Re: [Marxism] On the Iranian Economy

[Les Schaffer <schaffer@xxxxxxxxxxxxx>]

Politicus E. wrote:
> Comrades, my apologies but when I copied and pasted the report, the
> formatting was not preserved.  Please refer to the link that I sent
> for a "clean" version.


i'll post later today on this issue and on ways one can ensure the
formatting is preserved. in the meantime, here it is reformated:

*****

[...]

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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