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09/12/11

Vesta Monitor's Iran Economic Report: September 2011

Iran Economic Report (Monthly) - Number 1, September 2011

Vesta Monitor published its September 2011 issue of “Iran Economic Report”. Executive Summary and Table of Contents follows. To see and download the full report, please go to www.vestamonitor.com.

Executive Summary

A “rentier economy” is possibly the best description that can be given to the Iranian economy today. In general, countries that receive considerable amounts of oil income from foreign sources on a regular basis tend to become independent from their societies, unaccountable to their citizens, and despotic. The Iranian economy has adopted a rentier character. If not prevented, it will doom the country’s economy and long-term prospects.

Furthermore, corruption is ramping up. Just recently it was revealed that an embezzlement operation amounting to $3 billion has taken place in Bank Saderat. The described fraud is the biggest in the country’s banking history. The embezzlement comes only a week after a similar case, estimated to have cost around $2 billion.

The conceivable worldwide double-dip recession has already weighed on oil prices for the past couple of months and will continue to do so well into the medium term if the economic crisis continues. This will subsequently present major economic and political challenges for the world’s fourth largest oil producer. Iran’s real GDP growth has fallen to its lowest level, near zero, since the Iran-Iraq war, which ended in 1988. If the oil price decline continues, it will certainly impact Iranian growth prospects. Since a major chunk of government’s budget depends on oil revenue, the country’s fiscal outlook is particularly dire considering the fact that the budget has been planned for an average oil price of $85 a barrel.

Unlike developed economies, the government and Central Bank of Iran have limited capacity to employ fiscal and monetary stimuli to bolster growth as they failed to sustain surpluses during the oil surge. This may cause the economy to go out of control. Already, factors such as the artificial foreign exchange rate, directive deposit and lending bank rates, the high inflation rate, the high unemployment rate, the falling production rate, massive imports, sanctions, etc. have put the economy in shambles. A much disciplined advanced system is needed to replace the current system to resolve the state of the economy with all these challenges taking place simultaneously.

The business environment persists to be unfavorably affected by government and Central Bank mismanagement of the economy, international sanctions in particular banking sanctions, and import oriented policy of the government. The monetary package for this year has created distortions in the money and gold markets. Their planning has created speculative activities in foreign exchange and gold markets. Besides, the Central Bank changes its policies on a daily basis in addition to acting against its own policies following any policy announcement. An example of which is the spread created between the official foreign exchange rate and the market foreign exchange rate that has produced rentier opportunities. Plus the US continues to put pressure on international companies to halt doing business with Tehran.

The oil and gas sector, which is the heart of the economy, is suffering from a lack of foreign direct investment. Some time ago the petroleum ministry admitted that the annual production of oil declines 330,000 barrels per day each year due to the absence of fresh investment and outdated equipment. Additionally, the South Pars gas field is far behind its original development schedule. On the political front, an IRGC general officially took over the Petroleum Ministry. General Ghasemi has a history of unsuccessful practices in the Khatam Al-Anbia headquarters, which is the technical wing of the IRGC. Many of his projects have remained unfinished. More domination by the IRGC is expected in both the political and economic scenes in the future.

Table of Contents

1. Executive Summary
2. Current Affairs
The New Oil Minister and the Khatam Al-Anbia Headquarters
The Bushehr Nuclear Power Plant Has Become Operational
Other Important Affairs
3. Macro-economy
Important Challenges Facing the Business Environment in Iran
A Review of Recent Economic Decisions
Targeted subsidies plan
Non-payment of the production subsidy
Foreign currency shock
Economic statistics
Conclusion
Requirements for Economic Revival
Government's immediate withdrawal from price-setting
Set market interest rates
The foreign exchange rate has to become factual
Reducing tariffs
Inflationary liquidity
A competitive market, a prerequisite to attract investments
Modifications of labor and social security law
Indications of Further Increases in the Inflation Rate
New Confidential Economic Indicators
4. The Banking System
Possible Changes in Monetary Policy
The Great Embezzlement
5. Oil and Energy
Iran Officially Inaugurates an Oil Exchange
Gas Production Status in the Country's Energy Hub
6. Capital Markets
Tehran Stock Exchange (TSE) Performance
The Local Gold Market
The Local Foreign Exchange Market
7. Real Estate
8. Industries and Mines
Failure of Production


Vesta Monitor is a wholly independent economic research group under the management of Vesta Capital, LLC (www.vestacapitalllc.com). With a focus on West and Southwest Asia (currently Iran, Iraq, and Afghanistan), VM offers clients a complete perspective into the dynamics and developments of its covered regional economies and current affairs. The group reports include:

Periodic economic and business review reports: VM’s periodic reports comprise current economic and business events and the corresponding analyses. The reports are published monthly and quarterly;

General economic and business analysis reports: VM’s general reports include macroeconomic analysis and forecasts as well as industry and business analysis.

For more information please refer to the Vesta Monitor website www.vestamonitor.com.

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