IMF Director in Iran

After a four-year gap, Masood Ahmed, IMF Director for Middle East and Central Asia paid a one-week visit to the Islamic Republic of Iran in order to assess the economic developments in the country. In this respect, he met with various top-notch officials from the governments, banks, academics and the parliament. A brief report of the visit is presented herewith.

IMF forecasts 1.5% growth for Iran

Iran's economy is being overhauled and has become more resistant, said Director of the International Monetary Fund's (IMF) Middle East and Central Asia Department Masood Ahmed.

Speaking at a press conference in the Central Bank of Iran, Masood Ahmad, provided an assessment of Iran's economy. He noted that the report provided a comprehensive picture on the future and challenges faced by the Iranian economy and said: "IMF assessments and recommendations were very similar to those of the Iranian government officials'. Ahmed said that Iran is currently a growing economy and predicted a 1.5% growth for Iran for the present year. He noted that at present, the country's economy has become more stable because it has curbed the inflation and stabilized the foreign exchange rate. Referring to Iran's nuclear negotiations with P5+1 (the five permanent members of the United Nations Security Council plus Germany), he said the interim deal between the two sides has had positive impacts on the country's economy and provides it with more resources to boost productivity and regain foreign investors' trust.

Ahmed said creating employment and keeping hopes alive among youths are two important factors in achieving economic development and underpinned productivity as the key to realize this objective. He noted with satisfaction that the government of Iran is determined to address inflation, recession, economic stability and oil dependency as key strategies to pave the way towards economic growth. He reiterated that increasing productivity and efficiency will not only enable business environment and employment but also reduce dependency on oil. Comprehensive reforms are needed to realize the said objectives, some of which can be initiated right now.

"Iran is one of the prominent members of IMF. It has always been included in IMF programs. IMF helps the country by offering technical assistance and providing consultations," he said.

As to Iran's government decision to create an enabling environment, Mr. Ahmad referred to the international comparative reports as well as the research conducted by the Iranian Parliament highlighting some of the bottlenecks which need to be addressed. "To develop its business atmosphere, Iran is required to enhance its macroeconomic stability and become more transparent in its policymaking. The country will be able to create competitiveness among private companies only when it treats them equally," he said. Iran unfortunately has recorded a low rank among other member countries in terms of transparency.

"In IMF, the very basic principle is that each country differs from others despite their commonalities. At the moment, many countries do not share the same condition as Iran since the Iranian economy is suffering internal and external shocks. Implementation of the first phase of Subsidy Reform Plan was one of the shocks inflicted on the country's economy, which greatly affected the people, industries and companies", he said. He recalled that the government's reaction was to increase liquidity by paying cash subsidies. "However, the payment of subsidies has only transferred the problem from one sector to another. An ideal solution would have been to allocate subsidies to industrial and production sectors," he said.

Concerning government's effort to develop resistance economy, he stressed that at present, the country's economy enjoys more diversity in terms of exports, compared with other oil-based economies, which has reduced Tehran's dependence on oil revenues. This, he noted, was a key step towards increasing the resilience of the economy.

Reviewing other countries' efforts to cut subsidies, Mr. Ahmad recalled that only some of the 22 counties succeeded to fully implement similar plans. He reiterated that it was not possible to reform a 30-year-old subsidy system overnight and further efforts were needed to institutionalize it.

Ahmed also said some countries blow 50 percent of their budget on paying energy subsidies. $460 billion worth of energy subsidies are given to people across the world, half of which pertains to the Middle East and North African states. "The important point is that rich people, who constitute only 30 percent of the society, use the lion's share of the subsidies (almost 70 percent). Therefore, governments should clarify that subsidies are to help bridge the gap in the society with the poor people." he added.

According to Mr. Ahmed, regional and international tensions such as in China and Ukraine have adversely influenced economic activities turning to a source of risk for the world's economy.

Iran's sanctions, a lesson for the world

In his meeting with President's Chief of Staff, Mr. Nahavandian, the IMF director received an update on the major economic developments taken place since the 11th administration took office. He, in particular, welcomed the plans to increase the share of private sector in the economy and underlined the positive ensuing impacts that such a move would have on the business environment. Nahavandian elaborated on the progress made in healthcare sector and the arising public satisfaction. He then referred to foreign relations as positively ongoing and progressive and called for serious consideration of regional role of Iran as the symbol of stability in the region. According to him, some industries were also gradually leaving recession behind.

President's Chief of Staff noted that sanctions aimed at freezing Iranian trade could not succeed but it was high time for IMF to highlight it as an experience that created ambiguity and lack of transparency in trade damaging both sides of the sanctions. He hoped that the experience would not repeat for Iran or any other countries.

Banks at the heart of economy

During his one-week visit to Iran, IMF Director attended a meeting with the top-notch from the banking sector.

In this meeting, Ahmed noted that there was a wide agreement on the necessity to reduce dependence on oil and state ownership in economy in the government which IMF fully endorsed. Compared with other countries in the region, Ahmed considered Iran in a better situation in terms of growth as the inflation was curbed and stability returned to her money market. He also reiterated that it was necessary to upgrade the supervisory and regulatory role of Central Bank of Iran (CBI) according to international developments so that challenges in financial sector could be avoided and dealt with. Referring to IMF experiences, Ahmed highlighted the importance of dealing with problems in a timely manner as any negligence in this regard could intensify and extend the scope of them. Based on the lessons learnt from Pakistan, he noted, it was wrong to increase banks' capital without reforming their performance first. He believed reforms in banks and enterprises should take place concurrently and expressed readiness to render IMF assistance in financial reform in Iran.

CBI Supervisory Deputy, Hamid Tehranfar, provided a comprehensive report on the structure of Iranian banks in public and private sectors. Based on his report, there are currently 10 public and 25 private banks in the country. Public banks possess 60% of deposits and the rest lies with the private banks. Liquidity growth in the recent years has incurred problems in the banking sector and the economy is grappling with stagflation at the moment which exerts further pressure on the banks.

Pasargad Bank CEO, Ghasemi, referred to the Supreme Leader's instructed polices, cited in 24 articles, regarding resistance economy. As part of the policies calls for financial reforms, he hoped that the implementation of policies would improve the share of private sector in the banking sector. According to him, CBI performance has improved greatly compared with the previous term and instructions are now very transparent and clear. At the end of his presentation, Ghasemi highlighted the importance of utilizing the youth capacity as well as rich oil and gas reserves to improve economic situation.

Keshavarzi Bank CEO, Talebi, believed that the public banks serving as government tools influence intermediary role of banks in the financial market. Moreover, state banks are restricted in terms of capital increase. He noted that oil-dependency creates huge ground for liquidity growth in Iran's economy and further addressed the impacts of subsidy cuts on liquidity growth and rush of productive enterprises to banks to apply for facilities.

Middle East Bank CEO, Aghili, said that in the past 8 years, the liquidity grew by 10 times. However, huge oil revenues and liquidity in domestic market hid the problems underneath. Unfortunately, despite the current competent team in CBI, oil revenue has faltered dramatically. Therefore, all forecasts indicate that the banking system and economy will face challenges. It is important to move from state-run economy to free markets.

Saman Bank CEO, Taheri Behbahani, regarded CBI circulars in the past ambiguous and puzzling for the banks and welcomed the efforts made by the new administration and the prudent approaches adopted by the new economic team. He said he felt indebted to the governor of CBI who had injected new hopes inside the society.

Fathali, Chairman of the Board of Eghtesad Novin Bank expressed regret that the banks were currently grappling with some unnecessary regulations creating difficulties for the society. He outlined the challenges as overdue receivables, capital, etc.

IMF endorses Iran's stag-exit package

In a gathering attended by academics, government officials and banking sector, Ahmed evaluated the stag-exit package prepared by the government of Iran.

He opened his remark by elaborating on the current situation of global economy and assessed the progress in the past four years weak, unbalanced and falling below IMF predictions to the point where IMF modified the predicted 3.7% growth to 3.4% in 2014. He noted that although emerging markets were expected to perform better in the next few years, their economic growth would be less than the previous year.

Ahemd highlighted deflation and geopolitical conflicts as two major emerging risks in the European markets and noted that curbing deflation was as hard as inflation.

Regarding long-term structural trends of global economy, Ahmed said that "power transfer", at two levels, from developed countries to emerging ones and from state to private sector is the first. Fast and easy communication is another trend evolving the shape of financial markets. Higher pressure on environment and natural resource as a result of growing population and annual income is the third trend that will leave long-term effect on the global economy. Unbalanced population growth and income inequality are among other trends currently affecting the global economy.

IMF Recommendations for Iran

At the end of his presentation, Ahmed offered a set of recommendations for the Iranian economy. According to him, Iran needs to define her role in the global economy and organize the economic policies. In World Economic Forum in Davos, Rouhani hoped for Iran to be the next emerging economy and in fact the potential exists to realize it but how? IMF can answer.

1- Modifying the prices of energy carriers should be managed by making investments in supply and energy consumption management areas. Iran is one of the leading countries in this respect and has succeeded to implement the first phase of subsidy cuts despite some shortcomings. The main point here is that modifying prices should happen in parallel to increasing enterprise efficiency so that they can cope with the change.

2- Iran needs to increase economic growth. This requires a model with which productivity and enterprise dynamic growth are maintained. Bolstering business environment could serve as a stepping-stone by maintaining local and foreign investment. These reforms will guarantee the economic growth for Iran, regardless of international developments. Surely, in the absence of discriminatory policies against Iran, the growth will hit even higher. But policy package does not depend on external pressure.

3- Employment creation for the youth is another challenge for the Iranian economy. Arab Spring started by the youth as they saw a gloomy future ahead of them. Social consensus can happen only when hopes for the future is high in the society. Unlike other countries, in the Middle East, there is a direct relationship between level of education and unemployment rate. In other words, the higher the level of education, the lower the chance of employment. Lack of consistency and coordination between educational system and labor market needs is root cause of this issue. Although many countries have resolved it, it should be noted that without economic growth, unemployment persists.

IMF director noted that resolving the issues would incur short-term costs and what matters is to have public support and tolerance. He highlighted IMF role in the process as conducting periodical independent assessment on Iran's economy and publishing the outcomes. While lending full support to stag-exit package prepared by the government of Iran, Ahmed considered IMF as a platform for experience sharing among member states.