March 2007
According to the latest report on Iran published by the International Monetary Fund (IMF) in March 2007, Iran’s economy is continuing its robust growth and improved external current accounts position amid high oil prices and the strong performance of the non-oil sector. The economy’s future growth outlook, according to the report, could be jeopardized in the event of a drop in international oil prices and the continued expansionary and inflationary policies of the Iranian government which has been a source of worry for many economists. The IMF indicated that Iran’s transition towards a viable and efficient market economy, and the sustainable growth required to provide employment for the country’s fast-growing labor force, represent the main challenges faced by the Iranian economy. The report also included suggestions to help overcome these challenges. These suggestions include but are not limited to phasing out energy subsidies gradually while protecting the poor, strengthening the role of the annual budget as the main instrument of fiscal policies, avoiding frequent withdrawals from the country’s Oil Stabilization Fund (OSF), tightening monetary policies, greater independence of the Central Bank, and providing greater exchange rate flexibility.
Another development in March was the approval of resolution 1747 by the UN Security Council to expand the sanctions regime imposed on Iran for its defiance of previous UN resolutions requiring a halt of its uranium enrichment activities. Iran responded by reiterating its right under the Non-Proliferation Treaty (NPT) to enrich uranium for peaceful purposes and asked the UN Security Country to avoid politicizing the issue while describing the recent resolutions as “illegal”. The new resolution expands the list of companies and individuals that were sanctioned by the previous resolution while calling on international institutions to observe restraint in providing financial credits to Iran. This resolution also gives the Iranian government another 60 days to comply with UN demands or face further sanctions. According to a number of analysts, the magnitude of these sanctions is still too small to have a significant impact on the Iranian economy. However the prospect of being faced with tougher sanctions has made many in the country concerned about the future outlook for the market and the overall economy.
April 2007
The month of April witnessed new developments in macroeconomic decision-making as well as the Iranian nuclear program. On the nuclear issue, the Iranian president made an official announcement during a nationally televised celebration that the country has reached industrial scale uranium enrichment. Following this announcement, Iranian officials stressed their willingness to negotiate with the West over the giving of assurances that Iran’s nuclear program is aimed at peaceful energy production. Later in the month Iranian nuclear negotiator Ali Larijani met with the European Union’s lead negotiator Javier Solana to discuss a common basis upon which full-scale negotiations between the Western nations and Iran could resume. Both diplomats called the preliminary negotiations positive and constructive and indicated that they will continue with their negotiations when they meet again in a few weeks’ time.
On the macroeconomic front, there was some significant news in April. First and foremost, the country’s Supreme Credit and Monetary Council (SCMC) decided that interest rates during the current Iranian year will stay untouched and would not be cut as previously planned. This decision was later overruled by President Ahmadinejad who insists on decreasing interest rates on an annual basis claiming that high interest rates are responsible for slowing growth and inflation. The final decision on this matter is yet to be made. However, the country’s private sector representatives, the Central Bank and the state and private commercial banks who all have representatives on the SCMC oppose the decision to cut interest rates calling it disastrous since it poses a threat to the survival of the country’s banking sector by shifting investments from banks to other sectors while increasing liquidity growth and as a result the inflation rate.
The other significant decision by the parliament which was approved and handed over to the government for execution was the plan to ration gasoline consumption from 21 May 2007. According to this plan, domestically produced gasoline will be distributed equally amongst all vehicles giving them a share of 100 litres per month at the heavily subsidised price of 1,000 Rials (10 US cents) per litre while any consumption above this level requires consumers to pay a price of 3,000 Rials (30 US cents) per litre. This is still significantly lower than global prices but considered high for Iranian consumers. In order to ensure the smooth execution of this plan, smart cards have been issued for each vehicle which keep track of gasoline consumption. It is worth noting that the difficult task of distributing 7 million smart cards for existing vehicles could mean that the plan will take much longer than previous forecasts to be fully implemented. Production of inefficient vehicles domestically as well as heavy subsidies on the price of gasoline in recent years has significantly increased the country’s per capita consumption levels putting it amongst the highest in the world. This is while cheap gasoline has caused traffic, air pollution, and gasoline smuggling to reach critical levels. Iran currently consumes 70 million litres of gasoline per day while only producing 40 million litres per day domestically.
Prepared by Turquoise.
About Turquoise: Turquoise is a boutique investment bank based in Iran with offices in Tehran and London. Turquoise publishes Iran Investment Monthly with the aim of keeping its recipients updated on the latest macroeconomic developments in Iran, providing an in-depth analysis of the Tehran Stock Exchange as well as introducing new financial products and private equity opportunities to potential investors. For more information please visit: www.turquoisepartners.com/iraninvestment
