September 2006

Tehran’s top banker looks to the future

Ebrahim Sheibany is governor of Iran’s central bank, a position he has held for three years. He tells Eric Ellis in Tehran that as far as economic policy is concerned, little has changed, despite the election of Mahmoud Ahmadinejad as president.

The oil price is high. How are your foreign reserves?

The level is the highest in our history, it’s quite natural because of the jump in oil prices. The period I can compare it with is 1973-77, before the revolution. During that period we obtained about $99 billion, and after that much of it disappeared after the (1979) revolution. It was given as “loans” to many countries – Egypt, Jordan, France – and what was left was about $12 billion. Now it is at our highest level, and a very reliable level.

How much?

It is tens of billions of dollars.

The number is not public?

It is not possible… it is as I said.

Is it a state secret?

Well, it is not disclosed – for us, because of the international environment, we are a little bit careful.

Because of the political standoff with the US/West?

Yes, that is it… but the amount now is higher than before.

Are you happy with the level of reserves, whatever they are?

Sure, I’m very happy.

What is the composition of the reserves?

The first basis of the composition is the national payments, some of our payments are in US dollars, some in euros, some other currencies; and our reserves reflect that. The second
is that we are taking into account the political effect. What I can say is that we keep some dollars, euros of course, some bonds from European states and some other currencies – so it
is quite diversified.

How do you see currencies performing five to 10 years from now?

In fact, we have a board for this; we have experts closely following the change in the currencies and we are changing the composition every week. What we can see is that the US economy is growing fast. At 3.3%, quite high for America. It’s getting stronger and stronger and this means the dollar value will be at a good level compared with other currencies.
The emerging countries – India, China, even Indonesia and Malaysia – their currencies are getting stronger. Sometimes we keep some of our reserve in their currencies,
diversification is very important for us, not just for political reasons but to get most out of our reserves. We are a member of the Asian Clearing Union – India, Pakistan… south Asian countries. Our traditional trading partners are in Europe and there are very good relations there. But at the same time we are looking to the east so when we have trade with them, this also means we are looking at their currencies.

Beyond these clearing relationships between regional central banks, do you see a more formal monetary union emerging in this region in the future?

Yes, in fact this is a possibility; we are looking at that, we are thinking of expanding the role of such a union. We are quite influential in moving this, the secretariat is in Tehran. It is quite possible that in the future that we expand such union to a trade union, a customs union and eventually we get to a common market.

How independent are you in policy-making?

Last year, the law changed. Now the governor is appointed by the president of the Islamic Republic of Iran. This means we got more independence because before that the appointment was by the minister of finance.

Are there senior religious figures involved in the bank’s decision-making? Is there an ayatollah sitting on your board of governors?

No, we are technocratic. But of course we are all religious ourselves. We have a council of money and credit, the legislative part of our bank. On that council are members of the Majlis [parliament] and of the cabinet. I am the head of that council. In terms of independence, we are quite a technocratic organisation – very proficient. I can tell you that maybe we are the most proficient in this region. The IMF chooses experts from Iran in statistics and finance and sends them to train in other countries. The central bank has always been a technocratic institution; we all have PhDs.

How do you rank in terms of independence from the politicians?

We are free, quite free to watch and criticize the decisions of the central government. In fact the role of the central bank in this country traditionally is criticizing decisions of the government – not only me, but my predecessor – to see if, for example, the government’s budget is in line with our targets, for inflation and money supply. Sometimes we have bitter discussions, and sometimes the Majlis criticizes us. This is very normal. If, for example, they want to spend from our reserves, our position is to stand and criticize that and decrease it to the level we feel is safe for our economy; money supply the same, there are very hot discussions on this. I’m not saying we are as independent as, say, the central bank of Canada or of Australia but we are very independent compared with other banks in this region.

What’s stopping you getting more independence?

The law. In the US, the Federal Reserve reports to Congress. Here we report to the president, not to the parliament. That’s the difference.

You have been governor in both the Khatami period and now the Ahmadinejad era. What’s the difference between the two in economic policy?

There has been some fine-tuning, some small changes, which is quite natural: for example, the policy to favour small poorer province with credits over, say, Tehran. These things have taken place under Ahmadinejad but things are basically the same, so far so good.

Is president Ahmadinejad doing a good job?

On the whole I can say yes. It’s only 10 months since he has been in office, so it’s still quite early. As far as the central bank is concerned, we are quite free to exercise our policies, nobody has dictated to us do this and do that.

How is economic growth?

For the last year, growth has been 5.5%, which, compared with the Persian Gulf region, is quite high. Agriculture growth is 7.1%, quite good; oil and gas is 2.6%; industry and mining is 7.1%; and manufacturing is 8.5%, which is quite healthy for us. Non-oil GDP increased by 5.9%, with oil 5.5%, which means the non-oil sector is doing well. The official numbers are promising, we are satisfied with these growth rates. Next year, the growth rates will be higher. Last year we exported – oil and non-oil – about $60 billion, and our import bill was about $40 billion.

Is inflation is a problem? Independent economists have calculated it as high as 50%.

Of course, it’s a big headache of every central banker. For the last year, it came down by 3%. This is good news. This morning I learned it has come down to 8.5% for the last month [May].
Our major role and function is to control inflation and money supply. Last year, inflation was 12.1% and the year before that was 15.2%. My first year was 15.8%. During my time it has come down and down.

How did you do that?
We have been giving money to productive sectors. Producing more goods and services works against inflation. Secondly, we are trying to control money supply and then we are stabilizing exchange rate fluctuation.

During the past three years, the depreciation of the rial has been around 2% to 3% against 12% to 15% inflation. This means, in real terms, our rial has appreciated.

The rial is about 9,000 to the dollar. What’s the optimum rate?

We believe that right now it’s a good rate.

What are your forecasts for the oil price?

In our budget every year, we have a price for oil. Last year it was $40 [a barrel]. This year I do not know what will be in our accounting but I can say maybe around $45. A price of $50 is maximum for us. We can see the demand for oil increasing. High demand for energy, that’s the basic reason for this high price. In the next four to five years, I see the price only going up. And then, I cannot see it coming down drastically, maybe a few dollars. We can count on a $60 price, at least for three years.

Would it make your job easier to have the level of government participation in the economy reduced?

We are doing that. We believe in the market mechanism. We have the “justice” scheme of president Ahmadinejad; we are going to give state-owned companies’ shares to poor people. This means we are privatizing. Recently we issued six licences for private banks. After the Islamic revolution there were no private banks.

Is there enough money, enough buoyancy, liquidity, institutions in Iran to support a large privatization programme?

I think so. We have a very active stock market and capital market and we are trying to expand it.

Some 50 Iranian economists recently wrote an open letter attacking the president’s economic policy. What is the significance of that?

This is very common. This discussion happens even in the US – it’s very natural, this is not something extraordinary, they are just doing their job and we are seeing their ideas. It’s part of the debate.

How difficult is it to operate in an environment where Iran is constantly being assailed diplomatically?

This is a very good question. We would welcome it if the US want to remove sanctions against Iran. US business is welcome here, but even with civilian aircraft we have problems getting spare parts. This is humanitarian, this is not military. The US is a great people and civilization, we have respect for them. But their politicians, all administrations, have not behaved in a rational way. Every year they renew sanctions. Our attitude is that we want to work with them, particularly in professional ways. They are not following a productive way. We should talk things out face to face, like we are now. I can talk with any of them, have been there, I have lived there as a student in Indiana, I know their mentality. But they do not want to work with us. From the very beginning, they showed a sort of arrogance, a contempt. With Europe we do not have a problem, we have very normal banking relations. I know many of the [European central bank] governors face to face, they come here, we go there, we know them, we talk to them, trade is normal. Right now, they are under pressure [from the US] and they are not happy with that – they have told me. Of course, right now there is a special situation but I am sure this will change.

Yes, but do you operate differently because of these issues?

Not really. Right now, our relationships in Europe and in Asia are working normally. We are not taking any stabilization actions. We have reserves in their banks; this means confidence in each other.

In an inter-connected global financial village, where an action in, say, Tokyo, can affect you here in Tehran, how does the US affect you economically?

If they could, they would. They are doing what they can. Before the revolution, there were many American cars in Iran. Now they are Korean. So we are substituting, we do business with several countries. We have very good relationship with English, French and German banks. As economists, as central bankers, we would like to see normal relations [with the US]. I hope they [the US] come to this point, that free business, free trade, free banking, is good for everybody. I am sure that for the next 10 to 15 years, we will be number one in this region, so they are missing out. We do not like hostility.

How do you view the war next door in Iraq?

The situation is getting better over there. Now they have their own government, we hope it gets stabilized, it is very good for us. We are playing a major role to help them. If you look at this chaos around us, Iran is a stable state. We would like to see our neighbours rich and stable. We are exporting a good amount of goods to all our neighbours.

Do you expect conflict with the West?

No, I don’t. I am sure that sooner or later, everyone will come to this rationale, that the best for all of us is to work peacefully, with co-operation. Looking to the future, we can see all these neighbours are connected, economically, culturally, historically. This is our wish, this is our hope. It has been basically proved that economic sanctions are ineffective and against free trade. Financial sanctions will go against global financial stability. We should be very careful to avoid any interruption to this very fragile financial system. This is the message. They cannot ignore us and they cannot sanction us. We have never been a hostile country to anyone. This axis of evil, the terrorist state, this is just propaganda; these stories are propagated. There is no sign of evil, only the sign of God. This country is more safe, more civilized than any other country in this region. This president is a popular president; he is backed by a mass of people. He is thinking of our national interest.

The nuclear issue…?

Never, it will never happen. In our ideology [a nuclear bomb] has no place. Our spiritual leaders, our ayatollahs, have said this. This is impossible. In Islam it is banned, I cannot even imagine this. We do not need it; we do not have any dispute with anyone.

Is Palestine that important an issue among Iranians?

There are some poor people over there. They are oppressed, that is the sort of feeling we have here, they have no representation, there is no democracy. People should be represented by the size of their vote.

President Ahmadinejad has said very hostile things about Israel. But Israel is a reality.

It is, but the Palestinians are also a reality. There are some people, some extremists over there, they are pushing for their own matters but I hope some time they get a solution.