs.
In conclusion, the vice-president highlighted the efforts started to draft a performance-based budget law for 2015 and hoped to share further good news in the next year conference.