An overview of Iran’s economy

The present report seeks to review some of the major challenges lying ahead of Iran's economy and elaborate on the potential contributions of the 24th Annual Conference on Monetary and Exchange Rate Policy to analyze the situation and provide policy recommendations in order to revise macroeconomic approaches.
Iran's economy is currently experiencing one of the most difficult times during its post-war years. Apart from the chronic inflation the country has been grappling with for years, the pace of inflation particularly accelerated in the second half of 2012 in view of exchange rate fluctuations to the point where point-to-point inflation (the change in the Consumer Price Index during the last 12 months) hit above 40%.
Having experienced frequent turbulences and constant record breaking, the exchange rate market turned into the source of economic instability; in the meantime, a decade of successful efforts to unify exchange rate failed and dual rates dominated the economy.
Economic growth rate has plummeted since 2010 hitting -5.8% in 2012 indicating economic recession. Apart from the adverse impacts of sanctions, the unemployment of educated youth is one of the major challenges of the policy makers in the years to come.
Although the pressure is easing, the very existence of ratcheting sanctions in recent years has forced a decline upon production and aggregate supply and has hampered economic activities through various channels such as reducing oil revenue, soaring exchange rate and the ensuing instability, creating multiple exchange rate system, hindering financial transactions and import and export of goods and services to and from other countries, as well as intensifying uncertainty. In addition, the real aggregate demand in economy fell as a result of decline in real monetary balance, growing inflation expectations as well as weakening purchacing power. Consequently, the economy entered stagflation depicting a gloomy horizon ahead of it.
The sanctions placed on oil sector have led to significant decline in government's revenue which is not amendable in the short run. Besides, financial turbulences in the recent years together with inconsistency of government's developmental activities with available sources of finance resulted in accumulation of government's debts to contractors that, in turn, increased the concerned contractors' debts to banks. On the other hand, non-adjusted rates of interests disturbed the balance between bank resources and their allocations while increasing their debts to the Central Bank. In the meantime, the dominance of command and unbalanced rates of interest damaged the relations between the banks and economic firms.
Despite the growing number of branches, extensive interference in internal affairs of the banks by the regulators and their equal treatment of credit and money markets has weakened the competition in the banking sector and deprived the real economy of a sound, dynamic and competitive financial system.

The measures taken by the new government to redress economy
Thanks, in part, to positive developments in the new government's foreign diplomacy, the examination of key economic variables indicates that the economy and financial markets have relatively stabilized since Mr. Rouhani took office as the president. The government of "hope and prudence" has so far succeeded to slow down inflation and access frozen oil revenue and has made every effort to attract deposits to the banks and fight against decline in stock market investment.
In order to accelerate exit from stagflation and redress economy, it is vital to utilize collective wisdom in developing roadmaps. Given the Central Bank potential and competency to guide economy in the right path, it is urgent to address monetary policymaking structure in the country in order to achieve monetary stability and discipline and curb inflation. The stronger the collective will within the government for such improvements, the easier it is for monetary policymakers to act. The existing limitations in the economy can be well transformed into opportunities subject to modifying monetary policymaking structure and allowing for evolution and flow in monetary policies. In this respect, the Central Bank can play a crucial role. Monetary policymaking during sanction period should result in better economic policymaking by changing the paradigms of monetary policies through communicating economic information with the public and defining the areas where the monetary policymakers should and should not be accountable. This would help redress the economy in the short or medium run.
The Central Bank is positioned strategically within a network comprised of relations with the government, banking system and business stakeholders and therefore, the effectiveness of its policies lies in modification of the monetary policymaking structure.
Being well aware of the urgency, Monetary and Banking Research Institute has decided to utilize the conference to exhaust main issues in the process of revising monetary policies. It the meantime, it also seeks to review the process of rebuilding the Central Banks' internal and external relations as a tool to realize the said objective and help this body act as an effective policymaker and monetary regulator in the course of finding a non-inflationary solution to exit recession. Given the importance of non-inflationary solutions, the conference intends, inter alia, to review obstacles and challenges before financing production system.

Major challenges ahead of Iran's economy
- Crafting appropriate monetary policies to make a non-inflationary exit out of recession
- Identifying solutions to boost the Central Bank's independence
- Regulating financial policy
- Managing inflationary impacts of reforming energy carriers' prices
- Finding a mechanism to unify exchange rate system
- Financing economic firms working capital
- Strengthening the role of capital market in financing production
- Diversifying production financing tools
- Developing inter-bank markets and introducing new monetary policy instruments
- Finding non-inflationary housing finance

Conference main topics
The conference aims at providing a platform for monetary economic intellectuals and banking sector executives to interact and exchange theoretical and practical viewpoints in order to improve responses to monetary challenges in the economy.
Unlike the previous year, the upcoming conference consists of some working groups where the main themes of the conference will be discussed and exhausted among the elites and specialists in order to generate policy recommendations on the topic.
The main themes of the conference are as follows:
- An efficient model for monetary policymaking
- An appropriate strategy to end stagflation
- Banking system reform
- Production finance system

Theme (1): Developing an efficient model for monetary policymaking
Developing an efficient framework is the first step to evolve monetary policymaking. Such a framework should clearly define the scope of policies, decision-making structure and Central Bank's relations with government, banks and private sector.
The absence of a defined framework for monetary policy making in the country has inflicted the economy with chronic inflation for years. The urgency to address the need is particularly important as the Central Bank has the potential to curb the current stagflation and prevent its further extension to next year. To this end, as the first step, the limitations faced by the policymaker to define a clear framework should be examined. In other words, the areas needing urgent attention should be identified and redressed.
The limitations in case of Iran's economy include multiple targets, lack of prioritization, irregularities and low level of Central Bank's independence.
Given the aforesaid, under theme (1), the conference covers articles and speeches in areas such as decision making structure in central banks, developing monetary policy instruments, finding ways to strengthen Central bank's dependency, Central Bank's communication policies, regulating financial policies and their impacts on monetary policies, identifying the best solution to get out of stagflation and successful practices in curbing inflation rate.
The theme also addresses some key issues namely the current monetary policy framework in Iran, aspects needing attentions while revising the framework, the extent to which market stakeholders are aware of Central Bank's monetary policies, the best solutions to strengthen the Central Bank's independence in operation and instruments, the mechanism to unify exchange rate, methods to control banks' debts to the Central Bank, measures needed to expand inter-bank market and the requirements for implementing financial regulations in Iran.

Theme (2): Crafting the best strategy to end recession
The current stagflation makes it urgent to examine possible solutions to end it. The conference seeks to review obstacles and challenges on the way of production finance system in order to craft practical solutions to end recession and encourage production. In this regard, the conference pays particular attentions to supply-side policies and encouraging domestic production, mechanisms to improve business environment, financing working capital of economic enterprises, defining the role of capital market in production financing, adopting the best credit policies to encourage production at the time of stagflation, identifying the role of progressive industries in national economic growth, diversification of production financing channels and developing a suitable framework to assess clients' creditworthiness in line with sustainable financing of enterprises.
The theme also addresses some key issues namely sectors with potential to help exit out of recession; best currency, credit, banking and trade policies as non-inflationary solutions to get out of recession; best ways to improve business environment; suitable channels to finance enterprises' working capital and best credit policies to encourage production during stagflation.

Theme (3): Banking system reform
The current structure governing the Central Bank's relations with the banking system makes it difficult to establish discipline and control monetary base. A considerable portion of monetary base growth is related to the banks' debts as there are no practical and suitable mechanisms for debt management. Moreover, the command rates of interest have weakened competitiveness among banks. In the meantime, in the absence of an effective system for credit assessment, non-performing loans have turned into a major challenge in the banking system. To redress the situation, the conference has devoted itself to discuss possible reforms in the banking system.
The theme also looks to resolve the challenge of non-performing loans, evaluate the health of banks and identify major threats to their health.

Theme (4): Production finance system
Strengthening production finance system and aligning financial and real parts of economy are among the key factors fostering economic growth. The financial system of the country can perform best when the structure is balanced, capital and money market services are utilized properly and the legal system and financial configurations are based on science and Islamic teachings. In recent years, financing public sector's projects and enterprises active in production have formed a major challenge for development and consequently, an obstacle to economic growth. Market actors consider "lack of access to financial resources" as the major problem for businesses. In order to develop the finance system in the country, it is necessary to examine and identify instruments and existing bodies in the financial market as well as those of global market.
Other issues discussed under this theme are the challenges before production finance system, the role of capital markets in financing various parts of production sector, adaptable financial tools for Iran's economy in order to finance private and public sector projects.