January 2003 / No. 21

Banking

Good News for the Budget

"The next step for the CBI is ‘deepening of the foreign exchange’ and ‘expansion of foreign exchange transactions’."

The volume of Iran’s exchange reserves in foreign banks and financial institutions has reached $5.849 billion.

The Central Bank of Iran (CBI) has announced that Iran’s foreign exchange reserves in the second quarter of 2002 has matured by 80% or $908 million compared to the same period last year. At the end of the first quarter of 2002 Iran’s foreign exchange reserves equaled $4.9 billion.

The report also states that Iran’s total foreign debt was $7.3 billion at the beginning of the second quarter of 2002 compared to the $7.2 billion at the end of the first quarter of 2002. The commitments stemming from buyback agreements are another part of Iran’s foreign debt obligations. The value of such contracts at the end of June 2002 totaled $21.7 billion of which $5.5 billion was allocated to contracting commitments and $1.9 billion was repaid. The value of potential contracts of buyback agreements was equivalent to $1.8 billion and actual buyback contracts amounted to $4.3 billion in July 2002.

Of the $21.7 billion buyback agreements on record 26.3% has been allocated to operation of national oil fields and 60.3% goes to investment in the South Pars project.

The foreign exchange commitments of the country decreased from $21.8 billion – after calculation of interest rates – at the end of the first quarter of 2002 to $21.4 billion at the end of June 2002.

The report points to a number of potential foreign contracts of Iran and emphasizes that the volume of such forex commitments decreased from $13.7 billion at the end of the first quarter of 2002 to $13.2 billion at present.

At present the foreign exchange situation of the country is suitable and the debt crisis has come to an end, despite which the danger of recurrence of inflationary pressures still exists. Therefore with the application of correct monetary policies, care has to be taken not to merge the present stable exchange rate with the existing financial and monetary imbalance. 

Dr. Mohammad Jaafar Mojarrad, CBI Deputy Governor for Foreign Exchange says the CBI has played a satisfactory role in the area of management of foreign exchange reserves — using its 40 years of experience — to make advancements in the field and to train skilled workforce. “I can assure you that the CBI possesses a capable and expert workforce of over 60% in all related areas who are regularly trained on modern tools available to the currency market. We are updated and completely experienced and utilize the latest technologies suited to our needs,” he said in an interview.

The present foreign exchange reserves policy is based on three main principles, the first being the rule of making existing assets completely secure, he said, adding that, the CBI has always tried to categorize the foreign exchange reserves of the country and various organizations within the AAA class.

The second principle, he said is based on the flexibility of the foreign exchange reserves to be turned into funds effortlessly as the CBI is always in need of cash flow to pay its matured debts and avoid delays in this regard. The foreign exchange reserves are therefore planned in such a way as to never face shortage of cash flow, Mojarrad said, adding that this liquidity is always carefully considered.

The third principle, he noted is suitable return from foreign exchange reserves while at the same time taking into account security of the reserves and liquidity. Therefore, he stated the reserves are never invested in high-risk areas. To ensure higher security, Iran is only allowed to keep tools and assets, which possess lower risk factors.

“With the launch of the euro, the CBI made the inevitable necessary adjustments. Up until events of 11 September 2001 about 80% of the foreign exchange reserves were held in the form of the US dollars and the other 20% was composed of other currencies. At present only 45% of the foreign exchange reserves are held in US dollar and around 47% is now set aside in euro and the rest in pounds sterling, Swiss franc and Japanese yen.”

In the opinion of Mojarrad this formula will keep the CBI in touch with the present global trends and will help it maintain a dynamic aspect within the organization. “There has been no need to exchange or sell our foreign exchange reserves in the past few years in light of the fact that reserves have always increased. The changes within the reserve structure have been based on the models available and the global currency transformations which have a tendency to change continuously.”

Two other aspects, which must always be considered, he noted, are the interest rate risk factor and the maturation of reserves. The format for the maturation of reserves must be planned in such a way as to make payments on time, Mojarrad said. “Another reserve tool at our disposal to bring risk to a minimum is blending the compositions of liquidity, maturation, reserves and tools.”

The next step for the CBI is “deepening of the foreign exchange” and expansion of foreign exchange transactions and even a gradual move towards liberalization of capital accounts which may expand in ideal conditions within financial markets. “This policy is now followed by the developing countries in East Asia, which is believed to lead to economic development and creation of job opportunities. Such strategies must be considered and listed on the agenda of the fourth development plan. Motions of this kind must be put into effect slowly and with caution to ensure success.”