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Deputy Governor of Central Bank of Iran talks about monetary policies in “stagflation”

The Sign of the Three Markets

After the Islamic Revolution in ۱۹۷۹ we can divide the Central Bank of Iran’s history into two parts: Dr MOHSEN NOORBAKHSH’s era and his post era. AKBAR KOMIJANI is currently the second man in CBI and he is one of the few senior officials from Dr NOORBAKHSH’s era.

Mehdi Noroozian

After the Islamic Revolution in ۱۹۷۹ we can divide the Central Bank of Iran's history into two parts: Dr MOHSEN NOORBAKHSH's era and his post era. AKBAR KOMIJANI is currently the second man in CBI and he is one of the few senior officials from Dr NOORBAKHSH's era. He used to be the economic deputy of the Central Bank of Iran in both Dr NOORBAKHSH's and EBRAHIM SHEIBANI's tenure, after that he turned down the offer to be the deputy of CBI. After a six-year gap and the political changes which happened last year in Iran and the selection of VALIOLLAH SEIF as the Governor of the Central Bank of Iran he is back to MIRDAMAD St.
In our interview we tried to portray a perspective of Iran's economy and also talk about the criticisms leveled at the Central Bank, nature of the recession in our economy and rumors about the interest rate and fluctuations in the currency market.




Some experts and financial elites believe that due to the measures taken by the government the "real liquidity" has decreased and it won't affect the inflation. They assume that shortage of liquidity and the contractionary monetary policies and the regulations of the Central Bank of Iran (CBI) are the main causes of the recession .They call for a change in the policies. What's your stand on these issues?
According to the data, liquidity grew by ۲۴.۹% and ۲۸.۳% in the ۱۱-month of ۱۳۹۲ and the ۱۲-month period ended in the eleventh Iranian calendar month of BAHMAN respectively which are noticeable. Besides that, comparing those with the point-to-point Consumer Price Index (CPI) shows that the money supply has surged.CPI(۱۳۹۰) was ۱۵۵.۹ in ESFAND of ۱۳۹۱ then it moved upwards and stood at ۱۸۴.۳ in BAHMAN of ۱۳۹۲ (۱۸.۲% increase) . As you can see the liquidity increased by ۶.۷%.Counting the CPI in BAHMAN of ۱۳۹۱ (۱۵۰.۱), the point-to-point inflation was at ۲۲.۸%. According to this, the difference between the liquidity growth in the ۱۲-month period ending the month of BAHMAN and the P-to-P inflation in that period was almost ۵.۵ percent. Therefore it wouldn't make sense to claim that the CBI had contractionary monetary policies during last year. The CPI (P to P) fell off gradually from ۲۲.۸% in BAHMAN and ۱۹.۷% in ESFAND to ۱۷.۴% in the first month of ۱۳۹۳. We expect the decreasing trend to continue as it is backed by regulatory policies and supervisions.

While you talk about controlling the inflation some experts are concerned about prioritizing inflation and recession. They believe that going out of recession is far superior to inflation control. What do you think?
Priorities and approaches in economy and the main decisions are made by top authorities and constitutions of the I.R of Iran. It's indisputable that the priority of the current government and the President is to control the inflation growth rate and the measures taken by the government such as disciplinary budget and reforms is the MASKAN MEHR (a low cost housing program), prove that. Such policies are not in contradiction with the priority of going out of the recession and moving towards stimulation in economy.
In the past months stability in the exchange rates helped us to control the inflation expectations.
According to the empirical and theoretical knowledge inflation is mainly rooted in financial indiscipline and supply side of the economy. High inflation rates accompanied by fluctuations in exchange rates are so dangerous and will make financing more and more expensive which is absolutely negative for industry and production. In chronic inflation, economic growth will be paused and there will be no interest in investments and other productive activities. As a result it would be impossible to tackle the inflation in isolation, they are correlated .The inflation is affected by the reduction of the domestic production and supply. In Iran's current situation controlling the inflation and its uncertainty will consolidate the domestic production.

Q: There are disputes over the roots of recession in Iran and its relation with supply and demand. Reduction of sales of some businesses leads us to the demand side. CBI announced that in ۱۳۹۱ (۲۰۱۲) it was rooted in supply side. Do you see any signs of recession in demand side in ۱۳۹۲(۲۰۱۳)?
There was a shock in supply side of Iran's economy in ۱۳۹۱ and it remained the same in ۱۳۹۲, consequently we saw negative growth in demand indexes in ۱۳۹۲ that weren't necessarily signs of recession. We should consider factors such as drop in incomes of families and uncertainty and fear of the future .It's obvious that when there are still problems in supply side moving towards expansionary monetary policies and triggering demand will make the situation worse and won't help us get out of the recession.

Q: If we assume that the current recession in Iran is caused by demand side, What measures should be taken in order to get out of it?
According to the theoretical knowledge, in order to get out of the demand side recession we need expansionary monetary policies to trigger the demand and stimulate the economy. I can mention: Revision of the tariffs on imports, reduction of the interest rates, reduction of the reserves requirement and more credits for banking system as expansionary monetary policies. Expansion of the government spending and tax cuts are expansionary fiscal policies.
Of course economic potentials and different variables must be taken into consideration, when both internal and external situations have made it difficult and risky to maintain the stability in the economy such policies won't affect the recession in real terms and will make the inflation worse. Our data and statistics show that the recent inflation and recession in Iran are rooted in supply side of the economy and the money supply growth and exchange rate fluctuations have also resulted in inflation rate hike.
According to what I said, picking policies and prioritizing them depend on the economic situation, inflation rate, supply side of the economy, banking system, fiscal budget and so on. When we want to stimulate the demand side in economy, capabilities and potentials of the supply side are important, an improper supply situation leads to higher prices and inflation. I'd like to emphasize that the current recession is vastly rooted in supply side and we expect that political and economic stability and improvements in macroeconomics will shift the supply curve and stimulate the economy.

Q: During the past weeks we've heard a lot about interest rates, first I'd like to know what is the method of computation of the inflation (Point-to-Point, Average, …) in this matter?
Let me correct you by saying that inflation rate isn't the only factor.
"Expected Inflation" is a key factor in monetary policies and interest rates. The others including average inflation rate, monthly inflation rate and CPI index can help government agents to plan for it. The average inflation rate mostly is based on the past information, otherwise P-to-P and monthly rates will help us to predict the future. The Central Bank of Iran has invariably advised commercial banks and credit institutions to take these macro- economic indexes into consideration in order to set interest rates and avoid a kind of competition with each other and particularly with credit institutions which are not licensed by the CBI.

Q: There two approaches, some believe there is a constructive competition, another group think that high interest rates are risky when the market expects lower interest rates(below ۲۰%). Are high rates dangerous for the economy?
Fortunately, the recent increase of interest rates was mainly for short-term deposits and won't have a long-term effect on the banks' balance sheets. There was an agreement between state owned and private banks to have a more constructive competition under the supervision of CBI. Let me add that the CBI has made the banks more independent , the independence and flexibility make banks more responsible in the money market. Before this agreement there was actually a rivalry which was harmful for both banks and customers.
We are pro competition in the Central Bank. A competition which poses no risk to the banks' balance sheet and customers' interests.

Q: Can we say there was an order from the Central Bank to decrease the interest rates?
The Central Bank doesn't intervene in the money market and has a supervisory role and devises the guidelines and strategies. So we let the banking system reach a consensus on interest rates.

Q: Why did the Central Bank announce the new rates?
That agreement between private and central banks was a moral commitment and CBI made it official.

Q: Do you foresee a decreasing trend for interest rates due to the positive changes in the economy?
I am optimistic about country's economic future and consequently, the inflation rate. As a result, there will be revision to lower the interest rate.

Q: Many believe that Tehran Stock Exchange index(TEPIX) decline in recent weeks was due to high interest rates . Can new lower interest rates stimulate Iran's financial market?
There is a correlation between money markets and financial markets. Mostly the changes in financial markets are rooted in fundamental and technical factors. After the records in last year ( the main index , value of the total transactions ) we needed an internal correction. The national budget bill for the year of ۲۰۱۴, the ۲nd phase of the Subsidy Reform Plan and fluctuations in exchange rates all influenced the financial market. It doesn't make sense to directly relate what happened in Tehran Stock Exchange to interest rates and the money market. Moreover the recession that we experienced in the past two years was another factor for those internal corrections in stock market.
There is a difference between financial and money markets. Investors in the stock market look for high return risky investments . There was a return of around 135% from the beginning of the year 1392(2013), so the minor adjustments to the interest rate couldn't have led to declines in the stock market.
Actually the rise of the index and stock prices during the last year were not based on fundamental factors.
Besides, they didn't happen at the same time. Adjustments to the interest rates started in the last days of BAHMAN when the decline in stock market had already started couple of weeks before. It's important to mention the fact that despite the increase of interest rates in the last days of the previous year, lifting limitations on sales of stocks promotd the stock market.

Q: Is the reduction of Reserve Requirement Ratio in order to help the banks a good strategy to avoid destructive competition in the money market?
Reserve Requirement Ratio is an instrument of monetary policy to hedge risks of the banks. Although due to the supervisory role of the Central Bank the function of this ratio has been debilitated, according to Article ۱۴ of the Monetary and Banking law of Iran the CBI is authorized to determine RRR within ۱۰ to ۳۰ percent and according to another law approved in ۲۰۰۹ banks and credit institutions can keep up to ۲% of their reserves in cash.
As a matter of fact the current RRR is almost at its minimum level and there is no possibility for major adjustments.
It's important to note that the destructive competition in the money market was not directly related to the banks' reserves in Central Bank. The unauthorized credit institutions in Iran were the main reason behind what happened in the money market. They don't have reserved deposits in the Central Bank and don't comply with regulations and policies of the CBI. These institutions have started high risk investments, therefore the reduction of RRR which is a crucial monetary instrument for the CBI won't help. What we need is an integrated regulatory umbrella for all the players of the money market in compliance with monetary policies.

Q: Is it possible that the recent agreement on decreasing interest rates directs the liquidity to other markets ( gold , currency , real estate ,…) ?
After the financial indiscipline we had a series of meetings with bank executives and talked about the risks of such destructive competition in the money market. After that, as you know, private and state owned banks agreed on a maximum for interest rates which was later approved by the Central Bank. The new regulations are for new deposits and previous contracts between banks and customers remain the same as before , it seems what you mentioned in your question is unlikely to occur. Meanwhile, there are contingency plans in CBI such as issuance of Participation Papers .

Q: I would like to talk about the currency market, what is the main reason behind the fluctuations in the exchange rates during recent days?
There are many reasons behind what happened. Global price of gold climbed because of Ukraine unrest. This led to increase of Dollar - Rial exchange rate. Rise in the real demand for currencies ( industries need for raw material imports ) , implementation of the ۲nd phase of Subsidy Reform Plan and the rise of fuel price were other factors. The latter created the expectations of rising prices in the society as the same experience we had in the first phase. I'd like to add that currency reserves of the Central Bank of Iran have improved and are more accessible than before. So the factors I mentioned earlier had a short-term effect on the currency market and prices are now stabilized .

Q: What is the view of Central Bank on stability in the currency market?
At the Central bank we don't look for a fixed currency exchange rate system. We believe the balance in trade must be maintained. On the other hand there must be a coordination in our economic policies and the exchange rates. The fluctuations must be controlled and in cases of extreme appreciation or depreciation, the Central Bank will normally intervene to stabilize the currency.
Past experience indicates that although in the 2000s Iran's oil revenue made it possible for the government to apply a fixed currency exchange rate regime, wild fluctuations of the exchange rates in early 2010s proved to us that continuation of such policies are not possible anymore and accumulation of imbalance in the exchange rates will have consequences.

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