Monetary and Capital Market Exclusive, March 2004

Monetary and Capital Market in Iran

Catching Up to Our Neighbors

Iran enjoys the highest growth rate, least commitments, highest deposits and best opportunities in the region.

Dr. Mohammad Sattarifar, Vice President and Head of Management and Planning Organization

Dr. Mohammad Sattarifar, Vice President and Head of Management and Planning Organization elaborated on the country’s risky economic situation vis-à-vis the global economy and as opposed to economic growth in neighboring countries. The details follow:

I want to say something about the country’s conditions that must be revealed sooner or later. The Iranian people deserve much more than they are getting today. We cannot be indifferent toward economic growth rates in neighboring countries. At present, economic and social conditions are keeping us back, so that, we lag even behind Dubai or Turkey. This has made us extremely vulnerable. The report themed, ‘General Review of the Iranian Economy’ that was published in 2002-03, revealed that reforms were on the way, which would include financial and budgetary discipline, unification of foreign exchange rate, renovation of industries and mines and reforming the comprehensive social security system.

Of course, they have not been achieved in one year or by one government, but it was a gradual process. The achievements of 2002 were fruit of more than two decades of suffering by the Iranian people and efforts made by the statesmen. We failed to realize 2,800 billion tomans (28,000 billion rials) expected revenues. Foreign exchange rate unification, which needed financial discipline also continued in 2002. Policies adopted by the government curbed the shortage of banknote publishing for the first time in the past 24 years. Budget deficit would mean using people’s money clandestinely and, in fact, is a kind of theft. Last year, there was no theft for the first time. Both the nation and experts must keep their eyes open to prevent it from happening during the current year as well. Some 156,000 billion rials was to be spent in 2002 as the current budget, 148,000 billion rials of which was allocated most of which as wages, salaries and family allowance.

Out of the 55,000 billion rial development budget, some 37,000 billion rials—equivalent to 66% percent of the budget—was disbursed which was the highest figure on developmental credits during the past years. The government borrowed $2 billion and received loans to be used for high priority projects such as water and electricity, which can create jobs.

Before the Islamic Revolution and during Hashemi’s presidency, upstream efforts were made without the establishment of required networks. Also, 156,000 billion rials of Treasury payments on top of 37,000 billion rials developmental credits have been disbursed which mark the utmost capacity of the Treasury. Such a poor Treasury and the current standard of living do not suit our country. A glance at the budgets from 1976 to 2003, indicates continuous growth, so that, the 1976 figure was 65,000 billion rials, while last year’s figure stood at 231,000 billion rials. However, the budgetary hike must not make us delighted because its only reflects figures produced by accountancy. The parity for U.S. dollar was 7 tomans (70 rials) in 1976, which has now exceeded 800 tomans (8,000 rials). In fact, total resources have not changed much. The budget for 2003 has reached 395,000 billion rials, 103,000 billion rials of which are related to making the price of energy carriers more transparent.

Each day, 1.5 million barrels of oil are delivered to refineries cost-free, which if sold in the Persian Gulf, would have fetched more than 10,000 billion rials. The oil, however, is turned into gasoline which is sold at 65 tomans (650 rials) per liter or kerosene that is sold for 10 tomans (100 rials) per liter after being refined. A goal of the plan drawn up to rationalize subsidies is to make a decision about the 103,000 billion rial figure.

No substantial changes have been made in the country’s resources from 1976 to 2003 because decision-making and management system has not undergone drastic changes while people’s demands have been on the rise.

One of our big problems is that two decades of inattention during 1976-1986 increased population by 25 million, which currently form the country’s young population that need jobs and family. This number has imbalanced the social security fund and the fund must be alert during the Fourth Plan to meet the needs of the people.

Based on the price index for 2000, 9,080 half-finished projects have remained from the first and second development plans whose completion would need 30,000 billion tomans (300,000 billion rials), which is equivalent to the country’s developmental budget for six years! Now, it is the duty of the Social Security Organization to see why those projects have not been finished and increase pressure for their completion. Provincial projects that should be finished in six months, or at most one year, are delayed; so that, 43,000 half-finished provincial projects have remained since 1984. Completion of those projects would create new capacities in the country and create many jobs.

It was decided before the Revolution that crude oil should be sold underground (before extraction) and resultant revenues should be spent on developmental projects. The profit of those projects was to be settled to a fund. However, this was not carried out. Norwegians have been doing the same since 15 years ago and, at present; their reserve fund contains $95 billion.

Finally, a note made 40 years ago became Article 60 of the Third Plan Law and was implemented. The Foreign Exchange Reserve Fund held $8 billion early in 2003. Some $2.5 billion of the figure is to be drawn of which $900 million would be spent on developmental projects and $1.6 billion is to be given to the Central Bank of Iran for the unification of foreign exchange rate. About $4 billion has also been earmarked for the private sector.

Of course, one of our problems is that the private sector has not been clearly defined in the country. Before the Revolution, private sector comprised those who had money while it means entrepreneurs in developed countries. In other words, private sector comprises people who combine money with expertise. Such a combination is hard to achieve in Iran, but the Foreign Exchange Reserve Fund had succeeded to bring 1,000 entrepreneurs together.

With regard to attracting foreign resources, some talk about borrowing by the government, but I am against it. If we are to borrow money and spend it, I disapprove of it. However, if we use it on developmental projects, it would be of no objection.

At present, suitable ways for attracting foreign capital are finance, buyback and BOT. Our foreign liabilities stood at 23.438 billion rials last January. In the finance scheme, the government would be committed to repay the capital, but in buyback there is no need to guarantees from the Central Bank or Management and Planning Organization and investors tap their share of the project.

The potential and current liabilities of the government equaled $12.19 billion from 1976 to 2002. However, the figure announced by the World Bank and the International Monetary Fund was $9 billion. The reason for discrepancy was the difference between potential and current liabilities. The country’s current liabilities stand at $8.734 billion, which reflects imported goods and services. However, potential liabilities stand at $14.704 billion.

If the investment risk in Iran was reduced and the interest rate on facilities was lowered, it would have been to the benefit of the country. However, factional disputes have increased investment risks in Iran. The late Nourbakhsh used to say that if the investment risk for Iran was reduced from 6 to 3, it would mean saving $1 billion for the country.

Under these conditions, some domestic and foreign officials depict an unfavorable picture of the country by announcing that the number of the addict would reach 19 million by 2021 or the number of guardianless women to nine million and then when the report on human development and backwardness of Iran is published everybody wonders why.

Some groups do not care for the national interests. I have not been working in political posts for 24 years despite my political orientations. A country which needs $6 billion worth of goods and services also needs credits. At present, liabilities regarding buyback deals amount to $49.507 billion. About $7.94 billion worth of goods and services have been imported that will be repaid for 10 years after the projects are made operational through their own profits. Commitments regarding these projects stand at $12.268 billion.

On the other hand, apart from attracting resources and finishing projects, the biggest institutionalized danger in the country is unemployment and burgeoning population. During the First Plan there were 330,000 job requests on average per year. The figure hit 504,000 during the Second Plan and reached 600,000 during the Third Plan. An average of 281,000 jobs per year were created during the Second Development Plan. During the first three years of the Third Development Plan, 538,000 people were employed per annum.

If the current trend continued, the unemployment would take a more dangerous turn because due to living problems even the retired and women are working. Of course, higher literacy among women and their social activities is an amenity, but jobs should be also created in proportion to the population of women. One of the duties of Social Security Organization is finding solutions and strategies for alleviating unemployment. The country is still capable of taking an economic leap despite all hardships conditional on the predomination of rationality. If this year we work as hard as we did last year, economic growth will hit 7%.

Iran enjoys the highest growth rate, least commitments, highest deposits and best opportunities in the region. However, it is plagued with problems regarding economic and human development. The main goal of the Fourth Development Plan is to do away with software as well as acquired problems. Only weak people try to solve their problems with money. We must try to remove problems through creating virtual resources. If the system including the government and parliament managed to improve the situation, we will win.

Next September, we will have to draw up the budget bill for the following year according to the Fourth Plan goals. Therefore, the bylaws should be ready by next July. We are short of time. Drawing up a plan is not a task for political parties. Such a document would belong to all people and its main feature is being prospective.

During the Fourth Plan we must work on 12 fields in terms of software and sovereignty. Those 12 fields include: continued and sustainable growth, development based on rationality, active interaction with the global economy, economic competition, human and social security, national security, uplifting the standard of living, environment and sustainable development, cultural development, developing governance, security and judicial development as well as the regional balance of the country. To achieve a sustainable 8.6% economic growth, we must work in all the above fields.

Per capita revenues in South Korea, Singapore, Malaysia, Thailand and Turkey stood at $13,062, $28,230, $4,797, $2,805 and $3,134, respectively, in 2000. If the current trend continues, our country’s per capita revenue will hit $2,380 dollars in 2015. Respective figures for South Korea, Malaysia, Singapore, Thailand and Turkey would stand at $27,370, $9,520, $57,120, $4,760 and $4,760. Therefore, we have to choose for the rapid growth option in which case our per capita revenue would stand at $4,670 that would be similar to Turkey’s which is far from anything worth taking pride in.

We are not comparable to Turkey. Iran enjoys $40 billion worth of oil revenues (consumption and exports) which is lacking in Turkey. However, in case of rapid growth, our per capita revenue would equal that of Turkey in 2015!

Anyway, all these points have been taken into consideration by the Fourth Economic, Cultural, and Social Development Plan and despite our problems, we could take strides toward realization of a desirable society through coordination among all sectors. The desired society is one that enjoys dynamic social security and would be devoid of poverty, corruption and prejudice.