I RANIAN ECONOMY : S TRUGGLE FOR D EVELOPMENT Hossein Abdoh Tabrizi Istanbul, May 2014.

IRANIAN ECONOMY: STRUGGLE FOR DEVELOPMENT

Hossein Abdoh Tabrizi

Istanbul, May 2014

IRANIAN ADMINISTRATIONS SINCE THE REVOLUTION

Iran Iraq War (Imam Khomeini’s Era, Mussavi’s Premiership (1980-1988)

Rafsanjani Administration, AKA Reconstruction Government (1989-1997)

Khatami Administration, AKA Reform Government (1997-2005)

Ahmadinejad Administration, AKA Populist Government (2005-2013)

Current Administration (August 2013- )

o Government exposure to natural resources was volatile, though on average it had been more than 50%.

Oil Tax Other

o In the last 30 years, around 75% of the Government budget was in the category of current expenditure.

current infrastructure

BUDGET DEFICIT

In the last 10 years, the budget deficit increased dramatically.

o As the main source of monetary policy, liquidity grew without any discipline and unrelated to economic growth.

LiquidityGrowth

MONEY BASE, HIGH-POWERED MONEY

منبع: بانک مرکزی ج.ا.ا

برابر شدن پایه 10.3پولی

برابر شدن پایه 10.3پولی

LIQUIDITY

منبع: بانک مرکزی ج.ا.ا

برابر شدن نقدینگی17.9 برابر شدن نقدینگی17.9

o Central Bank of Iran had been highly dependent to the Government and boosted the money supply by political pressure.

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Money Supply

ϑ έΎμ ϣΐ δΣήΑ ϟϮ� ϪϳΎ�ϝΎϳέΩέΎϴϠϴϣ ϟϮ� ϪϳΎ�ΪηέΥήϧMoney Supply Growth

o Over supply of money was from 3 sources:

1) Budget deficit and lending to Government

2) Buying foreign assets (mainly oil revenue) from Government.

3) Borrowing from banks

-200,000-100,000

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Money Supply

ΰ� ήϣ ϧΎΑ ΟέΎΧ Ύϫ ϳ έΩκ ϟΎΧϝΎϳέΩέΎϴϠϴϣ ΰ� ήϣ ϧΎΑϪΑ ΘϟϭΩζ ΨΑ ϫΪΑκ ϟΎΧϝΎϳέΩέΎϴϠϴϣ

ΰ� ήϣ ϧΎΑϪΑΎϫ ϧΎΑ ϫΪΑϝΎϳέΩέΎϴϠϴϣ

Net Foreign Assets (B IRR)Net Governement Borrowing (B IRR) Banks Borrowing (B IRR)

DECOMPOSITION OF THE BASE MONEY

منبع: بانک مرکزی ج.ا.ا

oConsidering high inflation, the real rate of interest for deposits was mostly negative.

Inflation is the main problem in all

sectors of Iranian economy.

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Inflation

¹ Âew ¿� �| {� �Inflation

CONSUMER PRICE INDEX (CPI) 1978-2014

Average Inflation Rate : 17.79 Percent Single Digit Inflation Rates: 2 Years Two Digit Inflation Rates: 34 years Inflation Rate over 20 Percent: 16 Years Inflation Rate over 30 Percent: 4 years Highest Inflation Rate: 49.4 Percent (1995) Lowest Inflation Rate: 6.9 Percent (1985)

o Iran has the second highest inflation rate in the region.

o Young population is a key advantage for Iran.

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Population

ϥΩήϣΖϴόϤΟήϔϧέΰϫ ϥΎϧί ΖϴόϤΟήϔϧέΰϫ Men (thousands)

Women (thousands)

o More than 70% of the population are living in cities.

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Population Distribution

Urban Willage

Increasing unemployment rate; too many university graduates and female job demand

oReal GDP Shrinkage

02,000,0004,000,0006,000,0008,000,000

10,000,00012,000,000

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GDP

d]ZiÉZÅd¼Ì«Ä],Ê yY{ ·ZyZ¿| Ì·Âe�{ZÌ Ì»�É ZmÉZÅd¼Ì«Ä],Ê yY{ ·ZyZ¿| Ì·Âe� �{ZÌ Ì»�

GDP, fixed pricesGDP, current prices

oFollowing the sanctions, the GDP growth was negative during last 2 years. However, it is estimated to turn to positive figures in the current year.

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GDP Growth

o GDP per capita which indicates the welfare level, did not change significantly over the past 3 decades.

020,000,00040,000,00060,000,00080,000,000

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GDP per capita

d¼Ì«Ä]Ä¿Y Ê yY{ ·ZyZ¿| Ì·Âe� � �d]ZiÉZÅ d¼Ì«Ä]Ä¿Y Ê yY{ ·ZyZ¿| Ì·Âe� � �Ê  §ÉZÅFixed Prices Current Prices

o Iranian trade balance fluctuated significantly. During last 10 years, the exchange rate favored more imports.

-50-40-30-20-10

010203040

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Trade Balance

ΕΎϣΪΧϭϻΎ�Ε ΩέϭϢΠΣήϴϴϐΗΪλ έΩ

ΕΎϣΪΧϭϻΎ�Ε έΩΎλ ϢΠΣήϴϴϐΗΪλ έΩ

Import, % changeExport, % change

OIL BOOSTED THE INCOME

The main source of Government income was from oil & gas which provided wrong signal to decision makers.

Inappropriate Government PoliciesUnfriendly International Environment

LAST THREE YEARS PERFORMANCE: STAGFLATION

IMPOSED EMBARGOS ON IRAN

UN’s Security Council Embargos US Embargos EU Embargos Other Countries Embargos

www.finance.i

r

HARSHEST EMBARGOS IN HISTORY

Embargos on Products Embargos on Buyers Embargos on Sellers Embargos on Transport Embargos on Banks and other Financial

Institutions

www.finance.i

r

EMBARGOS: BARRIERS OF CONTRACTS

Product Embargos Insurance & Transportation Embargos Bank Embargos Self Determined Embargos

www.finance.i

r

PRODUCT EMBARGOS

Products of Dual-Use:1. Specific Alloys2. Petrochemical Catalysts3. Electronic Equipment's4. Hellion Gas For MRI5. Oxidized Water

www.finance.i

r

BEYOND PRODUCT EMBARGOS: BANK EMBARGOS

When Payment Methods Become Problematic, So Does

Buying and Selling

www.finance.i

r

INTERNATIONAL SANCTIONS

1. Approach: Mutual, Comprehensive, Long-Term, Step by Step and Coherent.

2. Context For Iran’s Nuclear Program: In Keeping with Iran’s Proclamation of It’s Commitment to Non-Military Nature of Its Nuclear Program: A Purification Program with Mutual Definition, Practical Limitations and Clarifying Arrangements Guaranteeing The Peaceful Nature of Iran’s Nuclear Program Which Would Allow Iran to Both Utilize Nuclear Energy and Maintain Its’ Obligations to NPT.

www.finance.i

r

INFLATIONARY PRESSURES

Hyperinflation: 2 Years Back over 5% a Month

www.finance.ir

INEVITABLE ENERGY REFORM

Cheap subsidized energy ended to high consumption rate, and low productivity

of industries

124 Million$

twice the size of current

year budget

ميليون بشکه در 700سال×100 $

ميليارد مترمکعب در 180سال×

30$ www.finance.ir

How it was implemented?Coincided with sanctionsCash subsidies: poor implementationDevaluation problemCould not save the energyAdding to budget deficit

Could not improve productivity

SUBSIDY REFORM

PETROL PRICES: TARGETING SUBSIDIES

ENERGY PRICE VS EXCHANGE RATE

Energy price is not independent

from exchange rate

www.finance.ir

ENERGY PRICE & EXCHANGE REGIME

Formal vs Market Rate of Exchange: Rent

(payment to a factor of production in excess of

its opportunity cost) & Corruption

www.finance.ir

LAST THREE YEARS PERFORMANCE

CRUDE OIL PRODUCTION

RECESSION ESTEEMING FROM LESS GOVERNMENT EXPENDING

www.finance.ir

HOUSING MARKET

A lot of new projects; 750 units every year and 30% in Tehran

www.finance.ir

HOUSING MARKET: SUPPLY SIDE

Built more than the plan: inappropriate distribution;

over-built in large cities

www.finance.ir

HOUSING MARKET: DEMAND SIDE

Still 1 million housing units in demand every year

due to household growth rate, high divorce rate,

and informal settlements

www.finance.ir

SOCIAL HOUSING: MASKAN MEHR

Starting to build 2.2 million social housing units in 2007

Financing the project by borrowing from the central bank increasing M1 by 60%

It could not be finance like that any moreProblem at hand

Maskan Mehr

Reduction of labor participation rate3.5 million unemployedMajor difference of male & female unemployment ratesMajor difference of unemployment rates across age groups5 million students: the army of unemployment

Current Labor Market

EXPORT

Iranian Major Non-Oil Export Items

www.finance.ir

Growth Rate of Iranian Economy: Two Scenarios

Inflation Rate Forecast: Two Scenarios

Oil Production Forecast: Two Scenarios