Flexibility against External Shocks Main Characteristic of Resilient Economy: Iran’s Minister

“The resilient economy in a nutshell is one that achieves high economic growth with little fluctuation and volatility and increases the share of productivity in the economy. The main characteristic of a resilient economy is flexibility against external shocks. When there is a storm, a dry tree may break very easily but a flexible tree can survive that storm,” Tayyebnia said in an interview with Al Monitor published on Sunday.

Following is the full text of the interview.

Q: You spoke this morning about the resilience economy and normally that has been translated here as the ‘resistance’ economy. Which is correct?

A: The resilient economy. In analyzing the growth of Iran, we came to the conclusion that we have three problems. In the last four decades, the economic growth of Iran was very low, the volatility and fluctuations have been very high and the share of productivity in increasing growth has been very little. All three items are rooted in reliance on oil. Reliance on oil revenues resulted in the fact that the fluctuation in oil prices were reflected in the economy of Iran. So we have to decrease reliance on oil revenue in our economy. The resilient economy in a nutshell is one that achieves high economic growth with little fluctuation and volatility and increases the share of productivity in the economy. The main characteristic of a resilient economy is flexibility against external shocks. When there is a storm, a dry tree may break very easily but a flexible tree can survive that storm.

Q: Given the role of the private sector in creating needed new jobs in Iran, what is the government doing to promote private sector activity, especially in the light of the presence of semi-state economic players. How far can privatization go?

A: The main approach of the government is to improve the business environment, which sets the stage for investment and more participation of the private sector. If we do not improve the business environment and we just focus on transferring ownership, we cannot achieve our goals to improve the economy. The second approach is to transfer state-owned enterprises to the private sector. In the past a great number of enterprises have been transferred to semi-state entities; a majority have been transferred to pension funds. And the main reason was that the government was in debt to those pension funds. The government tried to settle its debts through transferring those enterprises. The basic policy of the government (now) is to transfer the ownership of state-owned enterprises to the real private sector.

Q: What’s the percentage of state, semi-state and private sector shares in the economy now?

A: I cannot provide you with an exact number but when we talk about semi-state enterprises, it includes the pension funds and you know in the world pension funds have a big part in the capital market and Iran is not an exception. We are trying to transfer the ownership of enterprises to the real private sector. The pension funds and other similar entities can purchase those enterprises through the [stock] market. We are providing incentives for the real private sector. We give them a discount in the price, payment is longer and the interest rate is less. We are working to restructure semi-state enterprises and set them in the right direction.

Q: One of the obstacles to reconnecting Iranian and international banks is the compliance standards in Iranian banks.  How long will it take to improve compliance standards and what sort of difficulties are you facing in this effort?

A: A major step taken by this government was to provide a plan to restructure and reorganize the banking system. We came to the conclusion to reform the banking system not only because of cooperation with the foreign banking system but as you know the capacity to lend depends on reforms. During the sanctions, unfortunately, the banking system was harmed badly. From the very beginning of our administration, even before sanctions were lifted, we worked to reform our banking system. It is a time-bound plan to implement reforms. Increasing the capital of the banks, settling the government debt to the banks, resolving the issue of non-performing loans and divesting and selling the extra assets and property of banks.

Q: What’s the timeframe?

A: We are working to come to an acceptable solution within two years and even to this moment we have had some useful and good results. Three years ago the ratio of non-performing loans [to total loans] in all Iranian banks was 14 percent. As of the end of the last Iranian year, it came down to 10 percent. For Bank Melli it is 7 percent and in some banks even down to 5 percent. We are determined to pursue that trend to come to an acceptable international level.

Q: What is that level?

A: To me, 2 percent.

Q: We know that there has been an issue about FATF reforms. Are you confident Iran will fulfill its promises to FATF and are there problems you envision in fixing Iran’s financial reputation even if you fulfill those promises?

A: Actually our plans for AML (anti-money laundering) and CTF (counter-terrorism financing)  started 15 years ago. The first law – AML – was approved in 2007. Based on that law, all the necessary bylaws and regulations were prepared. A financial intelligence center was formed in Iran. All Iranian banks and financial institutions have some software which can recognize any suspicious transactions, to combat drug smuggling and smuggling of other goods, as well as transactions with groups such as Daesh. The terrorist groups have a very complex system to move money through Europe and the United States. We have designed some very serious plans to prevent transactions to those groups. A law on admission to the anti-corruption convention was approved in 2007. Just now that law is in force and based on that law we share information with other countries such as Armenia, Russia, Brazil, South Africa and Iraq. We are cooperating with financial intelligence units in Iraq, Russia and Syria against financing Daesh. The third law, CTF, was approved last year. We are determined to implement those laws fully. The main approach is to combat corruption, smuggling and terrorism.

Q: ...a lot of banks are still not willing to have a relationship with Iranian banks. What more can you do to convince the international banking community that it’s safe to have relationships with Iranian banks again?

A: In the past, the Iranian banking system never had any serious problem. In corresponding relations with foreign banks, Iranian banks never defaulted. During the sanctions, if we see some problems in paying back our debts, it was because there was no channel to make the transaction. So I believe we do not have problems with the big foreign banks. The main problem is that the United States does not keep its word. That’s something I’ve heard from many political and economic authorities of the European Union. If the United States fulfills its commitments under the JCPOA (Joint Comprehensive Plan of Action), we will not have many problems with the other countries.

Q: The United States has fulfilled its commitment to allow Boeing and Airbus to sell passenger planes to Iran. Has any financing been approved yet for those sales? 

A: Just now my colleagues are having some talks with some international institutions to see how they can finance that deal. We will choose the option that provides us with the best terms and conditions. In principle, in providing financing for that deal, we do not have problems.

Q: Are there European banks in the mix?

A: European and non-European banks.

Q: How important is this deal, not just financially but psychologically to have big American companies and products back in Iran? Will that help our overall bilateral relationship?

A: We are investigating and examining the economic situation, which is a little bit different than the other issues.  The situation and location of Iran is quite unique. Iran can take the role of a hub for the whole region. In the past, the biggest and most important air transport agency was of Iran. Iran is on the air corridor of East-West, North-South and we are trying to benefit from that. The issue which can influence the mindset of the Iranian people is if the United States fulfills its commitments. You know Iran fulfilled all its commitments under the JCPOA honestly and clearly but the United States has not done it yet. The European countries blame the United States. Iranians want to see what are the results of the deal with the P5+1.

Q: In August, Iran announced that there is now a mechanism in place, with the support of the US government, to convert South Korean won to euros without using the dollar. Is this correct and if so, can you explain the mechanism and can you use this model elsewhere, for example in converting Omani rials?

A: We have come to some sort of understanding and preliminary agreement (with South Korea) but it has not been implemented yet. Why should we face some problems to convert won to euro? I have raised the same question with many bankers and financial authorities around the world and all of them say, ‘I don’t know.’

For small amounts we are not facing any problem, but for big amounts we are trying to resolve the issue. At the same time, we expect the United States to take some concrete steps to resolve the problem.

Q: Is the government planning to make the Central Bank of Iran independent and if so, when?

A: We have taken some serious steps. In the past, the governor of the Central Bank would be appointed by the minister of finance but today he is appointed by the president of the country. In order to change the governor, there are lots of criteria to be met. The Money and Credit Council of Iran, the highest entity for the money and banking system, has been made more professional. In the past the chairman of that council was the minister of finance, but today the governor of the Central Bank is the head of that council. The rules and regulations have changed in a way that the CBI has a higher position and is more independent. The most important step we have taken is to try to remove and prevent fiscal dominance. In the past, it was not the CBI that would determine monetary policies but it was fiscal policies as well as the annual budget. You can see that in many oil-dominated countries. In the last three years, we tried to resolve that problem so the Central Bank can control monetary variables. Without resolving the issue of fiscal dominance, the independence of the Central Bank does not have any meaning. Our main approach is to make monetary policies independent from fiscal policies and in the last three years, we have had many accomplishments. Today our Central Bank has the capacity to control monetary policy.

Q: There has been talk of an exchange rate unification ever since the announcement of the nuclear deal, but it hasn’t happened. What are the obstacles in the place of exchange rate unification and will this occur before the upcoming presidential elections?

A: We have taken big steps to unify the exchange rate when we were still under sanctions and oil prices had fallen. Just today the premium between the official rate and the market rate is at its lowest, less than 14 percent. A big bulk of goods which were purchased using the official rate are now being traded using the market rate. So you see the share of the official exchange rate has come down to a great extent. In the course of the next two months, the share of the official exchange rate [in trading goods] will be zero. We are very smoothly and gradually doing that reunification without having lots of rhetoric and propaganda about it.

Q: There still is money going to unlicensed credit and finance institutions, which are competing with banks. What are you doing to get people to put their money in safer places?

A: The Central Bank has designed some plans for serious supervision over those institutions. Some issues that came to a very bad situation have been resolved. Just now we do not have any evidence that money from the banks is being transferred to those unlicensed institutions. The reason is that the real interest rate in Iran is positive for the first time and people are satisfied with it. People do understand that if an institution is providing higher interest, it is linked with more risk.

Q: What is the interest rate now?

A: The interest rate for a one-year deposit is 15 percent, which is twice the rate of inflation. You cannot find that real interest rate anywhere else in the world. And all of them are credible, credit-worthy banks.

Q: Are you happy with the rial’s present value. It’s been relatively stable since your government took office.

A: Our central policy is to improve the real exchange rate instead of focusing on the nominal rate. The decrease in the inflation rate has allowed us to improve the competitiveness of Iranian products. Our imports are increasing while our exports are enhanced.

Q: One of the biggest assets for Iran is the country’s Diaspora, which is wealthy and well positioned to invest in Iran and also transfer technology.  But we have seen mixed signals such as the arrest of dual nationals quite respected in international business circles. Do you want the Diaspora to come and invest in Iran?  How do you deal with those in Iran who don’t seem to want that?

A: We believe that Iran belongs to all Iranians. And we believe the Diaspora is an asset for the country. So we welcome them if they are interested to come back to Iran and make some investments and we provide them with all the incentives and whatever they need. So we never look at them as something negative. The main impediment before the Diaspora to make investments or trade with Iran is the sanctions imposed by the US And if the United States removes those impediments and obstacles, we can definitely benefit from the Diaspora.