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Avoiding Red Ink

Avoiding Red Ink Avoiding Red Ink

It is rather unfortunate that natural resources in general and oil in particular form the basis of Iran's economy and national budget. Some estimates have it that a one-dollar decline in oil prices results in a one-billion-dollar reduction in revenue for the Iranian budget.

Oil prices have plunged by more than a quarter since June. For example in the United States, the national average price of gas dropped under $3.00 per gallon for the first time since December 2010. Gas prices usually decline in the autumn owing to lesser driving, but prices have fallen faster than many had expected in current year due to sharply lower international crude prices.

The price of crude has dropped more than $20 per barrel since late June due to overproduction and concerns about the slowing global economy, particularly in Europe and Asia. There also are reports that some OPEC states, such as Saudi Arabia, would let prices fall further to retain competitive market share plus for political reasons.

Now the Rouhani administration has found itself in a complex situation. On the one hand, Iranians, especially those at the lower end of the economic ladder and the unemployed, had expected his government to improve the quality of life as the president had often promised on the campaign trail last year.

On the other, the administration for obvious reasons seems to have invested hope in the ongoing and highly sensitive nuclear talks with the six major powers.

The fall in crude prices and uncertainty about the outcome of the nuclear negotiations are two shocks that have been visiting the Iranian investment and business climate for several weeks.

After the present government took office in 2013, the economy was slowly but steadily making adjustments amid a semblance of stability slightly lower prices for goods and services. But in the new order of events and possible budget deficits, there might be a high temptation to print money and thus increase liquidity in the already tight market.

One question of paramount importance is whether we really have a plan for the period of substantially low oil prices, or would we again be condemned to red ink, deficit spending and galloping inflation.

The economy is now far below its potential and has untapped and excess capacity. Promoting non-oil exports, improving the tourism sector and investment in infrastructure that help raise productivity and improve technology, should be seen as escape channels from the critical situation and for building resilience.

Financialtribune.com