Comments on the Iranian Economy - Autumn 2014

By Dr. M. Javad Ardalan (ardalan@oxpe.co.uk)

Director of Oxford Persian Institute (www.oxpe.co.uk)

Unemployment and Job Creation in Iran

The Statistical Centre of Iran has announced that 2.5 million Iranians are without jobs, and that the average Iranian unemployment rate for the past year was 10.4 percent. In response, Ali Rabiei, the Cooperatives, Labour and Social Welfare Minister, said Iran intends to create 500 000 jobs by March 2015, the end of the current Iranian calendar year and by investing about $2.9 billion (90 trillion Rials) in job creation schemes. Finance Minister Ali Tayyebnia said last November that Iran must create 8.5 million jobs in the next two years, a feat which will likely prove unattainable.

IMF Approves President Rouhani's Economic Reforms.

The International Monetary Fund said this week that President Rouhani has succeeded in adequately stabilizing his country's economy. Masood Ahmed, Director of the IMF Middle East and Central Asia department, told reporters in Tehran that "the process of stabilization has taken hold and we do see the results already in a dramatic improvement in inflation".

The austerity measures taken by the Rouhani administration, such as cutting energy and cash subsidies, have helped to bring inflation under control. Inflation dropped to 15% last month, a dramatic decline from 45% last year before Rouhani's election. The administration's better economic strategy and management, as outlined in previous posts on 'Iran's resistance economy', along with the relaxation of sanctions on petrochemicals, gold and precious metals and crude oil, have equally contributed to this improvement.

The IMF forecasts that Iran's $400 billion economy is set to expand 1.5% this year, the first positive growth in two years.

Iran's New Economic Policy.

President Rouhani's administration released a new economic policy package on July 26, designed to help the country emerge from 'stagflation'. The policy package concentrates on four main areas:

  • Macroeconomic policies
  • Ease of doing business
  • Financial policies
  • Economic stimulants

The package seeks to boost Iran's productive sectors and exports while reducing dependence on oil revenues. So far the government has successfully tackled and reversed inflation, which has fallen by 20-30% over the past twelve months according to different estimates. Controlled inflation, in combination with a stable currency regime, another one of the government's objectives, is expected to provide the foundation for macroeconomic stability and bring and end to stagflation.

The government intends to improve ease of doing business by reducing the use of price controls and allocating financial resources to the most efficient sectors of the economy, in particular to SMEs (small and medium size enterprises).

Stimulating domestic demand is another key part of the policy.

However, the importance of the oil, gas and petrochemical sector for the Iranian economy cannot be overlooked, and its development its key to stimulating short-term economic growth. Thus the new policy has equally emphasized increasing energy production and efficiency of consumption.

Employment Discrimination Against Foreigners.

The Vice President of Iran recently ordered all ministries, governmental agencies and private sector enterprises to preferentially hire Iranian nationals for their workforce and avoid employing foreigners unless the foreign individual in question has a temporary work permit. This measure is intended to boost the internal workforce, minimize domestic unemployment and push the foreign workforce to be better organized and have appropriate documentation, however it will affect the the job market and productivity especially in the construction sector, which employs many Afghan nationals.

Oil and Gas

New Iranian oil and Gas Contract.

The announcement of new forms of oil exploration and production contracts by Iran at a London conference has been postponed until after the next round of nuclear talks are due to finish on November 24.

The new contracts, described as "flexible and attractive" by Ali Kardor, the Deputy Managing Director of the National Iranian Oil Company , are said to be "somewhere between a buy-back model and a production sharing agreement" and are designed to encourage long-term investors. Participating firms will be able to set up joint operating companies with local partners to develop fields, although they will be unable to own ???

The buy-back contract model, which enables companies to recoup their investment from oil or gas exploration at a pre-agreed rate of return, is currently under legal review in Iran. Under the proposed new model, investors would receive income for each barrel of oil produced as a result of their investment, depending on initial investment and project difficulty. Kardor said that while many foreign companies had shown interest in the new contracts, no formal negotiations had been initiated.

Developing the South Pars Gas Field.

The Iranian government is currently focused on the future development of the South Pars Gas Field. Situated in the Persian Gulf and straddling the maritime border between Iran and Qatar, the gas field is the largest in the world.

Ali Kardor said recently that Iran aimed to expand production to full capacity and complete the development of the South Pars field within three years, in spite of ongoing sanctions which limit its access to technology and capital.

Kardor predicted that within three years, Iran's natural gas production would surpass even that of Qatar, currently the world's leading supplier of liquefied natural gas. There is an estimated 1 193 trillion cubic feet of natural gas reserves within Iranian territory.

Exporting Gas Condensates.

Iranian customs data from recent months shows exports totalling 525 000 barrels a day of ultralight oil, also known as 'gas condensates', over twice the rate of last year. In the past three months, these exports have generated as much as $1.5 billion in extra trade.

Condensates, a by product of natural gas or oil production, are not technically considered as 'oil exports' if they are derived from a natural gas field. However, they represent a 'grey area' in the oil and gas world and even OPEC has no clear definition for them. U.S. officials confirmed that countries which had waivers to continue importing Iranian oil - China, India, South Korea, Turkey, Taiwan and Japan - were not prohibited from buying gas condensates and were thereby not violating sanctions. Likewise, these Asian markets are not prohibited from buying Iranian natural gas.

With the second largest reserves of natural gas in the world and ranking among the world's top five gas producers, Iran is a 'giant' in energy production. Further development of the South Pars gas field will allow for increased exports of condensates and the National Iranian Oil Refining and Distribution Company recently announced its intention to build a new condensates processing plant which could produce up to 60 000 barrels per day.

Iran Ready to Supply Europe with Gas.

On August 11, Ali Majidi, Deputy Minister of Petroleum for International Affairs announced that Iran was ready to supply Europe with gas through the Nabucco gas pipeline. Apparently two European countries have so far demonstrated interest in the pipeline, which would allow Europe to diversify their sources of natural gas and depend less on Russia, and have visited Iran recently to discuss possible routes. In Majidi's view, a trans-Turkish pipeline is the best option, and Turkey had equally shown interest in participating in the project.

In its original form, Nabucco was estimated to cost 7.9 billion euros, to stretch 3300 km from Turkmenistan to Europe, and to have a capacity of 23 billion cubic metres per annum. The main companies involved in pipeline construction were OMV Gas GmbH (Austria), BOTAS (Turkey), Bulgargaz (Bulgaria) and Transgaz (Romania).

Work on the project began in 2002. Initially, plans were to launch the construction in 2011, finishing it by 2014, but the project was repeatedly postponed. In 2011, it was reported that the launch date had been postponed to 2018. In June 2013, an announcement came that the project had been terminated in favour of a more promising project - the Trans-Adriatic pipeline. However, the forsaken Nabucco pipeline may have been given a new lease of life by recent world events.

International trade and investment.

Russia and Iran Sign Five Year Memorandum of Understanding

The governments of Russia and Iran have concluded a five year Memorandum of Understanding (MoU) aiming to expand their economic and commercial ties. The energy ministers of the respective countries, Alexander Novak and Bijan Zanganah, met in Moscow recently to finalise the deal, reputedly worth $20 billion.

The memorandum provides for closer economic cooperation in a number of key areas, such as construction and overhaul of generating facilities, the development of the electrical grid and infrastructure, oil and gas, and trade in machinery, consumer goods, pharmaceuticals and agricultural products. Under this deal, Russia will also help to organise the export and distribution of Iran's crude oil. Russian Energy minister Alexander Novak said in addition that Russia would purchase Iranian oil. Novak stated that "the implementation of the agreement with Iran will create conditions for tapping the potential of trade and economic cooperation between our two countries, which should boost bilateral trade with more Russian goods and services going to Iran". Novak denied that the deal violated any of the U.N. resolutions or trade sanctions on Iran.

The next meeting of the Russian-Iranian intergovernmental commission is scheduled for 9/10 September this year in Tehran, where both parties will discuss next steps for the implementation of their trade expansion plans.

German Firms Returning to Iran

Many German companies are looking to revive their economic ties with Iran. Managing Director of high-tech component maker Spinner GmbH Stephanie Spinner-Konig predicted that German trade relations and interest in Iran would "explode" when sanctions are lifted, which may also be the case for other European countries. Spinner-Konig was part of one of the two German business delegations which visited Iran this year.

However, the situation is complex. On the one hand, companies are cautious to openly voice their interest in Iran lest this affect political and trade relations with America. On the other hand, a cooling of Western relations with Russia in light of that country's role in the Ukrainian conflict may result in reduced German exports to Russia and therefore jeopardize the associated jobs in these industries.

Iran is a huge potential market and German firms stand well positioned to take advantage of trading when circumstances allow, with a long history of economic ties dating back to the 1860s when Siemens AG built a telegraph line connecting Britain and India. The German Chamber of Industry and Commerce (DIHK) estimates that German exports to Iran could exceed €10 billion annually if sanctions are relaxed, and the German-Iranian Chamber of Commerce in Tehran reports a clear increase in commercial interest and queries about Iran this year. Auto parts producer Bosch GmbH, a major global firm, has already signed its first contract for Iranian operations, which, although only in the early stages, bodes well for the future of bilateral trade.

European and Asian Companies Become Active in FTZs

Companies from Austria, Germany, Italy, China and Japan have recently been negotiating to invest in Iranian free trade zones (FTZs). Vice chairman of the Iranian High Council for Free Trade Mohammad Mo'ezzodin was quoted as saying that "Iran offers special incentives to foreign investors, such as a 20 year tax exemption, the possibility to establish companies with one hundred percent ownership and visa-free travel, in order to encourage investment in Iran's free zones". Behrouz Alishiri, Iranian Deputy Economic Minister, said that Iran needs annual domestic and foreign investment of $300 billion until 2015 to meet its economic objectives in the FTZs.

A notable economic development in recent months has been the increase in foreign direct investment into Iran. This has come about as a result of economic stabilization and due to the ongoing P5+1 negotiations, which have increased business and consumer confidence. Business Monitor Magazine stated that an improvement in relations with the West will continue to boost the Iranian economy, which is forecast to grow by 2.9% in 2015.

China, Iran Seek Expansion of Economic Ties

The Iranian Minister of Economic Affairs and Finance, Ali Tayebnia, met with Chinese ambassador to Iran, Pang Sen on 27 July to discuss opportunities for further expansion of economic relations between the two countries. Both parties expressed satisfaction at the growing tend of trade and economic cooperation between Iran and China, noting that bilateral trade in recent years had reached $27 billion, up fifty-four fold from $500 million at the time of the Iranian revolution in 1979.

Tayebnia underlined Iran's key role as a regional power and also as a major global supplier of oil and gas, which was crucial for China's economic growth as the world's second largest economy. Iran, China's third largest supplier of crude oil, currently provides China with about 12% of its annual oil consumption.

He also encouraged further Chinese investment in Iranian industries such as oil, auto production and petrochemicals and noted that several agreements to this effect had been signed, including a $70 billion Chinese investment in infrastructure projects.

Chinese ambassador Pang Sen concurred with Tayebnia and remarked on Iran's economic potential and also the China's willingness to further expand economic ties and increase investment in Iran.

Consumer Price Index

The Statistical Center of Iran has announced its consumer goods and services price index for urban households in the country in June 2014. The index has increased by 0.8 percent compared with the previous month.

Overall, government policies for reducing inflation have been successful. The inflation rate for July was 14.7%, less than its level in the previous month, 17.2%. The percentage change in the total index in the twelve months ending June 2014 is 26.2%, which is less than its level for the same period ending May 2014 which was 28.4%.

Currency Market

The official (CBI) exchange rate is 1 GBP equal to IRR 43,465, 1 Euro is equal to 34,475 and 1 US dollar is equal to IRR26,616. The market price is IRR 51,830 per GBP, IRR 41,097 per Euro and IRR 31,580 per US dollar as at 07 Sep 2014. Market exchange rates in Iran have been relatively stable.

Average Retail Price in Tehran

According to Iranian Central Bank's reports, the average retail price in Tehran for dairy products, vegetables, sugar and tea has gone up in the 15th week of the Iranian year, whereas the price of chicken meat, fresh fruits and eggs has decreased. On the other hand the price of red meat and cooking oil remained unchanged.

Percentage changes in the average retail price of food products in detail:

Dairy products and eggs

  • Price of Pasteurised products has gone up by 15.9%, whereas the price of unpasteurised and pasteurised cheese has fallen by 0.3% and 1.2% respectively.
  • The price of other products in this group has remained unchanged compared with the previous week.
  • There has been a significant fall in the price of eggs by 10.4%.

Rice and Beans
  • Premium quality domestic rice fell by 0.1% in price, but the price of secondary quality rice was unchanged.

Meat

  • The price of lamb was unchanged.
  • The price of beef and chicken decreased by 0.1% and 1.6% respectively.

Sugar, Tea and Cooking Oil

  • The price of lamb was unchanged.
  • The price of beef and chicken decreased by 0.1% and 1.6% respectively.

This content does not necessarily express the views of The British Iranian Chamber of Commerce. The views and opinions expressed are those of the author.