Achieving resilience

Nooshin Rahgozar

In early 2014, the Supreme Leader of Iran called for "resilience economy" to overcome Western sanctions through the development and increase of indigenous production, diversification of exports, and reform of financial markets. Since then, academic fora have embarked on a series of think-tanks and research to exhaust different aspects of the concept. In the meantime, different government bodies and entities have started to bring their current policies in conformity with the instructed policy framework or develop new ones. Central Bank of Iran is among one of the key financial arms to take the lead in order to play its part in the much-needed reform in the financial markets of Iran.
To this end, a roundtable to review the concept of resilience economy and policies in banking sector was held on the sidelines of the 24th Conference on Monetary and Exchange policies on 16 June 2014 in Tehran, attended by prominent economic figures namely, Mr. Peiman Qorbani, CBI deputy-governor for Economy, Davood Danesh Jafari, a member of Expediency Council, Mohammad Parizi, deputy minister for Insurance and Banking of Ministry of Finance and Economic Affairs, Mohammad Hossein Hossein Zadeh Bahraini, a member of Economic Commission of the Parliament and Mr. Kamran Nadri, director for Islamic Banking of Monetary and Banking Research Institute and academic secretary of the Conference who acted as the facilitator.
Mr. Ghorbani opened the session by delivering a presentation titled "Concept & Dimensions of resilience economy vs. role and position of CBI". In his presentation, he defined the resilience economy as making the economic foundation solid and resistive against any external adverse shocks. It seeks to strengthen productive activities and is achievable through adopting careful and optimal policies in all economic areas. He noted that analyzing a society or country's resilience required three stages of contextual, factor and resilience analysis. He outlined the chronological history of Supreme Leader's instructions and explained that resilience is the ability of households, societies, countries and system to mitigate and adapt to the shocks and restore themselves to the point where chronic vulnerability is reduced. In the framework of resilience economy, a major responsibility of central banks is to regulate monetary sector and align it with the productive sectors of the economy so that stability and sustainability are achieved. Budgetary, financial and foreign sustainability are the contributing factors to macro-economic stability. The policies should also secure the economy against various external adverse shocks namely fall in oil prices, global financial crises, international sanctions including financial and economic ones together with domestic shocks namely natural disasters or imbalance in supply-demand relation as a result of certain policies for example subsidy cuts. The macro economy is not stabilized unless financial, foreign and budgetary systems are aligned.
Mr. Ghorbani further expounded on the nature of shocks on Iran's economy, their impacts, and the stability status of government's budget, foreign and financial sectors. In this respect, he noted that the analysis of the average annual trend of foreign currency revenue, inflation and economic growth in three different periods indicated that both external shocks and macro-economic management and policymaking styles equally played detrimental roles in overall economic performance of the country. In addition, the economic developments in the past years shows that investment activities are highly affected by exchange rate fluctuations, access to foreign currency revenue and oil exports. In the meantime, curbing exchange rate fluctuations, CBI monetary discipline and government's financial discipline have contributed to decline in inflation rate recently.
Regarding the resilience economic indices, Mr. Ghorbani explained that the components of resilience index covered four areas namely macro-economic stability, micro-economic market efficiency, good governance and social development.
As to differences between resistive economy and economic austerity policies, Mr. Ghorbani clarified that they were different and underlined the positive and meaningful relationship between the resilience economy and GDP as an economic growth and welfare index. In conclusion he noted that it was essential to pay close attention to different sectors of economy, politics, security, society, environment and their interaction as well as the role of organizations, resources and adaptive facilitators while analyzing the resilience economy. In addition, budgetary, foreign and financial sustainability were considered to be of prime importance. Mr. Ghorbani proposed to develop localized indices to measure resilience economy in Iran. He also suggested to include the concept of resilience economy in the academic syllabus of universities.

Kamran Nadri: As a member of Expediency Council involved in drafting resilience economic policies, what is "resilience economy" and what are the implications for banking system and what is the significance for the economic growth? Is resilience economy a long term, short term or medium term plan for a country?

Daneshjafari: Resilience economy is a set of policies and practical measures that makes economy resistive against internal and external shocks, fluctuations and damages and helps it spring back to shape once it is exposed. For instance, when south-east Asian countries went through financial crisis and experienced sudden jump in exchange rate and local currency depreciation, they took certain measures to restore the rates to the original. These economies are said to be resistive. Achieving a resistant economy requires the government to carefully identify the risk-prone areas in the Iranian economy and find solutions to reduce them. There are two approaches when it comes to resilience economy: risk management or risk reduction and resilience engineering. Resilience engineering increases resistance against possible adverse shocks. As to the banking system, resilience economic policies could be to curb exchange rate fluctuations and end government's dependence on oil revenues. 65% of government's revenue comes from oil exports leading to significant pressure on the government during sanctions. Therefore, the government has to replace it with a more reliable alternative. An example to follow is Turkey where tax revenues form a large part in government revenues. Another vulnerable area to address in the Iranian economy is foreign currency reserves required for import. At the time of sanctions, with the decrease in oil exports and consequently the revenue, the reserves decreased and therefore, essential goods could not be imported. In the meantime, blocking the access to our foreign currency accounts intensified the pressure. Therefore, it is not enough to merely have foreign currency reserves but to have timely access to them.

What measures are necessary to increase currency system resilience?
Parizi: Any characteristics defined for resilience economy should be extended to various components of economy including real and financial economies which are, in turn, divided into smaller sub-sections. The whole financial system including capital and money markets is suffering serious imbalances which needs to be identified and addressed in order to build a strong and resilient economy. The existing imbalance in the financial sector is due to the improper division of tasks between the capital and money markets that can play important roles in financing productive enterprises in real company. In an economy where the money market accounts for the largest part, the behavioral study of entrepreneurs, investors, shareholders indicates a tendency to see banks as the sole source of finance while the capital market is in its initial stages of development. Requiring the banks to help the economic growth by resorting to policies beyond their jurisprudence is to jeopardize the economy and expose it to major risks. Therefore, it is necessary to redefine the financial system and redress all imbalances. Our banking sector itself is also reeling with no less imbalances. Banks are similar to other economic enterprises except that their capital comes from outsiders namely depositors. The banks have witnessed migration of deposits at times depending on the market turbulences. Thus, a logical balance needs to be prevail to push up their sustainability. In the meantime, the internal structures of banks needs to be retrofit; overdue receivables and fluctuations in exchange rate can adversely affect their performance as seen in the course of exchange rate fluctuations where the value of certain banks capital fell dramatically. Efficient decision making system in banking sector is also an essential requirement and transparency and modern administrative systems are the prerequisites. Other factors contributing to the empowerment of banks are observing the standards, adopting integrated banking, automation and core banking as well as conducting regular internal auditing.

Can the current umbrella banking regulations in general and usury-free banking operation regulations in particular help achieve resilience economy? What are the legal vacuums? What are the solutions?
Hosseinzadeh Bahraini: Yes. However, it is important to note that resilience economy is not an economic but a management model for economy. It is not correct to limit the resilience economy definition to resisting the adverse shocks. It is a management method to help the country achieve macro goals. In the meantime, it can make the economy resistant against adverse shocks. Iran's 2020 Vision Document, prepared by the Expediency Council, is a special document, our national vow, which we all strive to achieve. Unlike those of other countries, Iran's Vision Document is ordinal. It envisages the first ranking for Iran among the countries in the region. In other words, we have a race to win for which strategic policy making is an essential. Unfortunately, currently Iran is lagging far behind the ideal and the latest progress report dates back to 2008 in which the economic indicators were not promising. Since then, no improvements have taken place. At best, we would be still at the same level presuming that other countries in the region did not advance either. Therefore, it is important for macro and micro policymakers and executives to consider strengthens, weaknesses, threats and opportunities while making decision. This is the birth place of resilience economy where the said group are encouraged to adopt a management style whose result is a resilient economy. Currently the tax and banking systems discourage productive activities. The banking system is fostering cash deviation instead. In conclusion, I would like to reiterate that the usury-free banking regulations are good and in line with the Islamic jurisprudence, however in the absence of practical mechanisms, the same has infected the banking system with usury and has hindered production in the past 30 years.

Is "resilience economy" a long-term or short-term concept? What short-term policies need to be adopted? What measures should be envisaged while drafting the 6th National Development Plan?
Ghorbani: First of all, I would like to reiterate that various definitions have been given since the Supreme Leader issued resilience economy instructions. It is essential to further exhaust the concept and reach a unified definition and framework. The studies conducted in the Central Bank indicate that to achieve a resilient economy, a series of long, medium and short-term measures are needed. For example, as to overdue receivables only part of it can be solved through short-term actions. The same holds true for foreign currency reserves and export and import patterns and tourism. Business partners cannot be replaced overnight. As to tourism expansion, it is important to determine the target region carefully. It is evident that a uniform policy framework for resilience economy can later serve as a guide to draft the 6th National Development Plan.