Iran’s Hosseini Discusses Economy, Oil, Rial (Transcript)
Shamseddin Hosseini, Iran’s minister of economic affairs and finance, spoke yesterday with Bloomberg’s Kambiz Foroohar and Peter Green about the country’s economy, oil exports and currency.
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
KAMBIZ FOROOHAR, BLOOMBERG NEWS: How concerned are you about rising inflation in Iran, and what measures are you taking to stop inflation?
SHAMSEDDIN HOSSEINI, IRANIAN ECONOMIC MINISTER (translated): In Iran, when we talk about 30 percent inflation rates, we must be aware of never comparing that situation at that rate with an inflation rate of 2 to 3 percent.
In Iran, when you even look back at that year in which the world absorbed a big oil shock of 1973, it was then that unfortunately the potential for rising inflation was bestowed upon us. There are many reasons, many different ways in which this comes about, but I think the main factor is that from then on, the main way of supplying, securing government budget currencies became the reliance on oil.
FOROOHAR: Sure, but this has been going on for 35, 36 or even 50 years. What are you doing about 30 percent inflation now?
HOSSEINI: I will get to that. As we said, the need to reform the ways of dealing with inflation need a foundational reconstruction, if you will. For example, we need to have reforms in the construct of the budgetary income; the very framework of the potential of income must be reformed.
FOROOHAR: You mean how the government spends its money?
HOSSEINI: So for example, in order for the government to be over-reliant on oil revenues, maybe you can switch to tax revenues. The government must also reform the way in which it effectuates its own payments. For many years, we were paying hidden energy subsidies. So another way in Iran to bring these reforms about is the reform in the targeted subsidies. We had these programs of reform, and we still do.
I’m sure you are aware that we undertook a program of foundational reform. Until we reach the point of reform in the revenue and the expense framework of the government so that the potential can also increase, because wrong prices give the wrong address, it’s a waste of energy, and they have protected - low protected levels. We must increase productivity, and the need is to fix the price differentiations, distortion in prices.
FOROOHAR: Which distortions?
HOSSEINI: Last year we undertook efforts, for example, due to shocks absorbed based on the exchange rate and the instability in the exchange rate of foodstuff such as grains and flower, it became so that it wouldn’t see that kind of overwhelming increase. You’re aware that we provided those with preferential exchanges.
FOROOHAR: Anything else?
HOSSEINI: So this is one issue. We looked at another point, which was one of the main needs of the people, which was dwelling, housing, particularly the medium income and the lower classes of society. Two and a half million units - dwelling units were built under the name of dwelling housing of kindness. So we don’t only take attention to the level of the index. We also pay attention to the construct of it.
But the other point I would pay close attention to is last year we tried to bring about a savings - a mode of savings in expenditure policies vis-a-vis income last year we didn’t - we did not distribute the financial resources in the government budget on big projects, big projects - a lot of projects. We concentrated and focused on projects that had the progress rate of over 60 to 65 percent progress- these projects could better start giving back.
FOROOHAR: Any examples?
HOSSEINI: For example, roads. We have roads that had progress rates of 65 or 70 percent, and we concentrated on those until they became operational and opened. Perhaps under normal conditions, the money would have (inaudible) and these would not have been finished and started to be operational -
HOSSEINI: The limited funds focus on more limited projects so that when they are closer to becoming operational, then certainly they will be able to cross the finish line. In other words, the money that the government is spending in very short distances turns into services and goods production. But this policy saw considerable savings in the financial sector vis-a-vis expenses, not construction and building expenses.
We tried to allocate resources…. we eliminated many of the non-urgent expenditures vis-a-vis the monetary policy. We tried ….there were effects that led to an increase - to the expansion of the monetary base, which leads in turn to an increase in liquidity. With a use of policies of bearer (ph) bonds through the central bank, we were able to bring back this liquidity and guide it towards activities that receive priority.
So let me give you - let me sum it up for you. In order to mitigate and confront inflation, there are a series of foundational reform policies such as the targeted subsidies reform that we started that is followed throughout the world, it is being focused upon and represented as a model. We took the law - the legislation to the parliament for - for tax reforms, and we also have in progress policies for monetary and fiscal policies, and of course mitigating policies so as to benefit the people.
We started new actions, which was based upon steps taken earlier. We’re just augmenting it at present. That’s something that if things can be done by the hands of the people through the people themselves, we put that burden of that responsibility on their own shoulders, the expansion of the private sector. For example, petrochemicals must be given in the hands of private companies, same with metal- producing factory must be run by the people.
HOSSEINI: In other words, the expansion and progress of the private sector. The public funding - the funding of these is to be provided through public-private partnerships (inaudible) become the reason for things to move along at a much quicker pace so work gets done, but there is no need for - for an increase in liquidity. So let me sum up it again. So we started a financial reengineering, and this is the cause for that financial dominance will decrease on the - on the monetary policy. So your question was not that difficult, but it was technical. So at a deeper level, I wanted to share with you some of the technical aspects of it.
PETER GREEN, BLOOMBERG NEWS: I spent 20 years in Eastern Europe and writing about state-controlled economy that went through privatization, sometimes selling to private investors, sometimes giving shares to the public then organized the company in a capitalist manner. How does your plan compare with the privatization methods of former communist regimes?
HOSSEINI: First of all let me tell you, if you’re not aware, that we were never socialist. So when - when you talk about financial reforms in Iran, the financial reforms undertaken way back then in former socialist countries. Privatization, yes. Economic reform. You’re right. We were a mixed economy under which a much bigger share was in the hands of the government. The private - in some sections, the private sector did not have - was not operational - was not allowed to be operational.
So we removed those obstacles that were forbidding them from being involved in operations -- the president is always attending grand inauguration ceremonies at vast companies which are built at the hands of the private sector. This private sector now has the capability to buy a production facility from us and manage it .
GREEN: Is that your intention, to sell off the government-owned industry to private hands?
HOSSEINI: And also give them permission, give them the right atmosphere within which to operate. It’s also a lot of economic services and financial services. I want to focus your attention to this. In Eastern Europe, there was no private sector. Private ownership did not exist. Markets did not exist, but all of these existed in Iran, so we’re strengthening it. We have an aim from - to - from a government market structure to go to a construct market governmental structure. So the shares will vary here.
Allow me to complete this thought. Now in Iran, we have sold the Bank Saderat and - and commercial bank and export bank to the private sector. But many private banks, which I don’t want to name of course, have been created in this path. Insurance in the same fashion. Vehicle, automobile manufacturing industries even passenger airlines in the same fashion. So number one, we eliminated road blocks to activity wherever it was. And what was also purely in the hands of the government, we’re transferring on to the public.
Allow me to give you one example. We - we turned over - we turned - we transferred over 600 firms, state firms, more than 600. And one of them that took place last week, as a matter of fact, had a Persian Gulf holding. The initial price of it was over $9 billion, a holding company of petrochemical production firms that offer share in all those firms.
GREEN: If I could just ask one last question on this: how do you see the share of the state’s ownership of the economy percentage targets that you would like to reach, and where are they now?
HOSSEINI: The main part of our privatization is done in our stock market. In Eastern Europe, there wasn’t any stock market. There wasn’t any stock market. But in Iran, we have a market even before these policies, the stock market expanded. In addition to developed overseas markets. We actually opened the energy market. Even we opened merchandise and stock market. Actually, we are implementing the very last economic reforms.
GREEN: What is the - for you the target state control of the economy and the target private control of the economy by percentage?
HOSSEINI: The laws pertaining to these types of reforms, the industries have been broken into three categories under the umbrella of economic activities have been divided into three sections, one of which the government is under no circumstances free to operate. So the government has been forbidden from, in which the government cannot be - cannot claim an ownership of more than 20 percent. In a small circle of activity, such as the - upstream oil and gas-development, the government has management and ownership.
So I can answer you in this fashion. Other than the upstream that I talked about, and a limited number of industries, which are about 10, such as the National Iranian Oil Company, such as the central bank, in other areas the government can turn over up to 100 percent to the private sector and their share therefore, can reach 100 percent. Twenty percent is not mandated for the government to claim ownership at that level of maximum 20 percent. It can.
FOROOHAR: How concerned are you about the fall of the Rial?
HOSSEINI: We believe that the management of the currency has two different spearheads. One is in our hands. The other is in the hands of others. Therefore, what I personally think doesn’t have that much importance. What we can get to, what we can obtain is what is important. We had a thought, which was to have a boost of - of assurance in the economy, and we created a center for currency exchange in which the - the real offerers and the real purchasers of currency can be present.
So what I mean is there is no room for speculation because the other one who is in the currency exchange market, for example, the offerers of euro dollars (inaudible) mighty dollar comes from here from the European Union. They would have more effect on speculators. We do not unequivocally allow any speculation in the market. If you’re an importer, a real, legitimate importer, you can come and purchase currency. If you’re a real traveler headed for outside the country, you can come and purchase currency, foreign currency is clear can be present there as the offerers. It -
FOROOHAR: Is the minister saying that he’s powerless to control the rial?
HOSSEINI: What I’m saying is that the government under these conditions cannot forecast, therefore prevent, many of the shocks. We increase trust for those who are actively involved in economy. So the center that I just described to you is management of the market of currency exchange, not to control the exchange rate center for the requester - for the real requesters of currencies offered with very small fluctuations.
If you see this has been active for about seven months. The level of fluctuation is extremely low. We have three currency levels we have one exchange rate which is - which is determined in the exchange rate - in the exchange center for the importers of foodstuff and pharmaceutical drugs, only on the condition to transparently offer proof of the legitimacy of transactions with precise, specific prices, we will return them the difference with the because it was the beginning of this policy, we were forced to practice this preferential treatment, if you will, in the rate.
This year, we have - we have been forecasting to return the difference, something that during the past decade we - we initiated in order to stabilize the rate. But we don’t deny there are those that operate on the periphery of the legitimate market. And those are the ones who speculate, and that market is clearly, unequivocally illegal.
FOROOHAR: Do you have a target rate for Rial?
HOSSEINI: Allow me to answer your question in a different way. If I cannot convince you, I will explain further. I say let’s not talk about what is preferred, what is - what is desired. Let’s speak of the fundamentals. In my opinion (inaudible) and I think all of the - all of the analysts are in agreement, in our country, the real exchange rate in our country is less than 2,000 tomans.
FOROOHAR: Two thousand?
HOSSEINI: Two thousand. We believe that the political pressures of life have caused for the exchange rate to be higher than the real rate established by the fundamentals that I just alluded to. The market decides what the price is …. That market - the market that we are managing and overseeing, it hovers around 25,000 rials, the answer to your question.
But I have a question for you. If at a certain point non-economic events take place, for example, you take away the right of the offerers or buyers, then there is the possibility, I’m sure you will agree, for the price of those certain category of goods to increase. Now, has this been caused or brought about by financial and economic fundamentals or political limitations? We have a great deal of foreign currency reserves - I apologize, of reserves, that they don’t allow this to be exchanged and for it to be transferred or moved around.
FOROOHAR: Excuse me for one second. What the minister is saying is that they - you have huge foreign currency reserves. You have - you have huge amounts of currency why do you need to change? You can exchange that - you can exchange it in Iran rates.
HOSSEINI: Currently, sir, at least in the country that you’re from, you’re not very familiar with the banking. what good is the dollar for us in Tehran? What good is the euro for us in Tehran? What good is the yen for us? This is the question that was asked by over $2.2 billion of our money, of that nation’s money, was taken by Shell. Pharmaceutical drug importing companies need those funds so that we can import the needed drugs into the country.
And apparently, the British politicians are quite content and happy to exert undue pressure on the nation of Iran. And also, their human rights lobbying friends have decided to . And of course, Shell Oil is said to have some $2.2 billion of Iran’s money in their own hands and at their own disposal, money that they owe. But because of our humanity and because of their success in getting our money, we congratulate them.
Let’s go back to what you were saying. This money exists. It is our money. It is forbidden to be transferred and moved around. It doesn’t become part of the cycle of currency. We have $48.5 billion dollars in the NDF. This is not including the reserves of the central bank.
Allow me to tell you something very interesting - something very interesting. During the previous year in which our oil-related revenues were decreased, 23 percent of that very revenue we put in the national development fund. So we made it hard on ourselves, but we decided to sacrifice our benefit temporarily to make it easier in the future. This year, we have increased it to 26 percent and years ago we reached the conclusion that not become - should not be turned into government expenditure because of the conversation we had earlier about the analysis of inflation. But we had a plan to go through this step by step. Others want to see us hurry on our path, and we become more specialized and we gain more knowledge and know-how to get it done.
FOROOHAR: What was the dollar value of last year and this year, the 20 percent?
HOSSEINI: We’re not talking about dollars. When we sell each barrel of oil, (inaudible) very minimum, 20 percent of that revenue is deposited directly into an account completely separated from the government budget - operational budget. So these funds, these will become tools at the disposition of the private sector.. In other words, towards the direction of that foundational reform that I alluded to earlier.
So the only thing we’ve done is not to just remove some obstacles on the role of the private sector’s involvement, but even financially we have strengthened. Before, we were crowding them out - the government was crowding them out. Today, we’re crowding them in. We give them funds. We give them loans so that they come and - and build power plants, so that they come and build refineries and do other allowed and legal financial activities, so our economic activity is quite transparent and clear and comprehensive .
FOROOHAR: Are you concerned about the fall in the value of gold?
HOSSEINI: No. Allow me to share this with you. We have used - we are very rationalized in making the choices that we make. At very good timing, we transferred our reserves from the dollar into gold when the euro dollar - I apologize, dollar into euro when the euro was very cheap (inaudible) a part of the reserves were turned into gold. The gold reserves were purchased quite cheaply for us. Apparently, some have done some things in order for gold to become more expensive. Now that it’s falling, as you said, it will - granted that it’s falling now, it will certainly not reach the laws at which we bought them. It will not even hover near it.
And keep in mind, until such times that the likes of Europe and the United States and China and so on have a currency war, as you say, the market will not allow gold to fall below a certain level. Perhaps it will decrease in price, but certainly it will never go back to the numbers - to the value in numbers it had four years ago.
FOROOHAR: Which is when you transferred the exchange?
HOSSEINI: We started almost in that timeframe.
FOROOHAR: Do you have any projections for the growth rate this year and next year?
HOSSEINI: Clearly, we’re quite realistic. Our private sectors see very fast growth. Last year, the same, I shared with you the non-oil exports in the sector of agriculture (ph), in the sector of tourism.
And I even shared with you my assessment for us to adjust ourselves to each wave of the sanctions and the central bank acme under sanctions, of course we experienced much harsher pressure in the currency market, even in the capital market in the good - in the market for goods (inaudible) time, a certain calm returned to the situation, and they’ve even experienced growth since then.
HOSSEINI: They can be managed. And I do believe that they have reached a point in which the damage to those who initiated and executed the sanctions on us is becoming much more clear. The thing that I’d like to tell you is that this year our growth rate will be positive. In my opinion, it will be better than last year. And next year, in my opinion, will be better than this year. And everyone, all the - all the experts who analyze have the same forecast.
HOSSEINI: - very little based on pessimism or optimism.
FOROOHAR: I noticed that IMF said economy declined last year?
HOSSEINI: I have certain conversations with them. They must make known to us the sources from which they’ve derived their conclusion. They should have come to official sources and - and gotten the real numbers for what they were. They were just basing their conclusion on projections. I am convinced that their assumption is quite wrong.
FOROOHAR: So what are the minister’s numbers for last year, this year and next year?
HOSSEINI: The last numbers that we have were published in - 2011. There are two - two specific sources - two legitimate, official sources in our country, the census - the official census center for Iran and the central bank. The census center for Iran for the year 2011, considering the oil exports, determined the growth rate at 4.7 percent for certain. And the central bank has set it at 3 percent for certain.
FOROOHAR: For 2011 or 2012?
HOSSEINI: 2011. Why do I say without oil sector? Because oil, due to sanctions, has - has been something that has caused a decrease oil exports out of the equation, then this growth rate - both of these growth rates will be higher in 2012, which encompasses part of the Persian calendar year of (inaudible). Some sectors have slowed down. Some have - have yielded positively.
But since the beginning of the new Persian calendar year of 1391 on March 21 of 2013, it has been only a month and I do not have official numbers as of yet. We’re only one month into but those will be published soon, keep in mind that all - all of the aggregate that I mentioned earlier, and since they’re not for certain and official, I don’t announce them. And according to the laws according to the fifth plan of the parliament, we’re not even allowed by law to announce it. So the center for must first approve of these numbers before they’re made official. It is therefore that we are practicing restraint. So in reality, we’re being subdued by the laws.
But the forecasts that have been talked about for 2012 even though we overcame many difficulties in various sectors. If in reality (inaudible) unexpected actions - politically-driven actions are not brought upon us again by the outside, (inaudible) of sanctions, I have no doubt that 2013 will be much better.
GREEN: Just one - one last question.
HOSSEINI: Do you want to come to Tehran and follow up with me then?
GREEN: There’s an election coming up, big election. Inflation is up to here. People do better using their rial notes to wrap tobacco and smoke them.. Why would anybody in Tehran or anywhere else in the country hold rials?
HOSSEINI: You should come to Iran and see Tehran firsthand and talk to people to find out. One of the war fronts that has been imposed upon them and opened upon them is exactly that exchange market, that currency exchange market. And they have decided to - to stand strong in that very market that I described. These wrong calculations and equations are one of the main thrusts and reasons behind these wrongly-executive and conceived sanctions. And in 1979, each dollar was worth 70 rials. Now it’s 25,000. But did the people abandon the revolution? People will never trade in the revolution for money or hard currency of any kind.
Happiness and well-being is not cheap. It’s not in being cheap or obtaining something inexpensively. It’s in scientific progress and knowledge. Just as someone could ask you as a reporter, as a journalist, let me just pay you $1,000 extra, but write what I tell you to write, which is far removed from the truth. What if someone came to you with that (inaudible) we live with our values.
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