10 October 2006

In the Name of God, the Almighty

National Will for Curbing the Inflation

The 16th Seminar on Monetary and Exchange Policies, under the title of Role of appropriate Fiscal and Monetary Policies for Realization of Macroeconomic Policies of the 4th Development Plan (Growth, Inflation and Unemployment) was held on 16-17 May 2006 in Iran Banking Institute. The Minister of Economic Affairs and Finance as well as the Governor of the Central Bank of Islamic Republic of Iran were the key lecturers of the 16th Seminar. The aforesaid portrayed the overall economic situation and presented the latest indicators and statistics as well.

Governor of the Central Bank of the Islamic Republic of Iran:

Oil-independent Economic Growth, the Prelude to Economic Boom

Dr Ebrahim Sheibany, the Governor of the Central Bank of Iran presented the overview of the global economic growth trend at first, and then stated: The average global economic growth was 2.4% in 2005. The rate of economic growth of the advanced countries was 2.7%. Such countries and/or union enjoyed an economic growth of 3.5 in America, 1.3 in Europe, 0.9 Germany, 1.4 France, 0.1 Italy, 2.7 Japan and 1.7% in England. The developing countries and emerging markets, Africa, Russia, the Asian developing countries, China, India, Pakistan, Turkey and the Middle East enjoyed an average rate of economic growth of 7.2, 5.2, 6.4, 8.6, 9.9, 8.3, 7.5, 8 and 5.9% respectively.

The Governor of the Central Bank compared the country’s economic growth in the previous year (5.4% for 1384) with that of the neighboring countries and stated: Iran enjoyed a higher-than-global average, but a lower growth rate in comparison with the developing and the neighboring countries as well as the emerging markets. However, the country shall endeavor to enjoy an economic growth of higher than and/or equal to the neighboring countries’.

In order to describe the growth of various economic sectors in 1384,

Governor Sheibany stated: The agriculture, the oil as well as the manufacturing and mining group enjoyed a 7.1, 0.6 and 6.7% respectively. The mining and the industrial sectors reached a growth of 10.5 and 7.1% respectively. The country (with the exception of the oil sector) enjoyed a 6.0% growth in the previous year. Iran’s economic growth, oil excluded, has outperformed the oil sector during the recent years, which signs the country’s upcoming economic boom.

The Governor of the Central Bank further indicated the 3.6% increase in the net fixed capital formation (3.5 and 2.5% increase in the housing and the machineries sectors respectively) in the previous year and added: The rate of growth of capital formation in the previous year declined in comparison with the 7.0% increase in 1383.

Governor Sheibany described the liquidity growth as higher-than-expected, and further added: Such a growth shall be carefully watched, however, 13.4% of the liquidity growth attributed to the net foreign assets (resulting from the increase in foreign reserves) and the remaining related to that of the net domestic assets.

Dr Sheibany further stated: Money and quasi-money constitute 34.5 and 65.5% of liquidity respectively. The more the share of quasi-money in the amount of liquidity, the more stable the money will be. The share of money in the economy has now reached a historic low, which sounds good for Iran’s economy.

Mr Governor in regard to the growth of the monetary base in the previous year stated: The monetary base enjoyed a 45.9% growth in 1384 and reached IRR 220.9tn which mainly resulted from the increase in the value of the Central Bank’s foreign assets. The liquidity multiplier also decreased by 7.9% in the previous year.

Dr Sheibany further described the monetary and credit policies implemented during the previous year and stated: Curbing inflation is one of the duties of the Central Bank, which will be fulfilled through instrument at the disposal of the CB, i.e. controlling the monetary base.

Mr Governor described the monetary policies implemented during the previous year by the Central Bank and stated: The rate of return on participation papers was decreased to 15.5 from 17% in 1384. The Central Bank received a permit to issue

IRR 15tn participation papers in the previous year, which due to lengthy process of granting permission by the Parliament, only IRR 10,800bn of these papers (roughly 72%) were sold.

Dr Sheibany stipulated: Decrease in the expected rate of return on the state-owned banks’ facilities from 16 to 14% was among the policies implemented by the Central Bank in the previous year. Increase in the maximum ceiling of loans for house purchase, from IRR 80mn to IRR 100mn, grant of the permit for payment of house-purchase facilities to applicants through the banking system by a method similar to the one used by Bank Maskan – without down payment– (to increase demand in the housing sector) as well as extension of the authorized period for utilization of the

IRR 180mn facilities of the Housing Deposit Fund of Bank Maskan were among other policies implemented. Mr Governor added: IRR 400bn facilities were allocated to increase the working capital of the crisis-stricken industrial units during the previous year. In order to support the small and medium-sized enterprises (SMEs), the Council of Ministers also approved a decision on facilitating the process of allocating funds to SME’s to assist the country’s production and employment. Therefore, allocation of 20, 35 and 50% of all banking facilities in 1384, 1385 and the remaining period of the

4th FYDP, respectively to such enterprises was approved. In the light of the positive effects of implementation of the said approval on national economy, the Managing Directors of banks shall also implement the same in such a manner. Dr Sheibany further described the policies implemented by the Central Bank and the Government in the monetary sector during 1384 and stated: In line with the decisions approved by the Council of Ministers during the provincial trips; IRR 1,550bn of the gharz-al-hasaneh resources of banks was allocated to thirty provinces of the country. In order to improve the financial situation of the public, the maximum amount of gharz-al-hasaneh facilities was increased to IRR 5mn, from IRR 3mn. The other measures taken during the previous year were as follows: Allocation of IRR 690bn facilities at a unified rate to construct the infrastructures suitable for packing and distribution of fruits, appropriation of an approximate IRR 6tn to store up the goods selected by the Ministry of Commerce, allocation of IRR 300bn banking facilities to store fruits for the year-end, extension of the repayment period of a considerable part of the debts of the crisis-stricken industries and the farmers who suffered from agricultural damages as well as allocation of IRR 10tn facilities to improve and renovate the villagers’ houses.

Dr Sheibany stated: Two private banks named Pasargad and Sarmaye received operation permits in 1384. Meanwhile, three Credit and Finance Institutions named Mehr, Ghavamin and Ansar received primary agreement to formally operate.

Mr Governor further warned: The managers of such institutions shall observe the regulations set by the Central Bank and the Money and Credit Council (MCC).

Non-compliance with such regulations will not be tolerated. Regarding the measures taken to implement electronic banking, Dr Sheibany stated: Establishment of electronic banking is one of our goals. Due to the operation of 17 thousand banking branches nationwide, implementation of the electronic banking will be a tough job. Indeed, various measures are taken to streamline the implementation of the aforesaid. However, we hope for full operation of the system during this year. Development of the Automated Teller Machines (ATMs) network was also among targets of the Central Bank in 1384. The number of ATMs reached 4,300 from 3,600 in the previous year.

With regard to the external sector Mr Governor referred to the USD 14,037mn surplus of the current account during the previous year, and stated: current account surplus enjoyed a nine-time increase in comparison with the previous year due to the oil and the non-oil exports growth. Meanwhile, the trade balance enjoyed a USD19,043mn surplus. Export of services as well as the capital account faced a deficit of USD5,894bn and a USD411mn in the previous year. The latter enjoyed a USD7,388mn surplus in 1383.

Governor Sheibany stated: Foreign obligations decreased by 1.9% in the previous year. Imports amounted to USD40,969mn in the same year. Regarding the decrease in the inflation rate, Mr Governor stated: Prices increased by 12.1% in the previous year. Indices, which are considered as proxy for inflation, also confirm the decrease in the level of prices in 1384. Consumer price index (CPI), wholesale price index (WPI) and producer price index (PPI) increased by 12.1, 9.5 and 9.5% respectively in 1384, which shows a decrease in inflation rate in spite of the liquidity growth. The same increased by 11.1% in the 12 months period. The Policies implemented by the Central Bank, huge increase in imports, stability of exchange rate, decrease in the inflationary expectations and etc. led to the decrease in inflation rate. Mr Governor further added: As is shown by the macroeconomic indicators, Iran is on the way to an economic boom, which manifests the need to implement special policy packages.

Dr Sheibany stated: Conversion of foreign exchange resources of the OSF into rial does not favor the economy. In spite of the rise in oil revenues, Government shall spend wisely. The more money injected to economy does not lead to the better economic situation. Conversion of excess revenues to rial will result in inflation and socio-economic imbalances.

Mr Governor referred to economic security as the prelude to economic development and growth, and then stated: The certainty of economic agents is a requisite for economic growth. Therefore, the policies and the economy shall not be volatile and normative respectively. Regarding the conversion of rial into USD,

Mr Governor stated: Rial was depreciated by 4.6% against USD in 1384. Inflation of 3.8% with regard to the 12.1% inflation rate in Iran and the world, rial was appreciated by 6.5% in real terms. The Central Bank attempts to pursue the same trend in 1385, as well.

Dr Sheibany criticized the implementation of policies which hampers the independence of Central Bank, and stated: Central Bank has born the blame for others in political wings several times, which damaged the CB independence. According to laws and regulations, Central Bank and the MCC shall solely determine the rate of return on banking deposits and facilities. Governor Sheibany requested not to sacrifice the Central Bank in political challenges. The Parliaments have never determined such rate worldwide. Mr Governor agreed with a decrease in the rate of return on banking facilities; however disagreed with the fixation of such rate by the Parliament, and further stated: Should the independence of Central Bank preserved, the country will reap benefits.

Regarding the status of the country’s foreign reserves, Mr Governor stated: The gross balance of the OSF amounted to USD8,078,731,000 at the beginning of the previous year and USD5,317mn of which was frozen to pay for the obligations and facilities allocated through the OSF. The balance of the OSF was USD3,391mn at the end of 1384. Given the crude oil price at USD60 a barrel; the balance of the OSF will reach USD14.5bn in 1385 year-end.

Central Bank of the Islamic Republic of Iran

Public Relations Department