[Marxism] On the Iranian Economy

["Politicus E." <epoliticus@xxxxxxxxx>]

F.Y.I., I reproduce below certain points pertaining to the Iranian
economy from the IMF's 2008 Article IV Consultation.  The entire
report can be viewed online at http://bit.ly/12f1Y8 and includes much
useful data.  It was published 14 August 2008.
epoliticus

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[...]

1. Iran is endowed with vast hydrocarbon resources, but its capacity
to increase
hydrocarbon production is limited. In 2006, Iran had the second
largest proven oil and gas
reserves, and it was the fourth largest oil producer in the world.
However, its oil production
has remained virtually flat in recent years and will most likely
stagnate in the medium term
due to insufficient investment.

2. Iran has the largest economy in purchasing power parity terms in the Middle
East and Central Asia (MCD) region, with a sizeable and diversified
non-oil sector
(Figure 1). Iran’s economy is closely linked to intraregional trade
and capital flows. On the
one hand, Iran has benefited from rapid growth in the MCD region by
increasing its regional
non-oil exports. On the other, Iran’s robust growth in recent years
has had some positive
impact on smaller Gulf Cooperation Council countries serving as
transit points for Iranian
imports and trade financing.

3. Fund policy advice has focused on measures to reduce inflation and
structural
reforms aimed at stimulating growth and employment creation.
Consistent with Fund
recommendations, in 2007/08 the authorities reduced the non-oil fiscal
deficit, contained
energy subsidies, improved revenue administration, and intensified
their efforts to bring
banking supervision closer to international standards. However, there
has been no political
consensus to implement other Fund recommendations such as tightening
monetary policy and
reducing government interference in resource allocation.

4. Against the background of strong demand pressures and an uneven pace of
structural reforms, the consultation discussions focused on:
• Policies to reduce inflation,
• Medium-term fiscal challenges, and
• Key growth-oriented structural reforms.

5. Real GDP growth is estimated to have picked up to 6.6 percent in
2007/08, from
6.2 percent in 2006/07. Increased direct government support to
priority sectors, scaled-up
budgetary capital expenditure, and strong credit growth underpinned a
robust and broad-
based growth of the non-oil economy. Oil production, however,
increased modestly, mainly
owing to insufficient investment (Figure 2 and Table 1).

6. Intensified international pressures on Iran have negatively
affected economic
activity. UN and U.S. sanctions against certain Iranian institutions
have created difficulties
for trade financing and payments, discouraged foreign investment, and
adversely affected the
profitability of the targeted financial institutions.

7. Reducing unemployment has remained a challenge. The officially reported
unemployment rate declined only marginally to 9.8 percent in the year
to December 2007, in
part reflecting a decline in the labor participation rate.

8. Inflation has been on the rise. Expansionary policies against the
background of
capacity constraints and to some extent rising import prices caused
12-month CPI inflation to
increase to 24.2 percent in April 2008, from 16.8 percent in April
2007. CPI inflation
excluding food and energy also increased to more than 20 percent in
April 2008, suggesting
strong underlying domestic demand pressures.1

9. High oil prices supported a further strengthening of Iran’s
external position in
2007/08. The current account surplus is estimated to have increased
from 9.2 percent of GDP
in 2006/07 to 10.2 percent in 2007/08 (Table 2). Notwithstanding large
capital outflows
($5.5 billion in 2007/08), gross official reserves, including the Oil
Stabilization Fund’s (OSF)
foreign assets, increased from $61 billion (10 months of imports) at
end-2006/07 to
$82 billion (almost 12 months of imports) at end-2007/08.

10. Despite recent rapid real effective exchange rate (REER) appreciation, the
tradable non-oil sectors have performed relatively well (Figure 3).
This could be
explained by some initial currency undervaluation (Box), increased
subsidies, and the rapid
growth in trading partner countries. In addition, import-substituting
manufacturing has
benefited from relatively high import tariffs.

11. Fiscal policy was tightened in 2007/08 following a significant
fiscal relaxation
during 2005/06–2006/07. The non-oil primary fiscal deficit rose from
about 15 percent of
GDP in 2004/05 to 21 percent in 2006/07, as the government increased
transfers to
households, subsidies, capital expenditure, and OSF lending (Figure 5
and Tables 3–4).2 The
non-oil primary deficit, however, is estimated to have been reduced to
17 percent of GDP in
2007/08 through the rationing of subsidized gasoline, a reduction in
nonwage current outlays,
more moderate growth of capital expenditure, and a decline in OSF lending.

12. The Central Bank of Iran’s (CBI) ability to influence monetary
policy decisions
has been further curtailed. In 2007/08, the Monetary and Credit
Council chaired by the CBI
Governor was integrated into the government’s supreme council for
economic management
and planning.

13. Credit conditions were loosened in 2007/08 and the rial continued
to depreciate,
albeit at a slower pace. Faced with a reduction in budgetary
expenditure and OSF lending,
both private and state-owned enterprises intensified pressures for
increased bank credit. The
government’s decision to reduce banking rates of return in mid-2007/08
exacerbated these
pressures.3 To satisfy the growing demand for loans, state-owned
commercial banks
increasingly resorted to the CBI overdraft facility. As a result, the
CBI’s claims on banks
became one of the main sources of money and credit growth (Figure 6
and Tables 5–6). A net
redemption of Central Bank Participation Papers (CBPPs) and net
purchases of foreign
exchange were additional sources of liquidity growth. The authorities
continued to target a slow
rial depreciation vis-à-vis a basket of currencies, but the weight of
the U.S. dollar in the basket
was significantly reduced in late November 2007. As a result, the
monthly depreciation of the
nominal effective exchange rate (NEER) has recently declined (Figure 7).

14. The deepening of financial intermediation has slowed down and
dollarization has
increased recently. As real rates of return on domestic currency
deposits became increasingly
negative, the inflow of rial deposits into the domestic banking system
began to slow down in
2007/08. At the same time, relative returns on foreign currency
deposits became more
attractive, which led to a significant rise in dollarization, albeit
from a low base.
Notwithstanding the sharp increase in foreign currency deposits, the
velocity of broad money
(including foreign exchange deposits) remained unchanged in 2007/08,
in contrast with a
significant decline in previous years. The securities market has
remained relatively modest.

15. The legislative framework for banking supervision has continued to
improve, but
some banking system vulnerabilities persist. The CBI approved new
regulations on asset
classification, provisioning, and banks’ investment, and issued new
guidelines on liquidity
management and internal controls. While an anti-money laundering (AML)
law became
effective in January 2008, the law still contains deficiencies and its
implementation will require
the adoption of detailed regulations. In addition, Iran does not
currently have in place an
appropriate framework to counter the financing of terrorism (CFT).
Regarding banking
system indicators, the nonperforming loans ratio increased to about 16
percent at end-March
2007 (Table 7), and as mentioned earlier, the profitability of banks
under sanctions has been
adversely affected. Against this background, the authorities have
recently recapitalized three
state-owned banks by transforming OSF deposits funding loans to
domestic enterprises
($3 billion, about 1 percent of GDP) into government equity. However,
some state-owned
banks were still undercapitalized as of end-March 2008.

16. Progress on other structural reforms has been uneven. The increase
in implicit
energy subsidies was contained through the rationing of gasoline at
higher prices. In addition,
the preparatory technical and legislative work for implementing the
VAT is close to
completion, and tax collection agencies have been upgraded with new IT
technology.
Following the 2006 reinterpretation of Article 44 of the Constitution,
the divestment process
has gathered pace. However, given the lack of large private investors,
many government-
owned entities were acquired through noncash or deferred settlements
by quasi-public sector
institutions. Furthermore, remaining weaknesses in the business
climate, in particular in the
areas of employing workers and dealing with licenses, constitute an
obstacle to private sector
development and employment creation (Figure 8).

[...]

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