It is true that unemployment continues to be high but it is falling. This is the most promising development for 30 years: We have strong growth at the same time as we have balance or large surpluses in central government finances and foreign trade. The challenge for monetary policy is not to dampen demand unnecessarily but neither should demand be allowed to increase more than is compatible with the inflation target. In the long-term, monetary policy has, of course, no direct impact on the rate of growth although during a shorter period, demand and growth are influenced by the interest rate set by the Riksbank. If, for instance, monetary policy is made more stringent too late, there is a risk that inflation expectations will rise and gain a hold. To restore inflation to the target, a longer period of stringent monetary policy will then be required with weaker demand as a result. Then investment will also be throttled and capacity growth braked. The inflation target has not only a value per se but is also first and foremost a means for creating the prerequisites for stable, sustainable growth. The best contribution the Riksbank can make is to maintain the inflation target but there is no simple rule of action as to how monetary policy is to be  1  BIS Review 20/2000  conducted. According to the Riksbank Act, the overall objective for the activities of the Riksbank is to maintain stable prices.
The central bank is developing a new bank accounting framework, which represents a move towards international accounting standards, while taking account of the special features of Islamic finance. The authorities are also developing an action plan for implementing supervision reforms. These developments ought to be good news for prospective investors in Iran. They also help illustrate that international best practice standards can be flexible enough to accommodate individual country circumstances. The move to a more market-oriented environment brings with it new challenges. For example, liberalising exchange controls and freeing the exchange rate to market forces brings risks as well as opportunities. A sequenced approach to capital account liberalisation helps mitigate these risks and that is the route Iran has pursued. But that is not to say reform has stalled. Since mid-1999, the central bank has taken important steps to improve and simplify the foreign exchange market, including allowing the exchange rate to depreciate to market clearing levels. In March 2000, requirements to surrender non-oil export receipts to the central bank were abolished. The intention now is to introduce a direct, interbank foreign exchange market, and to eliminate an advance import deposit requirement by March 2001. These will be important further steps in increasing Iran’s exposure to international competition which in turn can contribute to its productive efficiency. Exchange rate unification and the partial liberalisation of trade and exchange controls will make greater demands on the effectiveness of monetary policy. For example, monetary expansion may arise from the phased reduction in banks’ reserve requirements.