Negotiations in Vienna, Austria, to revive the nuclear deal between Iran and world powers, known as the Joint Comprehensive Plan of Action (JCPOA), are likely to culminate in an agreement.
What impacts the possible agreement will have on Iran’s economy? Mohammad Reza Farzin, an economist, answers this question in a write-up for the Persian daily Iran. A translation of the text follows:
Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei has recently said, “We should not allow the economy to be conditioned. The conditioning of the economy over the past 10 years has hurt the economy hard; we have practically failed to manage macroeconomic variables.”
Most economic experts also believe that a large number of economic problems stems from being conditioned by external factors. On the other hand, political analysts predict that talks in Vienna to revive the nuclear deal between Iran and world powers are likely to culminate in an agreement. The question is what impacts the agreement will have on Iran’s economy. Are we ready to avail ourselves of the opportunities?
We have the experience of the past decade and the years following the Joint Comprehensive Plan of Action after all. Many of the economic expectations and forecasts we had regarding the improvement of the situation have not materialized. This failure is to blame partly on the behavior of government and lack of preparedness by organizations, institutions and economic enterprises.
The first outcome of a likely agreement is that oil sales will increase. Absent an agreement, the fiscal 2022-23 budget bill has projected the sales of 1.2 million barrels of oil at $60. Oil revenues will be around $16.5 minus the shares of the Ministry of Petroleum, the National Development Fund of Iran and oil-rich regions. That figure is more than the current year’s budgeted amount, yet the government will have trouble financing its budget without running a deficit.
Banks will be responsible for the transition to new conditions after sanctions are lifted, hence reforms in the banking system is vital for the country’s financial system
An agreement will increase demand for Iran’s oil in global markets but given the fact that domestic consumption of energy is very high, are we going to export more oil and gas? We need to think of making more investment in our oil and gas fields.
The agreement will have significant impact on our trade ties. Trade relations include the target countries, the cost price of imports and exports, and the institutions and organizations responsible for the country’s trade management.
Undoubtedly, if an agreement is reached, demand for investment in our enterprises will increase; producers will seek to import goods, devices and machinery they weren’t allowed during sanctions. Also, a new wave of consumption may be created in the society, which will increase pressure on the country’s trade balance in terms of foreign exchange demand.
Although we own foreign exchange resources abroad, that will be released following the removal of sanctions. We need to remember that most of the resources are assets of the Central Bank of Iran and cannot be used for imports. Up until now, they were used with the blessing of the Leader and due to emergency situation of the country. It is not in the interest of the country to tap into these resources when sanctions are gone.
If we consider the tariff or non-tariff regimes currently in force, we will notice that all these policies were designed in accordance with the country’s conditions. For example, imports of many goods have been banned. Obviously, under normal circumstances, these policies cannot be maintained.
We need to think about industrial strategies; the Leader also referred to this in a meeting with producers and economic players. Industrial policies of our large industries must be clear and the Ministry of Industries, Mining and Trade should formulate their strategies.
Under the new conditions, the industrial strategy must be fully defined so that the country can use new resources to benefit from investing in these industries.
Banks are the main pillars of domestic financing, financial relations with foreign countries and even foreign financing. They will be responsible for the transition to new conditions after sanctions are lifted. This comes as banks themselves are facing an array of problems; their distance from international standards and norms can make things difficult. Therefore, carrying out reforms in the banking system is vital for the financial system of the country. Capital adequacy of the banking system is the major problem of the banking system.
Accumulated losses, mandatory loans they have to offer, our weakness in the credit rating system, loss-making business model of banks and even the lack of central bank independence in formulating monetary policies are other major problems of our banking system.
Today, although monetary policies are being made by CBI, the government and even the parliament are still involved in the formulation of these policies; this issue should be addressed when reforms are introduced. We need tough reforms to fix the banking system. The whole thing requires a strong and independent central bank.
Finally, I believe that the removal of sanctions should lead to non-inflationary growth in the Iranian economy. If not, we’ll see the same conditions that emerged in the years after the conclusion of JCPOA.
