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5/21/07

Iran Economy Overview

Source: Iran Investment Monthly, Turquoise Partners

 

In this edition of the Economy section, the Iranian economy during the recently ended Iranian year of 1385 is analysed with emphasis on some particular challenges and problems.

 

Liquidity Growth:

 

One of the main characteristics of the Iranian economy in 1385 has been the surge in liquidity levels which have seen a 42% rise during the past year to reach 1,200 trillion Rials ($130 billion).  The main engine behind the rise in liquidity is the significant rise in Iran’s oil income which reached historic levels of over $50 billion. All the oil income, in addition to several billions of dollars of the previous years’ savings, was spent in 1385 following the execution of expansionary policies by the President Ahmadinejad’s government. According to official statistics, liquidity growth has forced the inflation rate upwards to 14% from the previous 11% level.

 

Imposing Interest Rate Cut:

 

During the first few weeks of 1385, the government announced a mandatory interest rate cut which forced the state-owned banks to drop their interest rates from 16% to 14% and the private banks from 22% to 17%. This decision was opposed by many experts who believed any government involvement in imposing interest rates would disrupt the balance of the money market and argued that a cut in interest rates would result in a surge in loan applications and a corresponding drop in bank deposit levels. These predictions largely came true as most state-owned banks faced liquidity shortages while a significant amount of money was shifted from bank deposits to other sectors such as the property sector in particular which saw a  20% overall price rise  in the second half of the year.

 

Employment and Wage Policies:

 

Another policy adopted by the government in 1385 was to force employers to raise the minimum wage level of permanent and contract-based employees by different rates giving contract-based employees high enough salaries to encourage companies to switch them to permanent employment. This decision proved disastrous as most employers and entrepreneurs threatened to lay-off large numbers of contract-based employees to curb rising costs.  This situation finally forced the government to reverse its decision and adopt similar rates of increase for salaries of both permanent and contract-based employees.

 

Later in the year, the government focused on financing Small and Medium-size Enterprises (SME) with a  plan for the short term return of capital as well as adopting microfinance models to promote employment opportunities for the country’s over 4 million unemployed. It is estimated that a total of 500,000 projects were approved by banks for these loans which totalled around 100 trillion Rials ($10.8 billion).

 

Real Estate and Construction

 

The prices of cement and steel witnessed a swift rise in the first few months of the year forcing the government to impose a ban on exports while eliminating all import tariffs of these products. It is estimated that a total of $3 billion worth of steel products were imported during the past year.

 

The rise in the prices of raw materials as well as increased liquidity in the market helped boost housing and property prices in the second half of the year. While in some areas of the country, the prices rose by over 50%, in Tehran the Housing Unit Price Index grew by over 21% in the second half of the year.

 

Auto Production and Gasoline Consumption

 

Iran’s production of different types of vehicles passed the one million unit mark in 1385. In addition, 30,000 foreign-made cars were imported into the country which mostly consisted of luxury passenger cars. In order to modernise the country’s aging fleet of cars, the government introduced a substitution plan based on which loans would be provided to those owning aging cars to exchange their vehicles with a newly produced replacements. This is intended to increase efficiency and reduce gasoline consumption and so far 250,000 people have registered for this program which appears to be behind schedule.

 

Iran’s gasoline consumption is reaching alarming levels of around 72 million litres per day of which only around 40 million is produced domestically. In 1385, Iran imported over $5 billion worth of gasoline which was distributed amongst consumers at heavily subsidised prices. For the current year however, the parliament has directed the government to ration gasoline consumption to curb consumption as well as imports, pollution and the smuggling of gasoline. The plan is expected to be implemented in June 2007.

 

Privatization

 

Although the government initially opposed the idea of privatisation, the push by the country’s Supreme Leader and other decision-making institutions forced the government to implement privatisation plans according to the decree presenting the new interpretation of the Iranian Constitution. According to this plan, the government’s share in the economy should drop to 20% from the current 70-80% within the next 8 to 10 years. By the end of 1385, shares of two of the largest Iranian companies, National Iranian Copper Industries Company (NICIC) and Mobarakeh Steel Complex (MSC), were offered for the first time on the Tehran Stock Exchange.

 

Another plan of the Ahmadinejad government which was implemented to some extent in 1385 was the introduction of a share distribution model dubbed  Justice Shares, based on which the government will offer its shares in state-owned companies to all Iranian families with priority given to  poor and underprivileged families. Families then pay back the government from the dividends generated by those shares over a period of 20 years. As a result,  in the second half of the year, around $2.5 billion worth of state shares were transferred to underprivileged families totalling 4.6 million people. Each person received around $550 in shares with a maximum of 5 payments for each family.

 

About Turquoise: Turquoise is a boutique investment bank based in Iran with offices in Tehran and London. Turquoise publishes Iran Investment Monthly with the aim of keeping its recipients updated on the latest macroeconomic developments in Iran, providing an in-depth analysis of the Tehran Stock Exchange as well as introducing new financial products and private equity opportunities to potential investors. For more information please visit: www.turquoisepartners.com/iraninvestment

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