IRAN - Economy
Minister of Economic Affairs and Finance, Iran
HE Dr. Seyed Shamseddin Hosseini is Minister of Economic Affairs and Finance and Head of the Economic Commission of the Cabinet.
In 2013, three years after the subsidy reform package takes effect, the short-term results of the plan are expected to fade away and be replaced with medium-term and positive outcomes. Parallel to the intensification of foreign sanctions imposed on Iran, the internal capacities of the Iranian economy will be further reinforced. For example, with the reduction of oil revenues, the financial discipline of the government will become stronger. In order to be able to provide the required financing, the government will devise a more effective process to prevent tax evasion. There will also be new financial resources created by the selling of government properties. Foreign currency devaluation will become more optimal, and new markets will be created for exporting Iranian goods. Therefore, economically Iran will be in better shape in 2013 than it was in 2012. The projections of the IMF (without taking into account the fact that its figures differ from those released by the official sources inside Iran) also confirm this trend. Based on the latest report by the IMF, released in October 2012, the economic growth of 2013 will continue into 2014 and 2015. The important point is that Iran intends to experience higher economic growth, relying more upon on its internal capacity.
Considering the role of this Ministry in shaping the macroeconomic climate to carry out economic activities, what it does will indeed be important. One of the foremost duties of the Ministry of Economic Affairs and Finance is in regard to finance. The issue of promoting the financial system and changing the banking system has been taken well into consideration. In our plan to promote the financial system, the obstacles facing financing in the four areas of capital markets, banking, foreign investment, and financing have been examined by the government. The outcome of this plan has resulted in various projects the implementation of which can solve a number of problems. With regard to our efforts to change the banking system in Iran, we have concentrated on five areas: reforming the existing bodies and instruments, the creation of new bodies and instruments, legal reforms, strengthening supervision, and reforming monetary and credit policies. Moreover, we want to encourage financing methods such as PPP. We intend to integrate the capacities of different sections we have access to in financing. For example, the capacity of the National Development Fund of Iran (NDFI) may be combined with the capacities of specialized and commercial banks to develop the agriculture sector and guide working capital in industry, mining, and energy to infrastructure in the country. Preparation of a bill called “Changing the Taxation System of Iran” is yet another initiative of the Ministry of Economic Affairs and Finance that has already been submitted to the Parliament to be ratified, and the first part of the bill has been approved. The bill has been prepared based on our intentions to reform the financial structure of the government, reduce the reliance on oil revenues, facilitate investments, maintain transparency, counter speculation, expand upon tax foundations such as income tax and wealth tax, improve income distribution, and make use of taxes as an instrument for economic management. Some of the major approaches visible in the bill encompass the areas of production, exemption from tax, investment by all economic agencies, and support for extending their services. Of course, these exemptions will be tantamount to zero tax rates. Changing the way amortization is calculated and granting permission to economic enterprises for asset renewal are some of the most important ways to strengthen the financial structures within the economic enterprises. Moreover, direct support has been included for production by reducing tax rates and granting investment exemptions, and mechanisms have been presented for better directing liquidity. Another measure by the Ministry has been aimed at improving the business climate, creating a unified window for facilitating the licenses given for investment, examining and reviewing the regulations, bylaws, and directives related to production and investment through setting up a council to supervise the deregulation process, facilitating the issuance of economic licenses, and rendering investment services by the representative offices of the government. Paying off the debts of the government to economic enterprises through stocks and bartering mechanisms, offering financial and non-financial incentives to the enterprises sold to the private sector provided that the number of the employees rises, forming an empowerment department for the private sector in the Privatization Organization of Iran, and offering services to the private sector are some of the foremost approaches adopted to encourage the private sector and facilitate the financing structures in economic enterprises. Considering the role and importance of foreign investment in promoting financing and the transfer of technical knowledge to economic enterprises, the Organization for Investment, Economic, and Technical Assistance of Iran (OIETAI) has devised plans to better attract foreign investment. Some of these plans include the formation of a capital coalition working group (domestic and foreign) with the participation of the relevant ministries and organizations, the introduction of new and modern financing methods to the private sector for a coalition between domestic and foreign capitals, the preparation of incentive packages for Iranian investors residing abroad so that they are encouraged to invest in various sectors inside the country, and the coordination of national organizations to make use of foreign financial resources through special arrangements such as the finance committee. This Persian calendar year has been named the year of national production by the Supreme Leader of Iran, and hence the Ministry of Economic Affairs and Finance has been working to deepen the capital markets both qualitatively and quantitatively through plans adopted by the Securities and Exchange Organization of Iran. Some of the most important plans include expanding and developing the expert consultations on how to be accepted into the bourse, creating and developing infrastructural regulations for constant monitoring and launching national bodies, creating and launching new financial bodies in order to develop and facilitate the financing of private sector projects including the private investment funds, and launching advanced parallel transactions in the Tehran Stock Exchange (TSE) with the aim of facilitating the transactions of goods produced domestically. Moreover, we intend to conduct follow ups and feasibility studies for launching knowledge-based companies as off-exchange in order to show support for the creative ideas and help knowledge-based companies, promote the utilization of the capacity of the capital markets in financing companies and introducing financing methods and promoting information transparency in the capital markets, and launch the energy bourse and oil sukuks. The plan also incorporates facilitative reforms in customs to reduce the reliance of the economic enterprises on resources through granting loans in paying entry duties, clearing the goods by securing ban guarantees, clearing parts and raw materials on an installment plan, obtaining insurance guarantees, and facilitating customs formalities. In addition, coverage of commercial insurances, strengthening reinsurance, and the diversification of insurance services have been paid attention to.
Such an assessment becomes meaningful when its necessities and objectives are taken into consideration. Although problems that are caused by scrapping the subsidies formerly given to fuels are so diverse and varied, the government was determined to go ahead with the plan because it sought “justice in the utilization of national wealth” and “the enhancement of productivity and competitiveness in the national economy.” Since Iran is rich in natural oil and gas resources, which belong to everyone and our future generations, the importance of justice and sustainable development entail that first and foremost, each and every individual would have access to these natural riches so that poverty is alleviated and that the gap between the rich and poor is bridged, and all walks of life can enjoy the natural resources in an equal way. Secondly, the subsidy reform plan aims to prevent the wasting of natural resources and preserve them for future generations by managing energy consumption and resorting to an optimal consumption model. In the past, the price of energy and fuel was the same for all social groups, and this needs to be fixed. At the same time, the plan has the potential to drastically reduce pollution and environmental degradation. We also know that in order to achieve high and sustainable economic growth, economic enterprises need to become more competitive and energy efficient. Evidently, it will take time for this plan to become a complete success. Moreover, it needs to be accompanied by other reforms in other sectors. However, now that only one year has passed since the implementation of the plan, there are some indications such as the reduction of the Gini coefficient, the overall improvement of the economic situation of the disadvantaged in society compared to previous years, and the prevention of the rise of fuel consumption, especially petrol. We may safely assume that the plan has already been a success. To us, the subsidy reform plan is more like a national awareness-raising venture on the importance and vitality of natural resources.
The subsidy reform plan was ratified by the Iranian parliament on January 5, 2010, and after being approved by the Guardian Council was communicated to the government to be implemented. On December 20, 2010, it became operational when the fuel and wheat prices were reformed. The goal of the subsidy reform plan is to replace subsidies on food and energy (80% of the total plan), with targeted social assistance in accordance with our fifth Five-Year Economic Development Plan (FYDP), and move toward free-market prices in a five-year period. The subsidy reform plan is the most important part of a broader Iranian economic reform plan. The government designed solutions to support the producers and help people maintain a sense of purchasing power. Naturally, those inefficient industries that are not able to adopt strategies to remain in the market may close down. Therefore, as long as such industries are replaced with new and more efficient ones, we have no reason to worry. However, according to Article 8 of the subsidy reform law, the government has been trying to be on the side of the producers by offering them support packages. In practice, if we compare the 5.8% economic growth of Iran in 2010 to the 5.2% economic growth in 2011, we see that despite the overall decline in global economic growth—global economic growth in 2011 was 2.9%—Iran managed to keep the wheels of its economy spinning and maintain positive and desirable growth. For the second phase, the important point for the government is to make sure that the enterprises are ready. We attach a great deal of importance to the approval and assistance of the other two branches of power in Iran. Therefore, the government has commissioned a number of expert studies in cooperation with the honorable members of the parliament, private sector pundits, and academics, to pave the way for the implementation of the second phase, bearing in mind the international and national economic situation and the tumultuous oil and gold markets. Another noteworthy point is that for the second phase we will be aiming to minimize the foreign currency rate fluctuations caused by economic sanctions imposed on us. When we were about to implement the first phase of the subsidy reform plan, there was a foreign currency shock in 3Q2010. Therefore, we had to postpone our work by a few months. When we overcame the shock, we went ahead with the first phase. We had another, more severe shock in 2012 as well, but we soon came up with a solution and launched an “exchange center” to better manage the foreign currency market in a more transparent way. Now the fluctuations have become much less frequent and we are gradually getting ready for the second phase. Sanctions have been impacting our exports as well. First, they limited our exports in areas such as petrochemicals, which resulted in lesser profits and the decline of indices, but little by little the resilient Iranian economy adapted itself according to the situation. Thanks to the rises in foreign currency prices, the proceeds from exports were higher, and the producers became more encouraged to export their goods. As a result, the profits made by the economic enterprises went up and the general index as well as the volume of transactions has increased in recent years.
The Iranian capital markets were growing briskly in 2012. The total index of the market hit 30,211 in October, which shows a 15.5% increase compared to the same period last year. At the end of October 2012, the market value was IR1,375 trillion, which shows an increase of 10.44% compared to the same period in 2011. The capital markets of Iran have always maintained positive growth, even when most of the international bourses were facing recession and severe price falls due to the global financial meltdown. Naturally, the growing capital markets in Iran can be the result of three factors. One is the proper use of opportunities created by the implementation of the general policies of Article 44 of the Iranian Constitution. This article stipulates modern views regarding downsizing and privatization, and has been crucial for exchange market activities in Iran. Another is the organizational and instrumental reforms that have happened in the capital markets in recent years, which have had positive impacts. In this vein, we established the required bodies in the capital markets, such as in goods, bourse, and off-exchange trading, as well as in the use of Islamic financing tools like sukuk. Finally, the managing views about financing and the methods to do it have changed and this has resulted in stronger capital markets. In the past, financing in Iran was highly dependent on the money market, but our studies showed that in order to improve the effectiveness of financing and alleviate the negative effects of inflationary financing methods, we needed to make better use of other financing sources, especially the capital markets. Accordingly, the Securities and Exchange Organization of Iran has taken a series of measures and has not only been using new methods and organizations, but has also commenced consultations with economic activists as well as ministries and policy-making organizations, and will continue to do so in the future.
When the general policies of Article 44 of the Iranian Constitution started to be implemented, privatization picked up pace. Hence, in the years between 2004 and 2011, more than IR971 trillion worth of shares in state-run companies were sold. Privatization has impacted many of the dimensions and components of the national economy. For example, one may refer to the increased presence of the private sector in the economy of the country, the promotion of the efficiency of economic enterprises, and the productivity of the workforce as well as improved technology, competitiveness, and the reduction of government leadership in economic activities. In addition, thanks to the adoption of privatization-oriented policies to downsize the government, the ground was prepared to boost and reinvigorate investments made by the private sector. Attention paid to the capital markets and securities as the bedrock for the implementation of this policy resulted in considerable changes. In fact, it raised the market value, the volume of transactions, and market returns, as well as diversified companies and industries. In general, this policy made the whole market more attractive. The ratio of the securities bought and sold in terms of GDP (18% in 2004) rose to 30% in 2011. Privatization has not only led to more diverse companies, but has also raised the number of large companies present on the TSE. In other words, thanks to implementation of the general policies of Article 44 of the Iranian Constitution, both the number and the volume of transactions have been on the rise. Therefore, it can be claimed that privatization has been instrumental in deepening and elevating the capital markets. In addition, the government has approved a plan to offer shares to low-income families, starting with the poorest. Under the “Justice Shares” plan, 75% of the Iranian population has received shares in state-owned firms. The Justice Shares plan has also brought about positive results in the area of social justice. According to the Article 44 Implementation Law, the government is allowed to cede up to 40% of the total value of the privatized enterprises in every sector to low-income families. In conclusion, privatization in Iran is not solely about selling state-run companies or the government’s share in them to the private sector. More importantly, it is about the creation of new enterprises by non-governmental sectors including private and cooperative ones. Today, dozens of new private banks and insurance companies have opened in Iran. Large contractors capable of exporting technical and engineering services are now operating throughout the country. Power plants, refineries, steel industries, cement manufacturers, airplane producers, and similar industries have been created. The domestic and foreign private sector is now active in finance, energy, infrastructure, large and heavy industry, and transportation; all sectors that had historically been ignored.
IRAN - Energy & Mining
Managing Director, Sazeh Pardazi Iran Consulting Engineers Co.
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