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Iranian economy : Struggle for Development

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  1. Iranian economy: Struggle for Development HosseinAbdohTabrizi Istanbul, May 2014

  2. Iranian Administrations Since The Revolution • Iran Iraq War (Imam Khomeini’s Era, Mussavi’s Premiership (1980-1988) • Rafsanjani Administration, AKA Reconstruction Government (1989-1997) • Khatami Administration, AKA Reform Government (1997-2005) • Ahmadinejad Administration, AKA Populist Government (2005-2013) • Current Administration (August 2013- )

  3. Government exposure to natural resources was volatile, though on average it had been more than 50%. Oil Other Tax

  4. In the last 30 years, around 75% of the Government budget was in the category of current expenditure. current infrastructure

  5. Budget deficit • In the last 10 years, the budget deficit increased dramatically.

  6. As the main source of monetary policy, liquidity grew without any discipline and unrelated to economic growth. Liquidity Growth

  7. money base, high-powered money 10.3 برابر شدن پایه پولی منبع: بانک مرکزی ج.ا.ا

  8. Liquidity 17.9برابر شدن نقدینگی منبع: بانک مرکزی ج.ا.ا

  9. Central Bank of Iran had been highly dependent to the Government and boosted the money supply by political pressure. Money Supply Growth

  10. Over supply of money was from 3 sources: • Budget deficit and lending to Government • Buying foreign assets (mainly oil revenue) from Government. • Borrowing from banks

  11. Decomposition of the Base Money منبع: بانک مرکزی ج.ا.ا

  12. Considering high inflation, the real rate of interest for deposits was mostly negative.

  13. Inflationis the main problem in all sectors of Iranian economy.

  14. Consumer Price Index (CPI) 1978-2014 • Average Inflation Rate : 17.79 Percent • Single Digit Inflation Rates: 2 Years • Two Digit Inflation Rates: 34 years • Inflation Rate over 20 Percent: 16 Years • Inflation Rate over 30 Percent: 4 years • Highest Inflation Rate: 49.4 Percent (1995) • Lowest Inflation Rate: 6.9 Percent (1985)

  15. Iran has the second highest inflation rate in the region. Kuwait Lebanon Oman

  16. Young population is a key advantage for Iran. Men (thousands) Women (thousands)

  17. More than 70% of the population are living in cities.

  18. Increasing unemployment rate; too many university graduates and female job demand

  19. Real GDP Shrinkage GDP, fixed prices GDP, current prices

  20. Following the sanctions, the GDP growth was negative during last 2 years. However, it is estimated to turn to positive figures in the current year.

  21. GDP per capita which indicates the welfare level, did not change significantly over the past 3 decades.

  22. Iranian trade balance fluctuated significantly. During last 10 years, the exchange rate favored more imports. Import, % change Export, % change

  23. oil boosted the income • The main source of Government income was from oil & gas which provided wrong signal to decision makers.

  24. Last Three Years Performance: Stagflation • Inappropriate Government Policies • Unfriendly International Environment

  25. Imposed Embargos on Iran • UN’s Security Council Embargos • US Embargos • EU Embargos • Other Countries Embargos www.finance.ir

  26. Harshest Embargos in History • Embargos on Products • Embargos on Buyers • Embargos on Sellers • Embargos on Transport • Embargos on Banks and other Financial Institutions www.finance.ir

  27. Embargos: Barriers of Contracts • Product Embargos • Insurance & Transportation Embargos • Bank Embargos • Self Determined Embargos www.finance.ir

  28. Product Embargos • Products of Dual-Use: • Specific Alloys • Petrochemical Catalysts • Electronic Equipment's • Hellion Gas For MRI • Oxidized Water www.finance.ir

  29. Beyond Product Embargos: Bank Embargos • When Payment Methods Become Problematic, So Does Buying and Selling www.finance.ir

  30. International Sanctions • Approach: Mutual, Comprehensive, Long-Term, Step by Step and Coherent. • Context For Iran’s Nuclear Program: In Keeping with Iran’s Proclamation of It’s Commitment to Non-Military Nature of Its Nuclear Program: A Purification Program with Mutual Definition, Practical Limitations and Clarifying Arrangements Guaranteeing The Peaceful Nature of Iran’s Nuclear Program Which Would Allow Iran to Both Utilize Nuclear Energy and Maintain Its’ Obligations to NPT. www.finance.ir

  31. Inflationary Pressures • Hyperinflation: 2 Years Back over 5% a Month www.finance.ir

  32. Inevitable Energy Reform Cheap subsidized energy ended to high consumption rate, and low productivity of industries 124 Million $ twice the size of current year budget 700 ميليون بشکه در سال × 100 $ www.finance.ir 180 ميليارد مترمکعب در سال × 30$

  33. Subsidy Reform How it was implemented? • Coincided with sanctions • Cash subsidies: poor implementation • Devaluation problem • Could not save the energy • Adding to budget deficit • Could not improve productivity

  34. Petrol Prices: Targeting Subsidies

  35. Energy Price vs Exchange Rate Energy price is not independent from exchange rate www.finance.ir

  36. Energy Price & Exchange Regime Formal vs Market Rate of Exchange: Rent (payment to a factor of production in excess of its opportunity cost) & Corruption www.finance.ir

  37. Last Three Years Performance

  38. Crude Oil Production

  39. Recession Esteeming From less Government Expending www.finance.ir

  40. Housing Market • A lot of new projects; 750 units every year and 30% in Tehran www.finance.ir

  41. Housing Market: Supply Side Built more than the plan: inappropriate distribution;over-builtin large cities www.finance.ir

  42. Housing market: Demand Side • Still 1 million housing units in demand every year due to household growth rate, high divorce rate, and informal settlements www.finance.ir

  43. Social Housing: MaskanMehr • Starting to build 2.2 million social housing units in 2007 • Financing the project by borrowing from the central bank increasing M1 by 60% • It could not be finance like that any more • Problem at hand

  44. MaskanMehr

  45. Current Labor Market • Reduction of labor participation rate • 3.5 million unemployed • Major difference of male & female unemployment rates • Major difference of unemployment rates across age groups • 5 million students: the army of unemployment

  46. Export • Iranian Major Non-Oil Export Items www.finance.ir

  47. Growth Rate of Iranian Economy: Two Scenarios

  48. Inflation Rate Forecast: Two Scenarios

  49. Oil Production Forecast: Two Scenarios