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02/24/12

Vesta Monitor's Iran Economic Report: January 2012

Iran Economic Report (Monthly) - Number 3, January 2012

Vesta Monitor has published its January 2012 issue of “Iran Economic Report”. Executive Summary follows. To see and download the full report, please go to www.vestamonitor.com.


Executive Summary

The beginning of a larger economic crisis

It all began when economic pundits warned Ahmadinejad of his potentially disastrous economic policies. Without paying any attention, he continued and occasionally denied and ridiculed economic theories. He attributed these theories to western economics.

Ahmadinejad's economic view, if any, has completely failed. Today Iran's economy is in shambles and encountering serious challenges. The rial is losing its value against other currencies and gold very rapidly. People are withdrawing their deposits from banks and purchasing non-rial-based liquid assets like foreign currencies and gold. The economy is in a deep recession. Many businesses have stopped buying and selling goods because of the uncertain future. Many only trade with dollars.

UN and American sanctions are biting hard too, although many state officials including Ahmadinejad have denied it many times. All channels of international transactions are practically cut off except a handful of countries such as china and Turkey. Trade has become very difficult. It has taken a heavy toll on the economy.

Mr. Ahmadinejad finally reluctantly approved a surge in the interest rate. Right before the rate surge, the dollar/toman ratio reached 2,300 and the Bahar-e Azadi gold coin hit 1,050,000 tomans. The toman had tanked 189% against the Bahar-e Azadi gold coin and 114% against the dollar compared to the same figures a year ago. After the surge in the interest rate the markets pulled back, but the volatility continues. However, it is believed that both the dollar/toman rate and gold/toman continue their upward trend due the current financial and political circumstances.

In this issue of the VM Iran Economic Report, the focus is on the turmoil in the foreign exchange and gold markets. Several articles have investigated the present chaos and the history of foreign exchange after the surge in oil prices back in the early 1970's in Iran.

Important News Flow - September and October 2011
  • Prices of gold coins are skyrocketing - Due to banning foreign currency exchange in the free market; people are rushing to buy gold to protect their devaluing rials.
  • February 5th deadline for foreign currency holders to deposit their foreign currency cash in banks - The Central Bank announced that all people who hold foreign currencies without a purchasing receipt must deposit their funds in a bank in order not to be confiscated and fined.
  • The European Union boycotts Iran's oil: The EU will not sign any new oil purchasing contracts with Iran. All contracts will be terminated by July 1st, 2012.
  • Bank Tejarat also joined the sanctioned banks - In a recent move the US Treasury Department added Bank Tejarat to the sanctioned banks. It is the last state-owned that joined the list. Many of the European Embassies in Tehran perform all of their financial transactions via this bank.
  • Official exchange rate was set at 1,226 tomans per dollar: This is the rate for imports, travel and other government affairs. The free market rate is still way above the official rate.
  • The interest rate was increased to 20%: The Money and Credit Council in a new move increased the interest rate to 20%. The government of Ahmadinejad reluctantly approved the vote.


Table of Contents

1 Executive Summary ................................................................................................................ 5
2 Important News Flow - September and October 2011 .......................................................... 5
3 Current Affairs ........................................................................................................................ 6
3.1 The Upcoming Parliamentary Elections .......................................................................... 6
4 Macro-economy ...................................................................................................................... 8
4.1 Iran's Economy on a Bumpy Ride with the Dollar........................................................... 8
What is happening to oil revenues? ............................................................................................ 8
4.1.1 Liquidity and foreign exchange ...............................................................................10
4.1.2 Monetary and banking policies ................................................................................10
4.1.3 Resource management and energy consumption....................................................10
4.1.4 High concentration in the currency exchange market ............................................ 11
4.2 The Role of Exchange Rate Fluctuations in Iran's Economy .......................................... 11
4.2.1 Major factors influencing exchange rate variations ................................................ 12
4.2.2 Repercussions of changing the exchange rate on the economic performance ........ 12
4.2.3 A proper framework for foreign currency policy to determine foreign currency rate 14
4.3 Post-Revolution Dollar Rate History? ............................................................................ 16
4.3.1 The role of the US dollar in Iran's economy ............................................................ 16
4.3.2 Resources and expenditures of foreign reserves ..................................................... 19
4.3.3 Iran dollar rates (2000-2009) ................................................................................ 20
4.3.4 Political considerations ............................................................................................ 21
5 Banking and Monetary Policy ............................................................................................... 22
5.1 The Banking System Performance in the Current Year ................................................. 22
5.2 Iran's Central Bank Faces Lost Rial Battle ..................................................................... 23
5.3 The Challenges in Front of Mahmoud Bahmani ............................................................ 25
5.3.1 The challenge of liquidity growth ........................................................................... 26
5.3.2 The challenge of the inflation rate .......................................................................... 26
5.3.3 The challenge of gold .............................................................................................. 26
5.3.4 The ensuing challenge of foreign exchange rates ................................................... 27
5.4 How Iran's Private Banks Enhanced the Commercial Banking Sector ......................... 27
5.4.1 Banking developments in Iran after privatization .................................................. 28
5.4.2 Private Banks, pioneers of usury-free banking ....................................................... 29
5.4.3 Creating jobs ........................................................................................................... 29
5.4.4 Relations with foreign banks .................................................................................. 29
5.4.5 Objections against restrictions ............................................................................... 30
5.4.6 Outlook of private banking in Iran ......................................................................... 30
6 Government and Fiscal Policy ............................................................................................... 31
6.1 Is the Expansionary Budget Inflationary? ...................................................................... 31
6.2 Lessons of Time for Ahmadinejad's Economic Views..................................................... 31
7 Oil and Energy ...................................................................................................................... 33
7.1 Iran and West Tensions Drive Oil Volatility .................................................................. 33
7.2 Iran-Qatar Rivalry over South Pars ............................................................................... 34
7.2.1 What is Qatar up to with South Pars? ..................................................................... 35
7.2.2 The shares of Iran and Qatar in global gas markets ............................................... 35
7.2.3 Qatar producing oil from shared layer ................................................................... 35
8 Real Estate ............................................................................................................................ 36
8.1 Excess Liquidity and the Real Estate Market................................................................. 36
9 Capital Markets ..................................................................................................................... 36
9.1 Tehran Stock Exchange .................................................................................................. 36
9.2 The Gold and Foreign Exchange Markets ...................................................................... 37
10 Trade and Commodities ....................................................................................................... 39
10.1 Oil Derivatives Top the List of Non-Oil Exports ............................................................ 39
10.1.1 Positive and negative balances ............................................................................... 40
10.1.2 A fall in carpet exports ............................................................................................. 41
10.1.3 Khandan pistachios................................................................................................. 42
10.1.4 Main export items ................................................................................................... 42
10.1.5 The UAE still full steam ahead ............................................................................... 42
10.1.6 27% growth of rice imports ..................................................................................... 43
10.1.7 155% growth of cigarette imports ........................................................................... 43

About: 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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