EYE ON THE ECONOMY

Iran 2011 | ECONOMY | INTERVIEW

TBY talks to HE Dr. Seyed Shamseddin Hosseini, Minister of Economic Affairs and Finance, and Head of the Economic Commission of the Cabinet.

Seyed Shamseddin Hosseini
BIOGRAPHY
HE Dr. Seyed Shamseddin Hosseini is Minister of Economic Affairs and Finance and Head of the Economic Commission of the Cabinet.

Can you list some of the major reforms undertaken by the ministry to overcome inflation and the state budget deficit?

Preventing the growth of inflation and reducing the general level of prices are among the main objectives and efforts of economic decision makers. Our financial and monetary policies have been centered around directing cash flow to the manufacturing sector as well as taking regulatory monetary policies to control inflation arising from demand pressure. The consequences of these policies have been reflected in the fall of inflation in 1388 (starting March 21, 2009)—following an inflationary rise in 1387 (2008)—in which we saw inflation drop to 10.8% by the end of that year.

On the other hand, the Ministry of Economic Affairs and Finance, in coordination with other relevant bodies, by taking the appropriate measures to curb inflation with an emphasis on the field of distributing goods, endeavored to minimize the impact of inflation on vulnerable and lower income groups.

In terms of budget management, predicting new sources and endeavoring to realize predicted sources, on the one hand, and enhancing productivity and the efficiency of credit allocation through improving public expenses management and the need to enhance government financial and budgetary discipline, on the other, are among the main pillars that the Ministry of Economic Affairs and Finance has taken into account in recent years. The main actions taken have included:

1 Reducing the government's non-sovereign role: Among the executive approaches for boosting the efficiency of government expenses, the government's non-sovereign role in ministries and state-owned firms has been reduced. This is a policy that, in line with Article 44 of the Constitution, has been expedited in recent years.

2 Compiling and implementing the Economic Transformation Plan with an emphasis on managing expenses: One of the Ministry's plans to restructure the country's economy is to draw up and implement schemes concerning the seven pillars of the Economic Transformation Plan, including rectifying the subsidy system, the taxation system, the productivity system, the banking system, the customs administration, the distribution of goods and services, and the money valuating regime. The rectifying approaches of some of the above, especially in enhancing the productivity and subsidy systems, are contingent upon public sector expenses management. In that connection, targeting subsidies has emerged as the overarching pillar of the Economic Transformation Plan for implementing fundamental reforms in the country's economic infrastructure, designed and implemented for expediting the realization of the country's 20-Year Vision and rectifying different economic sectors.

What is the current status of energy price reform?

Energy is one of the key factors for development and a main element of production. Regarding the price of energy carriers in the domestic market, the gap between the energy consumption ratio in Iran with developed countries, inequity in the payment of state subsidies, fossil fuel limitations, the considerable annual growth in the consumption of energy carriers, the technical and economic inefficiency of energy consumption, and problems related to the environment, it is now necessary to regard optimal energy consumption as a necessity. The studies made and experience gained shows that overcoming this problem without implementing price policies will not achieve the desired results, so in order to resolve these problems, such as organizing energy carrier consumption and targeting subsidy payments, the “Plan for Targeting Subsidies" was prepared and the “Law on Targeting Subsidies" was ratified by Parliament on January 13, 2009. Based on Article 1 of this law, the state is required to set the prices of energy sources (gas oil, fuel oil, kerosene, liquid gas, and other oil derivatives), with regard to the quality of carriers and the costs borne (including transportation, distribution, taxation, and legal duties and charges), in a way that they gradually reach at least 90% of f.o.b. prices for the Persian Gulf by the end of the Fifth Five-Year Development Plan (FYDP) in 2014. Hence, with regard to the programs established by the government, energy prices shall become more reasonable in the course of the next five years. In Articles 7, 8, and 11 of the law and its implementing regulation, the necessary measures for any possible consequences have been foreseen and it is expected that minimum negative impacts will arise because of the law's enforcement.

The main advantages of amending energy prices include:

•Amending the technological structure of manufacturing units, aiming at improved energy efficiency,

•Reducing the level and ratio of energy consumption,

•Preparing appropriate grounds to attract investment in the energy production sector,

•Developing renewable energy sources,

•Mitigating the rent and smuggling of energy sources,

•Mitigating polluters and preventing the pollution of the environment,

•Improving the possibility of accurately assessing economic activities and investments, and

•Preparing the way for Iran to join the World Trade Organization (WTO).

What are the root causes of unemployment in Iran, especially among the young, and what policies are being employed to mobilize Iran's human capital?

Economic indicators from 1375 (1996) onwards show the emergence of a structural transformation in the combination of working age job seekers due to the rapid population growth experienced in the early years after the magnificent Islamic Revolution. The results of this structural change are reflected in the increased pressure on labor force supply. The average annual supply of new labor over the course of the last decade has been about two folds that of annual labor force demand. In addition to the large working age population, the growing numbers of university graduates and women entering the workforce intensified pressure on labor supply factors. On the demand side, because of a reduction in the economy's unutilized capacity and the lingering of relatively low production growth, as well as the deviation of some capital toward non-productive economic activities, we faced an imbalance in the creation of stable productive jobs.

The country now enjoys a great potential for entrepreneurship. Iran's young well-educated labor force embodies this potential, and can become a strong point if they are trained with practical complementary courses.

Generally speaking, the basic criteria for policy making in the labor market can be summarized as follows:

•Improving the investment climate for private sector entrepreneurs,

•Improving the flexibility of laws, regulations and active bodies in the labor market, and

•Enhancing the country's educational and training system to match the needs of the labor market.

How would you describe the changing composition of the economy, the ongoing privatization efforts and their impact, and the rising role of the private sector in the economy?

Given the role and importance of the private sector in economic development, the enhancement and strengthening of the private sector has drawn the attention of policy makers in recent years. Removing the impediments to the development of the non-governmental sector centered around four key pillars: transforming the administrative system, organizing state firms, breaking monopolies, and decentralizing the functions of the state. It should be acknowledged that the notification of the general policies of Article 44 of the Constitution and then compiling the law on implementing the aforementioned policies had crucial importance on preparing the ground to speed up the transference of the government's non-sovereign functions to the private sector. As mentioned in Article 44, the government obtained the ability to divest itself from a large number of firms. With regard to the volume of divestitures, the grand total between 1370 and 1388 (1992-2009) amounted to IR697,989 billion, IR 7,000 billion of which were made between 1383 and 1388 (2004-2009). The volume of divestiture in the said period was an outstanding record. In the same vein, a bill is being drafted that will offer huge incentives and facilities to non-governmental activities, which, in turn, may improve privatization indicators.

Concurrent with the divestitures, the other strategy of the government is to improve the business environment. In this regard and through the cooperation of the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), some workgroups were established to enhance the ranking of Iran's Doing Business indicators. The administrative, legislative, and judicial powers intend to take practical steps to improve the business environment, and the actions taken in this regard have already improved the international ranking of the country.

What has the Ministry of Economic Affairs and Finance done to promote and protect foreign investment in Iran?

Providing financial resources and the appropriate technology for the management of macro-scale issues as well as the developmental and infrastructural sectors of the country are the main concerns of all countries, and especially of Iran. Although there are various methods for providing financial facilities, international experience shows that foreign investment is one of the best solutions suited for this purpose.

Pursuant to the importance of economic growth and development and the necessity for deeper global interaction in the post-war years, a consensus at the macro level regarding foreign investment was formed among the government and other authorities of the Islamic Republic of Iran, and the amendment of the structures and legal bases of foreign investment has captured their attention.

The execution and interpretation of the laws concerning these topics, such as the general policies of Article 44 of the Constitution, the preparation of the 20-Year Vision, as well as all rules and regulations concerning foreign investment in the Islamic Republic of Iran, including the Foreign Investment Promotion and Protection Act (FIPPA) and its Implementing Regulation, are among the key measures that have been taken.

The above-mentioned laws, in general, and the FIPPA, in particular, prepared the judicial and legal environment for foreign investment in Iran in a way that foreign investors can register 100% owned local companies and are allowed to repatriate the profits generated from their activities in the form of foreign currency or goods, following the observance of legal procedures as mentioned in their investment licenses. They also equally enjoy, according to FIPPA, all the rights, protections, and incentives granted to domestic investors. In addition, foreign investment is guaranteed against nationalization and expropriation. The other area available to foreign investors is in investing in the securities and exchange market, and some investors have already invested in the country's securities market.

Iran enjoys some unique characteristics. It borders 15 countries, enjoys an outstanding labor force that can meet the economic needs of the region with a population of 400 million, and with regard to oil, gas, and petrochemical products it is the economic hub of the region and is at the same time blessed with strong domestic demand.

In 2009, the Iran Securities and Exchange Market experienced 60% growth and saw the divestiture of large companies sold within the framework of the privatization program, which exceeded $60 billion. All of this is an obvious sign of the dynamism of Iran's economy.

Iran, as a major producer and exporter of energy, can easily meet the energy needs of active manufacturers in the domestic market. Being located on the historic north-south and east-west transit routes, it is blessed with climatic diversity as well as having the appropriate infrastructure. Few places in the world can offer all these capacities. Taking all the above into consideration, the rate of return on investments in Iran, which is the most important criteria for investment, is remarkably higher than that for other countries.

The formation of the National Development Fund will provide new opportunities for private sector economic activities and foreign investors. Since it is based on the Articles of Association of the National Development Fund, foreign investors are entitled to use the resources of the fund for their investment projects in Iran.

Taking all the above into account, Iran is able to attract large volumes of foreign investment, such that the volume of FDI in 1388 (2009) amounted to $3 billion, reflecting 86% annual growth. It is also predicted that by the end of the Fifth FYDP, foreign investment will exceed $12 billion.

Following the approval of the Law on the Admission of Foreign Banks, a chain of actions has been taken by the authorities to devolve the developmental role to players in the economy. The presence of these banks facilitates the access of economic firms to new and various resources, increasing their choices and options.

In addition, the admission of foreign banks into the country shall create a competitive environment and increase managerial capacities. It is also a positive sign for the domestic and foreign private sectors to prepare and plan their financial models with confidence regarding the availability of financial resources.

As a result of the efforts made, in recent years Iran has succeeded in joining the group of countries that have high standards of human development. With regard to human development indicators, Iran has improved, reflecting the enhancement of human development over the course of recent years. The Islamic Republic of Iran rose 18 places among the 194 countries measured, and took 70th place and for the first time it was listed among those countries possessing highly developed human resources.

What is the status of the foreign trade regime of Iran and the reforms undertaken in this area?

During recent years, Iran's economy experienced considerable growth in the trade sector and in non-oil exports as well as in imports, notwithstanding the global economic crisis. Considering the approach of the 20-Year Vision, Iran's economy underscores its interactions with the world as a strategic objective, with an emphasis on regionalism.

Nevertheless, since export promotion is tightly linked with trade liberalization, during recent years some widespread and outstanding measures were taken to improve foreign trade, including the removal of non-tariff barriers, concluding preferential trade agreements with countries of the region, creating free trade zones, consolidating duties, and preparing the legal grounds for the participation of foreign investors in the real and financial sector.

Facilitating trade and enhancing export trends resulted in the improved performance of non-oil exports, which exceeded the goals set. Non-oil exports in the Fourth FYDP (1384-1388) (2005-2009) were 50% higher than the objectives laid out in the program. The growth of non-oil exports, despite the global financial crisis, reflects the success of the trade policies of the Islamic Republic of Iran.

In addition to the above, the country's great potentials, the diversity of its products and manufacturing, and the variety of its trading partners have made it possible that by changing the combination of exportable goods and trade partners and also moving from conventional trade and target markets in the West toward new markets in the East for foreign trade to remain immune of the undesirable impacts of foreign bottlenecks. During the years of the Fourth FYDP, imports into the country, under the influence of exports, rose.

With a population of more than 74 million people and growing needs, Iran is one of the biggest markets in the region and enjoys a great capacity to expand trade relations with countries in its region and around the world. Regarding the type of imports, the bulk of imported goods are intermediate and capital goods, and these make up 81% of all imports, while the contribution of intermediate goods is 66%. Hence, concerning the kind of manufactured goods in countries of the region, there are many grounds to expand trade relations.

From this view, the events that occurred in the world trade arena, despite the limitations imposed on industrialized countries, have created considerable grounds for the development of regional cooperation and investment by developing countries.