Q&A With Ali Tayebnia, Iran’s Minister for Economic Affairs and Finance

Economy Minister Ali Tayebnia speaks with Bloomberg one year after the signing of the nuclear accord

One year after the nuclear accord, Iran's economy minister sat down with Bloomberg to discuss banking, bonds, oil and terrorism.

What is your forecast now for Iran’s economic growth, for this year and for next year, what will GDP growth be?

Well you know that after the broad sanctions against Iran were applied, for two consecutive years the growth of Iran’s economy became negative. In 1391 (2012), we had negative economic growth of 6.8 percent and for the year 1392 (2013) we had negative economic growth of 1.9 percent, of course since all the policies and plans of Dr Rouhani’s government were adopted, we were able to turn that negative economic growth positive, and did so under the continued circumstances of sanctions. In 1393 (2014), our economic growth was positive, by 3 percent and in 1394, despite the severe decline in oil prices, our economic growth remained positive, although it was limited to 1 percent growth.

For the current year, our forecast is that we can reach 5 percent economic growth, both Iran’s oil production and exports have seen a particular increase and this increase of oil production can also prepare the ground for increased production in other sectors.

An optimism and hope is now evident and governs economic actors and has prepared the climate for more foreign investment in Iran’s private sector. Improvements in the business climate have meant we’ve promoted Iran’s ranking from 152 to 117 and we’ve forecast that in the current year we will see a recovery in Iran’s situation and God willing this trend will continue.

Reforms that have taken place in the country’s financial system, in the banking system and the capital markets and in the participation of the banking system and our capital markets in improving financing for economic activity, on the whole these developments mean that we can achieve five percent economic growth this year.

For the years ahead, for years that apply to the Sixth Economic Development Plan, we’ve planned for 8 percent economic growth and we think that achieving this growth is possible if these plans and the common determination that has taken shape right now between the country’s officials and the people, continues.

We’ve forecast significant plans for implementing structural reforms for the country’s economic institutions, the policies of the “economy of resistance” whose purpose is to raise the country’s production capacity, have been approved and implemented. These policies are policies that have been very carefully set and designed according to Iran’s economic circumstances and a complete pathology of the problems and barriers to Iran’s growth has been put into practice and these policies are based on this pathology and therefore we are hopeful that with the full implementation of these policies we can, in the years ahead, we can reach that objective of 8 percent economic growth.

Those changes that you referred to in your comments about the banking system, do you mean efforts that helped in the FATF decision, the laws that were implemented that helped that decision?

The FATF issue clearly goes back to laws combating money-laundering and also anti-terrorism financing laws, regarding which we have undertaken some very good measures in the past few years. Firstly the law of combating money-laundering was approved in Iran, we’ve established an advanced law by using the experience of other countries around the world, and anything that can be a criminal source of money laundering has been accounted for in this law, and has been criminalised and very good guarantees of implementation have been factored-in for it. All the bills and the rules and guidelines for the implementation of this law have been provided for all the organisations and institutions that can be involved in anti-money laundering affairs including the banking system.

We are now equipped with intelligence gathering technologies and systems which can detect all suspicious money-laundering activities and the relevant institutions are obligated to report any suspicious actives to the Financial Intelligence Unit which resides within the ministry of economic affairs and finance.

Very good measures have taken place and when we provided these positive measures and the world was able to see this positive progress, the outcome was an agreement to remove the limits that had been placed on Iran, for one year.

But the reforms I mentioned are not limited to this area. We have designed extensive reforms for the whole country’s financial markets and the country’s banking system. The objective of all these programes is to prepare the groundwork for more simplified and cheaper financing for production activities. Up until today, our financial system has been one that is bank-based, the banks took on the main role in facilitating financing for economic activities and banks, because of the problems they also faced with this issue, didn’t have the capacity to supply all the financing needs of the economy at a suitable cost.

Therefore we arranged our own plans to firstly grant the capital markets the role of financing production; long-term financing and financing for big companies can be taken-on by the capital markets, and short-term financing and financing small to medium-sized companies can be carried out by the country’s banking system. All programs have been arranged and procedures have been factored-in so that once they are realised, the lending power of banks can increase, the scope of financing through capital markets can increase and we can also reduce the cost of borrowing for economic actors.

They are very broad measures and these plans have been arranged against a complete timeframe, meaning that it’s fully clear which measures we have to be carried-out at a particular point in time and which quantitative targets we ought to reach.

A section of this plan has been implemented in the past and we can now see its positive impact on our own economy and another part of the programe will become operational during this year and next year.

And how are you managing the interest rate reduction?

You see the rate of inflation in 1392 had reached even higher than 40 percent because of the wrongful economic polices that had been implemented in the past and because of the sanctions that had been applied to us, under those circumstances. With the programs that we have arranged and with the monetary and fiscal discipline that we adopted from before, we’ve been successful at reducing the rate of inflation from above 40 percent to under 10 percent in the month of Khordad (June to July) of this year. This remarkable reduction in inflation which happened gradually and continuously was a remarkable success. It’s possible that we could’ve reduced inflation temporarily but what makes this a success is that this reduction has been part of a gradual and ongoing process and it makes us hopeful about the stability of this process.

Alongside the reduction in the rate of inflation, efforts were made to reduce bank deposit and bank financing rates and today we can see this decline, albeit more slowly than the rate of inflation, but the decline in interest rates is very palpable. Last year, in our interbank lending rate we had an interest rate of around 30 percent and today this rate has dropped to 17.5 percent. The borrowing interest rate, which was around 30 percent, with the recent directive of the Monetary and Credit Council, is at most 18 percent and the rate on bank deposits has dropped to 15 percent, of course for us this isn’t completely satisfactory, we will continue with our work, the downward trend will continue and more important than this, we will need to generate stability in the current situation so that we won’t witness a return of inflation, and alongside this reduction in rate of inflation the rate of deposits and bank lending needs to come down so that there is a limited and logical difference from the inflation rate.

When do you think that will happen? When do you expect to see them in line?

Right now, we’ve had a sensible reduction in interest rates and the difference between interest rates and inflation is less that what it was in the past, I think that by the end of this year and the beginning of next year we can reach a favourable situation with this regard.

And considering that it’s the anniversary of the JCPOA and one year has past since that agreement was signed, and six months has passed since its implementation, have you seen the economic benefits that you had expected from the deal? What has the been impact of it in general on the economy, was it in line with what you were expecting?

We are seeing the positive effects of sanctions removal on the economy. I can think that just as the sanctions were applied and approved by a gradual process, their removal may also need time. In some areas we are not faced with any practical limitations, as an example, in relation to the export and production of oil, we are currently not facing any particular limits. In some areas we still haven’t managed to fully benefit from the outcome of sanctions removal.

Iran has fully implemented its obligations as outlined in the JCPOA, but it seems that the opposing sides to Iran are not fully loyal to their commitments or at least in practice the implementation of their obligations hasn’t been fully undertaken. Of course we have learned to become more self-sufficient. We have found that if we couldn’t show resistance in the face of sanctions, if we couldn’t make our economy invulnerable, if we weren’t able to turn our economic growth positive under conditions of sanctions and declining oil prices, and if we couldn’t reduce the country’s inflation during the sanctions, bring stability and calm to currency markets, perhaps Iran’s negotiating counterparts wouldn’t have given in to Iran’s demands.

The thing that compelled the opposing side in the talks to comply to Iran’s requests and led official recognition of Iran’s right to operate peaceful nuclear energy was our vigour in managing our economy under the conditions of sanctions. We will certainly continue this policy and this style of management in the post-sanctions era. We recognized our economic weaknesses during the sanctions era, our awareness compared to our weak spots, our economic vulnerabilities, has improved considerably and therefore our programs for the post-sanctions era are ones that will get us to uninterrupted and stable economic growth and at the same time insusceptible to external shocks.

“It’s natural that when a car that has stalled and wants to start moving, at first it will come under more strain and will need a higher driving force, after that it will move with more ease” 

We want programs that will reduce the government’s dependence on oil. We want programs that will reduce oil’s share of the country’s revenues. We want plans that will reduce oil’s share of the country’s foreign currency income and we want to be able to secure our currency needs from non-oil exports. And overall we want make our economy immune to external shocks and sanctions. I’m pleased that today, in these conditions where I’m speaking to you now, our economy’s dependency on oil has seriously reduced. Today the proportion of our budget that comes from oil is around 30 percent, which shows a serious difference compared to Iran’s past history.

In the first months of the current year in our trade balance, we had a surplus, meaning that non-oil exports were in excess of Iran’s imports by about $1 billion. This means that for our import needs, we are no longer dependent on oil revenues and we are able to secure our import needs from non-oil exports. The dependence of Iran’s economy on the outside and on external shocks and on oil revenues has reduced remarkably and this means that in the current situation when sanctions have still not, practically speaking, been fully removed, we can reach a suitable level of economic growth.

You said that the limitations on oil no longer exist but in other areas the removal of sanctions hasn’t been effective, which areas are those and why has that been the case?

Mainly in the area of banking relations, especially big banks, we are still facing some problems and limitations, however some of these problems, gradually and over time, will be resolved. Some of this is maybe because of the failures of the counterpart in Iran’s negotiation and naturally Iran’s expectation is this — an Iran has implemented all of its own obligations — it expects that the opposing sides also fully their own obligations into practice.

But you are in talks with foreign and European banks at the moment?

Yes, these negotiations are taking place and they will continue and we are hopeful that we will reach a normalization of relations between Iran foreign banks

How long do you think this will take? When will be see a large European bank enter Iran?

Right now in terms of the sanctions we’re not really facing any official limitations. In the area of money laundering and terrorism financing, considering the recent statement that was issued at Busan [FATF statement in Korea] and the limitations against Iran that were removed, practically we don’t really have any more barriers or problems therefore our natural expectation is that in the very near future, these practical limits will be removed and the relationship between Iranian banks and foreign banks become fully normalized.

Do you think the U.S. Treasury is doing enough to help in this matter? Right now I think Dr Seif was meant to meet with the Treasury in London, which was cancelled in the end, perhaps you can tell me—

We recognize effective cooperation when we can see its effects and outcomes in practice. If in practice we can’t fully see the results, then the logical conclusion is that the measures that should’ve taken place have not, at least in terms of taking effect, actually taken place.

But right now you expect this to gradually happen?

Certainly our natural expectation is that this cooperation takes place. Just as we have completely and swiftly complied to our commitments and shown that we only have peaceful intentions when it comes to using nuclear energy, the opposing side must also fully put its commitments into practice and show its goodwill in the first instance.

And going back to the banking system. What is the country’s NPL ratio? What is the percentage, compared to last year—

In this past two years we’ve seen and are seeing a steady and continuous reduction in non-performing loans. The period that Dr Rouhani’s government has been in charge, this rate was around 14 percent and we were also in a situation of stagnation, normally under stagnant economic conditions, the rate of non-performing loans increases. With the positive measures that took shape, this not only did the rate not increase but it declined and right now it is around 10 percent and in some of our banks the success has been more tangible. As an example Bank Melli, which is Iran’s biggest bank and a government bank (and lots of these lending obligations were in the past being shouldered by Bank Melli) and the natural expectation is that the it would have the highest rate of NPLs, but thankfully we are pleased to say that now this has reached to around 7 percent. This means that if Bank Melli follows this process, as it has for the past two years, and follows it over the course of the next year, it can reach a normal international level.

Our colleagues are negotiating with all the ratings agencies.

The success that’s been achieved in this area has honestly been considerable and the reduction regarding the NPLs  has happened in part through recovering the debt and not by any changes to accounting that may have taken place.

And this NPL rate for Bank Melli, how much was that last year?

I don’t remember the precise figure for last year, but it was above 12 percent and it is now around 7 percent.

And I wanted to ask you about Fitch and foreign ratings agencies. It seems Fitch was here one month ago can you tell me what stage those talks are at? Where have discussions got to?

Our colleagues are negotiating with all the ratings agencies. Recently we’ve seen that the OECD upgraded Iran’s rating by one level, of course we had expected we’d be upgraded further and in their negotiations with us they stated that the conditions in Iran conditions are more favourable and that in the past few years when Iran’s ranking dropped, it wasn’t because of conditions in Iran’s real economy, but because of sanctions and political reasons. Therefore in reality, the foundations were there for Iran to be upgraded by several levels but we were told that on the basis of the criteria within their own statute/rules, they cannot upgrade by more than one level at a time.

We’re in the process of negotiations with other important ratings agencies and in the near future we will see the announcement of Iran’s rating, when conditions are favourable.

Can you be more precise about when that will happen?

If you want more thorough details you can speak Dr Khazaee who is responsible for this and is working with the Central Bank on this issue and on the latest negotiations

The last time Iran issued a Eurobond, the last time a Eurobond came into maturity was in 2008 I think, when do you think Iran will again issue a bond 

Right now we have serious offers from authorities in capital markets in various foreign countries and, they’ve made requests, insisting for us to issue bonds in their markets. As an example, just last week when South Korea’s supervisory authority visited Iran, they were insistent about their willingness to issue Iranian bonds in South Korea and it’s now us who has to decide whether we are willing to start issuing or not. They also suggested that in first stage we should issue $1 billion and then issue a further billion dollars in the proceeding weeks.

From this point of view I think Iran was always a country with good accounts. In our past history you will never see us ever having defaulted on payments of loans. Our currency inflows are high, the ratio of debt to production and the rate of Iran’s export revenues is very, very low. One of the lowest ratios of all the countries the world in terms of debt to production and export, belongs to us. And if in the past few years we had some limited cases where there was a lull in Iran’s payment or return of debts it’s mainly because of sanctions and because the channels for transferring money to Iran had been closed.

Overall Iran is a country with good accounts and right now the groundwork for issuing bonds and various Iranian debt securities in international markets exists and I am sure that in the future that this situation will improve. Right now we have around something like $45 billion worth of signed agreements with various difference countries for financing Iranian projects. A proportion of these are at the state of negotiating the terms and conditions of the financing, some of them have reached an outcome and have been determined and some of them are at the final stage of negotiation.

Countries that are opposing us and are trying to tarnish Iran’s image are actually those who are the main supporters of terrorism

We are reaching the stage where are deciding how those clearly defined projects, whether they are private sector projects or projects that are government-sector, will be introduced to foreign entities for financing.

When we’re able to agree with big foreign countries about securing $45 billion of financing and there’s still room for further agreements, it’s because those who secure financing are hopeful about the future of Iran’s economy and they know that the future of Iran’s economy is bright and they have confidence in the profitable opportunities that investing in Iran can bring, and that Iran will be capable of repaying funds in a timely and regular manner.

When the JCPOA was implemented the president said that Iran needs $30-50 billion of foreign investment a year, in the 6th development plan this has been outlined, now considering the limitations that you’ve mentioned still exist, do you think you can still reach that volume of foreign investment?

Firstly what he said wasn’t foreign investment, but rather foreign financial resources. One of the means of securing foreign financing is direct foreign investment, or FDI. There are other means too that exist. I’ve just said that we’ve have around $45 billion of agreements and naturally when an agreement is signed, for it to get to the implementation stage, it takes a number of months for the conditions to be discussed, especially when there is an interruption in the relationship between Iran and financial lending institutions. It seems to me that securing financing, to the extent that our long-term programs have forecast, is entirely possible. It’s natural that when a car that has stalled and wants to start moving, at first it will come under more strain and will need a higher driving force, after that it will move with more ease.

And it seems right now in the U.S. some lobby groups are trying to block the contract with Boeing, are you worried about this? It seems that the right wing want to, given that a year has passed, to disrupt the deal 

Maybe we are not really that sensitive about this deal. It’s not as important to us as it is perhaps for the Americans. There are other companies in the world that can provide for our needs and also we have more important needs with a higher priority, in the plans that we’ve designed it doesn’t maybe have the status that it’s been given in the media. The American side has more of a need to close this deal with Iran. What’s important for us is strengthening Iran’s production capability and preparing the ground for developing the country’s wealth and entrepreneurship potential, and that will mainly come as a result of investment. In terms of investment, our priority is to fully use the existing capabilities and potential in the country.

We have some great opportunities inside the country and in the past these opportunities haven’t been used effectively. Iran’s situation, compared with many countries which have faced severe limitations on financial resources, is very different, our main limitation has never been about limited financial resources, but because of huge revenues from oil and gas, we haven’t really faced any particular limitations and perhaps one of our problems has been that on this level we haven’t faced any limits — a country that that has to face limited financial resources has a better appreciation for the value of those resources and tries to use them more effectively and more optimally. In the past because in Iran such limits didn’t exist, subsequently efficient use of financial resources didn’t take place.

Our main priority is to promote the role of efficiency in Iran’s economy and this efficiency and its growth will naturally be applied to the area of financing. If we can effectively use the financial resources that exist and are within our reach, then the groundwork for achieving greater economic growth will be established. But of course we’re not apathetic with regards to the international economy and the existing opportunities that the global economy offers. We will certainly look to foreign markets. We want to export our own products abroad. We are certainly willing to use existing financial resources in the global economy, and of course this is a two-way exchange. Just as using foreign funding can be beneficial for us, it’s also beneficial for financiers. You know that right now, what’s abundant in the world is financing, and financing is being offered with very, very low rates. There are very profitable opportunities within in Iran, and if foreign funding is put to use for these beneficial opportunities, it can establish a highly efficient, low risk, outcome for the foreign party. Therefore my take on this is that it’s a win-win game in which actually the foreign side can see a higher benefit.

We’re seeing various groups that are against the deal, whether they are in the U.S. or in Saudi and in the region, they want to ply pressure on the JCPOA and it seems they are quite active and maybe aware that Obama is reaching the end of his presidency, are you now concerned about this current situation?

In the past we’ve faced much greater difficulties. We’ve very well been able to show our peaceful objectives to the world. The international community knows very well today that Iran is a country that wants to secure peace, stability and security in the region of the Middle East and the world. We are on the front line of combating terrorism. Most of the victims of terrorism are from Iran, many of our great people, our president, prime minister, head of the judiciary, they are all victims of terrorism. And right now the international community very well understands this. Countries that are opposing us and are trying to tarnish Iran’s image are actually those who are the main supporters of terrorism and today the international community very well knows which countries have organised Al Qaeda, which countries have financed Al Qaeda, which countries have given Al Qaeda weapons and which countries have supported Daesh and other terrorist groups. Certainly Iran is on the front line combating these terrorist groups and has paid a high price. Today the international community is very well acquainted with this reality and it’s natural that the world has now recogniszd the true face of our enemies and they won’t believe their words and from this point of view I don’t have any particular concern. I am sure that the international community today understands the threat of terrorism better than at any other time and is more familiar with the position that Iran can have in the fight against terrorism and this can provide the foundations for better cooperation between Iran and the international community.


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