The Forum for Partners in Iran's Marketplace

September 2017, No. 85

Cover Story

Reform in Forex, Bank Interest Rates

Shariatmadari pledged to lower banks’ interest rates and overhaul the current system of determining foreign exchange rates to support industries and exports.

Mohammad Shariatmadari is President Rouhani’s new Minister of Industry, Mine and Trade.

Shariatmadari, who holds a Master’s in commercial management, led the now-merged Ministry of Commerce from 1997 to 2005.

According to his vision statement, Shariatmadari, who has replaced Mohammad Reza Nematzadeh, has divided the objectives of his ministry into general and quantitative goals.

His general goals include improving productivity and industrial competitiveness, boosting high value added exports, increasing the role of private sector in the economy, creating sustainable jobs, increasing foreign investment, improving the efficiency of goods and services distribution and increasing the share of mining in economy.

The minister said he is planning to win Iran’s accession to World Trade Organization.

More than 20 years have passed since WTO received Iran’s application for accession on July 19, 1996. It took the organization nine years to accept Iran as an observer member. In 2005, WTO eventually established a working party composed of a group of representatives tasked with assessing Iran’s accession bid. However, the chairman of the party has not yet been elected. At present, Iran remains the world’s largest economy outside the world body.

As for Shariatmadari’s quantitative goals, he aims to increase the share of industry, mine and trade sector in GDP from 38.8% in the fiscal 2016-17 to 42% in 2021-22.

Industries’ share in GDP is targeted to reach 21% from 19.5%; mining sector share of GDP to 1.5% from 0.93%, and trade sector’s share in GDP to 19.5% from 18.4%. The rate of industry, mine and trade added value is expected to rise from 7% to 9% by the year Shariatmadari is to leave office.

The export of non-oil goods will increase from $56 billion to $130 billion in four years. Industrial and mining exports will jump to $84.5 billion from $31 billion. Gross capital formation will rise from 440 trillion rials to 1,160 trillion rials, based on the fixed prices of the 2004-5.

The minister announced plans to attract $7 billion in foreign direct investment compared to $0.7 billion attracted last year.

“As many as 4 million people will be employed in the industry and mine sector from the current 3.4 million,” he said.

Shariatmadari wants to improve the Iranian industrial sector’s competitiveness to 50 from 66 in 2014.

Electronic trading share in GDP, which now stands at 4.8%, is planned to rise to 5.3% and Iran’s global rank in e-trading is to rise by nine steps to stand at 60. 

Shariatmadari also pledged to lower banks’ interest rates and overhaul the current system of determining foreign exchange rates to support industries and exports.

“Domestic industries will not be able to continue their activities when banks’ interest rates stand at 25%. Therefore, we need to offer them loans with interest rates closer to the inflation rate, which currently stand around 10%,” he was also quoted as saying.

However, in the face of growing public backlash over high rates, the Central Bank of Iran has already announced that it seeks to fix the interest rates approximately 2-3% higher than the inflation rate, which was 10.2% for the Iranian month ending June 21, but that is not an easy task when interbank rates are around 20%.

Shariatmadari noted that he will personally pursue the matter of forex rates in the Money and Credit Council.

“I do not concur with leaving the currency rates unsupervised, but fixing an irrational rate for foreign currencies without noticing the difference between foreign and domestic inflation rates has troubled Iranian exporters and supported imports, therefore reforms in this regard are inevitable,” he said.

According to a report by the Institute for Trade Studies and Research (affiliated to the Ministry of Industry, Mine and Trade), the government has kept the exchange rates lower than its real value by 38% and 11% in 2013 and 2016 respectively.

Domestic production in Iran is highly subsidized by the state. However, overshadowing the country’s protectionist policies is the practice of allocating cheap, subsidized foreign exchange by the government to imports, which runs counter to the spirit of boosting domestic industries.

Seeking to gain the trust of Iranian lawmakers, Shariatmadari elaborated his plans for the ministry during the next four years in the Parliament on Saturday August 19, in which he noted that his strategies are derived from the country’s macro policies based on Resistance Economy principles.

“The Sixth Five-Year Development Plan (2016-21) was the major cornerstone of devising my proposed program,” he said, noting that the ministry will endeavor to resolve the issues of competitive production.

The minister believes Iran’s share of the global economy is not satisfactory, vowing to enlarge this share as soon as possible.

He added that according to international reports, Iran ranks as the 27th biggest economy in the world after its neighbors Turkey and Saudi Arabia so “we need to significantly boost our GDP”.

The minister noted that the industry sector accounts for 34% of all job opportunities, but unfortunately the sector has registered a negative growth of up to 10.5% in the past.

However, he said during 2014-16, the situation improved slightly, as the sector’s uptrend restarted and registered growth rates of up to 6.5%.

“We have more than 49,000 incomplete projects in the country while about 11,200 of them have made more than 60% physical progress and we plan to create 365,000 new jobs in this area,” he said.

The minister noted that small- and medium-sized enterprises account for 95% of all industrial units in the country; therefore they have a special place in the proposed plan.

“About $3 billion from the resources of the National Development Fund of Iran have been considered for development of rural areas and we need to extend our support and offer stimulus packages to improve industrial estates in underprivileged areas,” he said.

Shariatmadari said unfortunately, only about 150 industrial estates out of 959 are currently active.


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  September 2017
No. 85