Iran is pursuing a “resilient economy” that is less dependent on oil, has reduced nonperforming loans in its banking sector and is anticipating European participation in financing a landmark Boeing deal, according to Minister of Economic Affairs and Finance Ali Tayebnia.
In an interview with Al-Monitor on Oct. 7 on the sidelines of the fall meeting of the World Bank and International Monetary Fund (IMF), Tayebnia gave an upbeat account of reforms undertaken since the inauguration of President Hassan Rouhani in 2013. But Tayebnia, like Rouhani and other Iranian officials, accused the United States of not completely fulfilling its promises under last year’s landmark nuclear deal and suggested that the United States should do more to facilitate Iran’s return to the international financial system.
Iran’s approach to economics has often been described as one of “resistance" to Western-led domination. Tayebnia, in comments on a panel with other ministers from oil-producing countries on the morning of Oct. 7, said a more accurate translation was “resilience.”
“The main characteristic of a resilient economy is flexibility against external shocks,” he explained in the subsequent interview. “When there is a storm, a dry tree may break very easily, but a flexible tree can survive that storm.”
According to Tayebnia, Iran has historically suffered from low economic growth, sharp fluctuations in revenue and low productivity, all of which he attributed to over-dependence on oil. “So we have to decrease reliance on oil revenue in our economy,” he said. “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.”
In part because of a sharp reduction in oil exports under sanctions as well as the decline in oil prices, Iran has been forced to reduce its dependence on oil revenues. Tayebnia told the earlier panel that oil revenues now account for only 30% of Iran’s budget and that his goal is to cut that to zero and to deposit oil revenues in a national investment fund. He said that in the previous Iranian year ending in March, Iran for the first time had a positive trade balance in non-oil goods amounting to $1 billion. The figure for the first four months of the current Iranian year is $3 billion, he said.
The IMF is predicting that Iran’s gross domestic product will grow by at least 4.5% over the next year, thanks in part to oil exports, which have recovered to pre-sanctions levels, but also because of economic diversification and sanctions relief. The IMF team that recently visited Iran advised the Islamic Republic to strengthen its banking sector, clear up nonperforming loans and implement new laws against terrorism financing and money laundering. “The staff sees these reforms as critical if Iran is to harness its reintegration into the global economy to spur growth and become a more market-based, diversified economy,” the report said.
Tayebnia told Al-Monitor that Iran has followed this advice. He said Iran had reduced imports, strengthening its currency and facilitating a gradual end to multiple exchange rates.
He said the differential between the official rate of the rial and the market rate is now 14% and predicted it would shrink further. A “big bulk of goods that were purchased using the official rate are now being traded using the market rate,” Tayebnia said. “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.”
Iran has also taken steps to improve international confidence in its banking sector. Tayebnia told Al-Monitor that Iran is implementing laws against money laundering and terrorism finance to prevent funds from going to groups such as the Islamic State. That may not be sufficient to reassure Western banks that are fearful of contact with banks that maintain relationships with Hezbollah and other organizations still on a US State Department terrorism list.
Tayebnia said Iranian banks have installed software to track suspicious transactions, and he expressed confidence that Iran would fulfill an action plan reached with the Financial Action Task Force (FATF), a Paris-based multinational financial watchdog, earlier this year. FATF has suspended countermeasures against Iran for a year, giving it a chance to earn removal from a blacklist that includes North Korea.
Many big European banks are still wary of contact with Iran out of fear of falling afoul of remaining US sanctions. Tayebnia said, however, that European banks are included among those that Iran is talking with to finance multibillion-dollar sales of Boeing and Airbus planes and that, “in principle, in providing financing for that deal, we do not have problems.”
He said Iran had also reached a “preliminary agreement” with South Korea to convert South Korean won to euros. But he said the United States could do more to facilitate Iran’s conversion of such currencies to euros by allowing tangential contact with the US dollar.
“For small amounts, we are not facing any problem, but for big amounts, we are trying to resolve the issue,” Tayebnia said. “We expect the United States to take some concrete steps to resolve the problem.”
Asked if the Boeing deal, the first involving a major US company and Iran in more than three decades, would improve Iranians’ attitude toward the United States, Tayebnia said, “The issue that 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 [Joint Comprehensive Plan of Action] honestly and clearly, but the United States has not done it yet.”
US officials say they have done everything required and cannot force foreign companies to undertake business they regard as risky. The US Treasury Department also continues to clarify remaining sanctions.
Iran has also yet to attract significant foreign investment in its oil sector. The first company to sign a long-in-the-making new oil contract is an Iranian firm, Persia Oil & Gas Industry Development Co., which is part of a conglomerate controlled by Supreme Leader Ayatollah Ali Khamenei.
Tayebnia said that Iran welcomes foreign investment, including from Iranian-Americans and other dual nationals.
Diaspora appetite for such investment has been adversely affected by Iran’s imprisonment of prominent dual nationals, including Siamak Namazi and his 80-year-old father, Baquer.
“We believe that Iran belongs to all Iranians,” Tayebnia said. “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.” The minister added, “The main impediment before the diaspora to make investments or trade with Iran is the sanctions imposed by the United States.”
Tayebnia suggested that Iran was an attractive place to invest given interest rates on one-year bank deposits of 15%, twice the rate of inflation. “You cannot find that real interest rate anywhere else in the world,” he said. “And all of them are credible, credit-worthy banks.”
He said Iran has also made progress in reducing nonperforming loans from 14% of outstanding loans to 10% and that his goal was to cut that back to 2%. He said favorable interest rates at banks were diminishing the appeal of unlicensed credit and finance institutions, which burgeoned under the administration of Mahmoud Ahmadinejad.
“The reason is that the real interest rate in Iran is positive for the first time and people are satisfied with it,” Tayebnia said.
To safeguard economic progress and reduce inflation, Iran has sought to increase the independence of its Central Bank. Tayebnia said the bank governor — who used to be appointed by the minister of finance — is now chosen by the president. The CBI governor chairs the Money and Credit Council of Iran, the highest decision-making body for the monetary and banking system, and the CBI has control of monetary policy, he added.
The following is a transcript of the full interview:
Al Monitor: You spoke this morning about the resilience economy and normally that has been translated here as the ‘resistance’ economy. Which is correct?
Tayebnia: 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.
Al Monitor: 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?
Tayebnia: 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.
Al Monitor: What’s the percentage of state, semi-state and private sector shares in the economy now?
Tayebnia: 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.
Al-Monitor: 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?
Tayebnia: 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.
Al-Monitor: What’s the timeframe?
Tayebnia: 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.
Al-Monitor: What is that level?
Tayebnia: To me, 2 percent.
Al Monitor: 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?
Tayebnia: 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.
Al Monitor: Iran’s banking sector does not have a good reputation around the world and 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?
Tayebnia: 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, we will not have many problems with the other countries.
Al-Monitor: 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?
Tayebnia: 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.
Al-Monitor: Are there European banks in the mix?
Tayebnia: European and non-European banks.
Al-Monitor: 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?
Tayebnia: 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.
Al-Monitor: In August, Iran announced that there is now a mechanism in place, with the support of the U.S. 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?
Tayebnia: 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.
Al-Monitor: Is the government planning to make the Central Bank of Iran independent and if so, when?
Tayebnia: 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.
Al-Monitor: 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?
Tayebnia: 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.
Al-Monitor: 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?
Tayebnia: 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.
Al-Monitor: What is the interest rate now?
Tayebnia: 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.
Al-Monitor: Are you happy with the rial’s present value. It’s been relatively stable since your government took office.
Tayebnia: 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.
Al Monitor: 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?
Tayebnia: 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 U.S. And if the United States removes those impediments and obstacles, we can definitely benefit from the Diaspora.