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Salaam (Morning Daily)
May 26, 1998
Summary: Dr. Hossein Namazi, the minister of finance and economic affairs, at the 8th Seminar on Monetary and Exchange Policies at the Central Bank on May 19, called on economic experts and those involved in monetary and exchange affairs to review and determine the real rate of exchange.
He said: "To boost non-oil exports and encourage exports grounds should be prepared so that individuals would not think that the problem of exports can be put into order by raising the exchange rate. We must pay attention that we must not cover weak management and high cost of production by raising the exchange rate. Using the production factors in a way which is not optimum and high expenditures are as dangerous as increased exchange rate. We must not sacrifice the interests of the country for a few people. If our economists do not think about the country it will suffer losses.
"About the real rate of exchange studies should continue until the time the exchange achieves its real rate.
"About the bank profit rate [paid to deposits], I must say that raising the rate cannot help to reform the economic conditions. If we want to encourage investment in the production sector raising the bank profit rate will not solve the problem."
Text:
The following are excerpts from the minister's speech:
One of the instruments to regulate monetary policies is the bank profit rate (the interest rate in the capitalist economy or the profit rate of partnership).
We know that in the capitalist countries the use of the interest rate is with some limitations. For example it is not usual to raise the bank profit rate from 6% to 12% all of a sudden. The reason is clear. The interest rate is determined on the basis of supply and demand in the capital market. If the rate goes up [excessively] there will be no demand for capital. Or if the bank profit rate is reduced excessively some will not be willing to save.
Therefore, the use of the interest rate is limited especially since some of the savings do not follow the interest rate.
Many people want to save their money to buy something in the future. If the interest rate is even zero they will keep their money. There are also those who are not for investment and taking risk. They put their money somewhere to be able to have a regular income. There are also some who want to keep their money in a suitable place. The interest rate does not have much effect on the decision of the above.
The interest rate cannot be effective as regards demand for capital at all times. Because an employer's or an investor's decision for investment to a large extent depends on the expectations about the future.
If you raise the interest rate by 4 percentage points but the investor considers the conditions in the market to be in his interest and he can sell his product with 40% profit the increase in the interest rate will not have an effect on his demand for investment.
Of course there are much more important factors in society. Economic security and social security are much more decisive. If you endanger this security and then reduce the interest rate by 3 percentage point certainly no one will invest in insecure conditions.
The use of the bank profit rate (determined before hand) [rate paid to deposits] as a monetary policy instrument will not have any effect and even has a negative effect in the conditions of stagflation.
In the stagflation conditions there is no propensity to invest, demand is low and warehouse are full while prices go up.
If you raise the interest rate to make up for the loss of the value of the savings and to mobilize the savings you will see the demand for investment decreases. In the stagnation conditions we should put production into motion. But this will reduce the demand for investment.
In other words in the stagnation conditions the investor is not willing to invest and the increase in the interest rate further reduces the demand and increases the stagnation.
And if we lower the bank profit rate we will face less supply of capital.
This is the problem which exists in the capitalist banking system. In other words a decrease or an increase of the interest rate will add to the economic disequilibrium.
In the partnership system you are not facing such a problem and the reason is very clear, because the bank interest rate has not been specified before hand. You make an investment and the profit, whatever it is, will eventually be shared between the producer and the saver. If there is stagnation and the profit is less the shares of the investor [producer?] and the saver will be less and vice versa.
Because the share [profit paid] is based on real profit it does not create a problem in the stagnation or inflation conditions.
Raising the bank profit rate before making a profit and in the conditions that we are admitting goods are not sold as they should cannot help to reform the economic conditions.
Perhaps you cannot find even one economist in the world who believes that in the conditions of stagnation we should raise the bank profit rate.
We are indeed stressing partnership not because we like Islam and are passionate and want to establish the case of the religious partnership and contracts. We believe in that on the basis of our own findings and experience and from the theoretical viewpoint.
Fortunately the banking system in the world has been paying more attention to partnership. We should work on this more.
EXCHANGE POLICIES
About the exchange policies there have been a number of viewpoints. One is that if the exchange rate goes up to its natural level misuses and rents will be prevented and the financial problems of the government can be covered and the government will be able to extend its umbrella and put the low-income groups under its protection.
Of course the question existed from the beginning about the real or natural rate of exchange and its relationship to the purchasing power of our currency and the demand in an unhealthy economy as a result of speculation and smuggling.
It used to be said from the beginning that if the exchange rate goes up officially all the time the government's expenditures will also increase. If we were receiving Rls 70 or Rls 600 or Rls 1,400 for a dollar in the expenditures of our agencies -- for example the Industries, Road and other ministries which use exchange -- we had to pay more too because of the increase in the exchange rate.
Another question was whether the purchasing power of our currency could be the criterion for determining the exchange rate or we should increase the exchange rate for some other considerations.
One of the points raised has been boosting the exports. It is argued the exchange rate must be raised or be high so that export will be economical for exporters.
Promotion of exports is one thing and our covering every problem and management weakness, increased production cost and inefficacy by raising the exchange rate is something else. Raising the rate of the dollar to Rls 7,000 or 10,000 to make production [and export] profitable -- a production which observes none of the economic principles and involves inefficient use of the factors of production - I believe, is a dangerous course.
You know that before the stabilization of the exchange rate some were even exporting water declared as rose water. They used to empty the containers abroad. They were receiving permission for import of some goods on that account.
On the list of our exports there were items such as rose water and we were happy that our exports had increased. Or some high figures used to be reported on the list of the exports. For example the declared prices of the carpet exported were two or three times the real price.
On the other hand the carpet is sold in the European countries at a price lower than the price of moquette. The idea is that with the dollar secured in this way some goods can be imported and they can be sold at a price which would mean a dollar has been sold at Rls 20,000-30,000.
As a result we are facing an inflated list of export items. If our economists do not think about the interests of the country and make comments only on the basis of theoretical foundations or, heaven forbid, their group interests this ship will not reach the land and all the country will suffer losses.
REAL EXCHANGE RATE
About the exchange rate, in my view one of the basic things to do, and it has been mentioned in the Economic Rehabilitation Plan which is being reviewed right now, is finding the real rate of exchange. The World Bank estimated our GNP in 1375 [ended March 97] at $335 bn. And our GNP according to the Central Bank figures was Rls 233,651 bn. If we divide the latter by the former we arrive at Rls 697.46. You should study and say the exchange rate is Rls 2,000 or Rls 3,000 or less or more.
At any rate I want to say their calculation has been on the basis of some criteria and the purchasing power of the currency.
BANKING SERVICES
The final point I would like to mention is about the banking services. If we want to carry out the best monetary and exchange policies but our banking system is unable to provide services we shall certainly not achieve the desirable results.
Last week I had a discussion with Dr. (Mohsen) Nourbakhsh (governor of Central Bank) about the improvement of the banking system services and the difficulties which exist in this connection and the necessity or a more thorough supervision over the banking system.
Naturally government institutes have less motivation to provide services. The deputy director of the World Bank was telling me: "When I call the U.S. I can feel whether the other side of the line is the private sector or the government sector. The private sector approaches the matter with interest but the government sector is very sluggish and for example says: "Call tomorrow. We do not have time right now."
This is a universal thing. But I would like to say that there is a limit to this. And this does not mean because there is not sufficient motivation in the government system no effort should be made to attend to the business of the public.
About the sale of the partnership bonds [offered at higher profit rate than bank rates] I heard that some of the bank branches were resisting to pay the money of their customers from their saving accounts to buy partnership bonds. Why? Because the volume of the saving is a measure for payment of the productivity bonus to bank employers.
Well, should we not pay the people's money because our productivity bonus will be cut? Shouldn't we consider that if the people lose their confidence in the banking system the productivity bonus itself will go up?
The point we discussed before Dr. Nourbakhsh was that more and more care should be exercised in those areas.
To be able to mobilize capital, activate the capital market and put investment and production into motion we should have reconsideration in those areas too; otherwise we shall not achieve results.