Tuesday, May 17, 2011

Iranian economy on positive path

Iranian economy on positive path...
By Kaveh L Afrasiabi

Although talk of Iran's "economic crisis" is commonplace among the regime's critics, thanks to smart macroeconomic policies and rising oil revenues, the Iranian government is now earning high marks from outside observers such as the World Bank and Economist Intelligence Unit [1]. This is for implementing politically risky cuts in cumbersome subsidies, financial discipline, robust foreign exchange reserve, debt reduction and the pursuit of job growth in its mixed economy, thanks in part to its sanction-busting foreign trade and foreign investment.

Iran last year attracted about US$10 billion in foreign investments, and it has just concluded six new agreements with China worth $20 billion. The volume of Iran-China trade, currently at $30 billion, is expected to double by 2015.

Iran and its neighbors, above all Turkey and Iraq, are enhancing

their bilateral relations, with Tehran and Ankara signing an agreement for shared power generators, while energy and trade ties are expanding between Tehran and Baghdad.

As a result, it is not "crisis" but rather growth and opportunity that lies in the near future, even though some fundamental problems pertaining to inadequate privatization, excess subsidy of quasi-state firms, and double-digit inflation remain.

This week, the watchdog Guardian Council approved a $508 billion budget for the fiscal year 2011-2012, one third more than the $347 billion budget for the previous year. Its decision came after months of parliamentary deliberations that cut some $34 billion from the initial budget submitted by President Mahmud Ahmadinejad in February due to inflation fears.

The ambitious new budget foresees the creation of millions of jobs, which will depend partly on steady oil prices, projected at $81.50 per barrel for the budget purposes. Saudi Arabia uses a much lower $50 per barrel in its budget. Iran's estimate is based on hopeful expectations that despite a recent fall in oil prices there will be "price stability" come this summer.

Not everyone in Iran concurs with this approach. Hojatol-eslam Ali Banai, a member of parliament, has warned of a budget deficit unless "we sell every barrel of oil at $90". Banai and a number of other lawmakers have also questioned the government's policy of giving cash direct to citizens, aimed at compensating for the pressure of subsidy eliminations and costing the government around $38 billion. They state categorically that these handouts "represent a heavy financial responsibility that is beyond the ability of the budget".

One solution proposed by lawmakers is to limit the number of recipients, more than 72 million including 2 million Iranians living abroad, and adopting an income and wealth-based approach that targets the lowest echelons of society.

Even so, the government's biggest hurdle may turn out to be the lack of a coherent industrial strategy, key to the employment strategy. Iran's overall industrial policy lacks a coherent framework and is handicapped by bureaucratic wranglings over a merger of ministries.

As stipulated in the Fifth Five-Year Plan, the government is obligated to reduce the number of ministries to 17 from 22. The president has in fact targeted eight ministries for merger, including those for Energy and Oil, much to the chagrin of Oil Minister Masoud Mirkazemi, who has reportedly quit his post in protest; for now Ahmadinejad has assumed the role of caretaker oil minister. Bureaucratic streamlining is one thing, the unwanted consequence of overlapping responsibilities and excess responsibility another, and the experimentation with the new ministries may or may not have the desired result.

The intense debates over the bureaucratic re-organization of the state mask a relative paucity of vision and alternatives for a sound industrial strategy, in light of several failed initiatives by key ministers in the recent past.

More than 60% of Iran's manufacturing output is in the hands of state-owned and so-called para-statal organizations, which receive generous foreign exchange subsidies and are often less than fully transparent. The new budget and the accompanying five-year plan fall short of a bold new strategy that could result in the industrial blossoming of Iran. In the energy sector, the budget allocates only $30 billion for modernization of the ailing oil/gas sector, which requires no less than $100 billion to $150 billion for re-tooling.

A more ambitious and forward-looking industrial privatization is called for in Iran, following the Supreme Leader's call for a new "economic jihad" and the 2006 initiative to privatize parts of the public sector such as the downstream oil sector, banking, and the utilities.

Iran's private sector has been complaining loudly of insufficient government backing, heavy debts to banks requiring relief, excess regulations, foreign exchange shortages, and unfair competition by privileged state-owned enterprises. One example - the more than 100 Iranian companies producing mineral water have warned of imminent closure and the loss of 50,000 jobs unless the petrochemical companies provide essential materials.

Another example is the government's decision to cut the subsidies for milk, threatening the cattle industry, and dozens of units are likely to go out of business in the near future. Such problems highlight the need for better microeconomic policies that address the detailed problems in each sector of Iran's evolving economy.

Still, despite the various shortcomings cited above, Iran's oil economy has primed the country for a tangible and significant leap forward in 2011-2012 that will likely yield positive results, barring the unforeseen consequences of a sharp decrease in world oil prices - unlikely to happen in light of the continuing Libyan crisis and continuing world economic recovery.

1. For the World Bank report on Iran click

Kaveh L Afrasiabi, PhD, is the author of After Khomeini.

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