Oil revenues this year will surpass $45 billion.

The Monetary and Banking Research Center recently held its annual conference titled, ’Iran’s Macro Economic Developments’, to discuss the status of the economy. Head of the center, Ahmad Mojtahed, as the first speaker in the meeting drew a direct link between a rise in inflation and lower investment volumes. “Higher inflation slows down the trend of economic growth, thus decelerating the inflow of cash.“
Mojtahed said demand pressures have made liquidity growth the main inflation-conducive factor in Iran and without the government exerting the proper policies to control the excessive amount, inflation will rise further to reach 15 percent.
Another inflationary move, he said, would be withdrawing money from the Foreign Exchange Reserve Fund and injecting it into the market. “I have been informed that a number of plans and by-laws are pending legislative deliberation that pertains to allowing the government to remove up to $14 billion from the fund.“
Pointing to a possible 100,000 billion rials budget deficit, the government says it is anticipating, Mojtahed warned that offsetting the shortage by borrowing from the fund would further push inflation higher, reported Persian daily Sharq.
He suggested the government move fast to get rid of legal and economic bottlenecks for issuance of participation bonds by the Central Bank of Iran as one of the most effective monetary tools to control general prices.
“Demand pressures in Iran in view of high costs of acquiring raw materials and paying wages is a major pressuring factor,“ he noted, adding that the property bubble in real estate, stock exchange and gold markets has prevented a proportionate relationship between inflation and liquidity rates in the sense that the two have not increased in tandem.
“Creating employment was the government’s main concern during the 1970s. That priority has now shifted to curbing inflation as a major factor that has been foiling all state plans for attraction of investments.“
“Oil revenues this year will surpass $45 billion,“ said Mojtahed, adding that Iran is losing its oil production capacity by 5 percent each year and so in order to maintain and boost the current capacity, it needs cash and technology so as not to repeat the Malaysian example of being forced to halt crude exports and begin imports, for lack of adequate investments to maintain production level.
“The same is happening to Libya and Algeria.“
Mojtahed said there will be less oil exporting countries in 10-years time than at present.
Pointing out that the share of agricultural and traditional Iranian products (such as carpet) from total non-oil exports has declined from 18 percent in 2001 to 12 percent at present, he said, petrochemical and steel products constitute the bulk of Iran’s non-oil overseas sales in the recent years, though a closer look at the type of exported commodities would reveal that just as in the oil sector, what is being sent abroad mostly includes raw material.
The larger part of petrochemical shipments included gas liquids instead of polymer and plastic, and ingots and rods in the steel sector.
He said government’s strict adherence to stipulations of the Fourth Five-Year Economic Development Plan (2005-10) is a prerequisite for fulfilling the system’s aspiration of achieving 8 percent economic growth rate.
“Achieving higher productivity, higher investment ratio to gross national product up to 34 percent, higher non-oil exports to gross domestic product by 10 percent, 5.8 and 8 percent reduction in inflation and unemployment rates respectively are prerequisites for stimulating 8 percent economic growth rate.“

The share of agricultural and traditional Iranian products (such as carpet) from total non-oil exports has declined from 18 percent in 2001 to 12 percent at present.

Lack of Tools
Head of the International Energy Studies Institute Mehdi Assali said neither the Central Bank of Iran, the Management and Planning Organization nor the Ministry of Economy and Finance have the necessary monetary and financial tools at hand to require the government to exercise financial discipline in a bid to prevent more wastage of the country’s fiscal and monetary resources.
“At present, 60-70 percent of state revenues are derived from oil exports,“ he said, stressing that eliminating the government’s stringent dependency on oil as the main source of its income and attracting investments into various economic sectors are needed for maintaining higher growth rates.
“Most of the investments are focused in the oil and gas sectors,“ he pointed out, adding that some of this money should be diverted towards funding up-stream oil schemes.“
He also said attaining a stable economy will help reduce production costs and noted that enforcing anti-inflation and poverty alleviation policies as well as forging a fair system of wealth distribution is needed to expand and develop crucial economic activities.

Slow Progress
Behrouz Hadi-Zonouz, an economic expert, put the average economic growth rate in the past four decades at four percent. He said Iran’s economy has in the past two decades progressed slowly, undergoing many ebbs and flows.
“The per capita income today is lower than before the 1979 revolution. Unemployment, low competitive abilities and a widening technological gap with advanced economies are among reasons behind the sluggish performance of the economy.“
The solution, he suggested, would be opening up the economy and making it market-oriented.
Terming the government’s efforts to push for policy dŽtente at the regional and international levels as a failure, he said, Tehran should prove to the world its commitment to and respect for democracy and human rights.
“As a result (of this failure), plans for enforcing effective economic interaction with the rest of the world have mostly fizzled out, showing itself in the rejection of Iran’s membership to the World Trade Organization for so many years.“
Pointing to the new government’s emphasis on reviving small and middle-scale corporations, Hadi-Zonouz expressed hope that such an approach does not make major industries suffer by recurrent shortage of funds.
“A government can only claim to be development-oriented by making all conditions ripe for attraction of highest possible level of cash from domestic and foreign resources, which would necessitate reforms in the Labor Law, elimination of state bureaucracy and monopoly, ownership guarantees, and preparing a business-friendly climate.“

Demand pressures have made liquidity growth the main inflation-conducive factor in Iran.

Need for Bonds
Head of the High Banking Training Institute Seyyed Mohammad Tabibian also expressed concern about the future of the economy, most prominently inflation.
“The 34-percent rise in the volume of liquidity since March has exerted intense inflationary pressures on the community.
Noting that inflation in Iran is calculated based on the retail price index provided by the Central Bank of Iran, he said a same evaluation by the State Statistics Center a few years ago based on the implicit index indicated the figure was higher than that claimed by the government.
“Not surprisingly, the center was indefinitely banned by the government from releasing such reports.“
Tabibian referred to concentration of money in the construction sector in northern parts of the country which has sent real estate prices staggeringly high, and said the money could instead go to productive economic activities such as gardening and live-stock breeding.
“Luring the excess liquidity to the stock market also helps divert the idle money towards industrial schemes.“
Tabibian said unless the government abides by rules governing the global economy, Iran’s economic interests will be at stake for the time to come.
“For example, unless we become a member of the World Trade Organization, it will be of no use to try and close the market to low-quality commodities from China or India.“
The expert criticized what he called ’a superficial stability’ in the foreign exchange rate and called for reforms in the forex regime.

Poor Spending
University lecturer, Gholamali Farjadi said although there is a national consensus and will towards achieving the objectives of the fourth plan, there seems to be major disagreements running among the officialdom on ways to achieve them. “Should the new government have any reservations about executive strategies laid down in the plan and opt to removing them, it should come up with valid and practical executive alternatives.“
Also, he said, if the government is committed towards attraction of domestic potentials and capabilities for funding the economy, it should balance out its incomes and expenditures for optimal allocation of resources.
The current subsidy regime, he said, is proof of the state’s erroneous fiscal habits.
“Development has not occurred in Iran, giving rise to acute poverty. The population has doubled but the GDP has remained the same. Despite rapid urbanization and higher public demands, economy’s growth trend is restricted at a low three percent,“ he noted.