This week I published this oped in the UAE newspaper, The National. Referring to Rouhani’s famous refrain that as the centrifuges turn so should the wheels of the economy, I asked if “he can take much of the turning to production lines rather than shopping malls.” I would like to expand on that question here.
The answer depends on the extent to which any easing of sanction will help stimulate production instead of consumption. Everyone expects a huge inflow of foreign exchange as a result of the release of Iran’s frozen funds abroad — some $100 billion according to reports, though none with a reliable source. This is about the highest Iran has earned in oil revenues in any one year. Adding oil exports of about $50 billion, we are talking major stimulus.
Or at least these are the expectations that have kept the dollar steady at the 33000 rial mark for the past several months as optimistic news from the nuclear talks has been trickling in.
But the current value of the dollar in Tehran is at least 25% below what it should be given that Iran’s higher inflation has outpaced that of its trading partners by a factor of 5 in the last dozen years. The graph below shows how much faster Iran’s prices have risen relative to prices in US and OECD (5.7 times in the last 12 years) and that the exchange rate adjustments have failed to keep up with the difference. As a result Iranian goods are about 37% more expensive relative to foreign goods than they were 12 years ago. Assuming that the exchange rate unification in 2002 put the rial at its correct value relative to the US dollar that year, the rial should be trading at 45532 rials per USD now, not 33000 rials.
Notes: All price indices are normalized to 100 in 2002. US and OECD CPI are virtually the same. The exchange rate (ER) is rials per dollar normalized to 100 in 2002.
So why are so many Iranians expecting the dollar to become even cheaper? Is their priority to make weekend trips to Dubai and Istanbul as cheap as it was before the sanctions? How is the economy going to create 3 million news jobs for the country’s unemployed youth?
Iran’s middle class, about 45% of the population, meets all the criteria defined by its international counterpart except one — productivity. All over the world the value of a country’s currency has close relation to its citizen’s productivity. Not in Iran. Instead it depends on productivity in other countries, who buy Iran’s oil. The more productive they become the more they are willing to pay for imported oil and the richer are the people in oil exporting countries.
Cheap dollar — sustained by high oil prices — is one important reason behind Iran’s continuing economic malaise, and, unfortunately, the ailment gets worse precisely when its citizens think they are doing well.
Rouhani’s challenge is to get the middle class, who are among his more steadfast supporters, to take the high road to prosperity, to strive for higher productivity rather than quick benefits from the likely inflow of cash; look for jobs for their young instead of furniture for their living rooms.
This is a short followup note to my previous post which compared the proposed budget for next year with the budget bill for the current one. I was looking for a table that included the numbers for basic expenditure items that would reveal the budget priorities for next year and could not find one in English, so I decided to post one here. Then I found an excuse to grumble about lack of attention to long term development priorities, such as education, which have been eclipsed by all the talk about inflation as enemy number one and the poor climate for business as the enemy number two. (more…)
Rouhani’s budget for the current year (1393 =2014/2015) was a tight one, and for good reason because he inherited a macroeconomy in a shambles with a high rate of inflation. Despite the contractionary budget, this year the economy appears to be squeezing a small positive growth rate (4.6% in the first quarter). If Rouhani’s promise of a robust economic recovery is to turn from hope into reality, the just released Budget Bill for 1394 (2015/2016) has few indications. (more…)
A while back a friend asked me if the Palma ratio — the ratio of the incomes of the top 10% to the bottom 40% — is a good indicator of inequality in Iran. I waited until I had the data for 1392 (2013/2014) to answer his question. In the meantime, I came across a banner headline in the economics newspaper, Taadol, which read something to this effect: “Subsidy reform deepens inequality.” The claim itself was nothing new, but the reported Gini indices were: I had not seen anyone report Gini coefficients as high as 0.53 for the post-revolution Iran, and it turns out that they do not exist.
The recent welcome slowdown of inflation in Iran, like its devastating acceleration four years ago, has something to do with global influences that are well beyond Iran’s control. The credit in the current slowdown in inflation goes in large part to Rouhani’s economic team but what Iran’s economy minister, Mr. Tayyebnia, has called a “miracle”, has earthly reasons that are not even under the control of Iranian policy makers. Not realizing these influences can be misleading. (more…)
In my last post I examined if the quarterly growth in the GDP using data released by the Central Bank of Iran (CBI) that indicated a robust economic recovery during spring 2014. As promised, I will now review the most recent employment figures released by the Statistical Center of Iran (SCI). (more…)
In its recent quarterly Economic Trends, the Central Bank of Iran reported that the economy grew by 4.6% last spring (which corresponds to the first quarter of the Iranian year 1393 and the second quarter of 2014). What appears to be straightforward reporting of macroeconomic facts has caused much controversy in the Iranian media. Controversy is part and parcel of economic data in Iran, so nothing is new there, but in this case the facts themselves are not as straightforward as one might think. Mr. Rouhani and his economic team insist that the numbers are a firm sign that the recession has ended, while the opposition dismisses the news as bogus.
Today is the first anniversary of President Rouhani in office, so I wrote a piece for Lobelog.com reviewing the economy’s performance. I noted his accomplishments –lower inflation, stopping or slowing down economic free fall and above all lifting business spirits — and setback — continued loss of jobs in industry right up to this summer. The fact that I am able to claim the latter is because of another accomplishment of his government, which I did not note in that piece — timely release of economic data.
The most recent labor force survey (LFS) results for spring, 2014, that Iran’s Statistical Center released last week must be disappointing for Rouhani’s economics team. This survey, which is collected quarterly and is put out with remarkable speed, is the only official data that give us a sense of how the economy has been doing most recently. The short report shows job gains in agriculture (by 25%), which may be mostly seasonal, and services (by 2%), while industry lost jobs (by 1.3%). The fewer number of jobs in industry is disappointing because the main benefits of the agreement between Iran and the 5+1 signed last November were expected to come in industry. The employment picture that LFS paints for industry is not very complimentary for Rouhani’s first year in office. Industrial employment, according to LFS, has been declining since he took office a year ago. Last summer, more than 7.5 million workers were employed in industry, 9 months later fewer than 7 million are working there. Agriculture and services have also lost since then, though by less, for a total of one million jobs lost since he took office.
If you are someone who pays attention to economic news and have not been hiding in a cave for the past few months, you must have heard of the famous book by the French economist Thomas Piketty, Capital in the Twenty-First Century. Since its translation was published in English earlier this year, it has sold more than half a million copies, which is astonishing for a book with many tables and charts (a publisher once told me that each chart cuts sales by 10% — there goes that bit of wisdom).
Last month people were also talking about Piletty’s book in Tehran, and this month’s Mehrnameh, published this week, has a section discussing it, including a short interview by yours truly. I must confess, as I did to the interviewer, that like most people who have bought the book, so far, I have only read the introduction (I have read, however, many of the book reviews — more pages of reviewes than of the book itself! Read an excellent early review by Branko Milanovic here). (more…)