Iran’s leadership is not satisfied with the pace and the way in which international sanctions are about to be lifted definitively. On the one hand, Iran still has many difficulties in having access to global financial markets by using standard procedures; on the other hand there are significant shortcomings and delays in the domestic banking system.
The current yearly inflation rate is 11.9%; the maximum interest rate has fallen from 24% to 22% while, as announced by President Rowhani, the trade surplus is now positive for the first time after 37 years.
At the end of March 2016, the oil and non-oil exports were 41 billion and 42 billion Us dollars, respectively, with an expected annual growth of 0.7% only.
The exports of the free economic zone of Anzali, in the Northern province of Gilan, are growing to an impressive level of 40 million US dollars as against the 20 million US dollars of last year.
Iran’s economy clearly needs to quickly reduce its dependence on oil sales, while the Bandar Abbas refinery will be doubled in terms of extraction and condensation of natural gas, with capital and equipment largely of Iranian origin.
Here the real problem is cultural and political: the Iranian banking system has been segregated for many years with respect to international flows and now the country’s financial leaders do not know how to handle the new, inevitable globalization of the Shiite Iran.
In the research centres of European financial companies there are those who maintain that the Iranian banking system is so badly run, and with such a dominance of political and sectarian mortmain, that the structural crisis of the sector is supposed to break out in three years, at the maximum.
Furthermore the Finance Minister, Ali Tayyebna, has long been maintaining that the government should refinance banks due to the losses resulting from the fall in international oil prices, while the Iranian Central Bank states that the government debt to banks is 33 billion US dollars or even more.
The cases of economic and financial corruption are commonplace and the Iranian banking institutions are accustomed to obscure, personal and ambiguous operations and transactions, partially because of the old closure to international markets.
An international Forum of Iranian banks is scheduled in Berlin in mid-May.
While, as is likely, a global recession will take place in the coming months, due to the fact that the US banks are not convinced of the effectiveness and solvency of the new loans and of the possible 2% inflation rate, the US bankers believe that, with the current North American growth pace, recovery will occur in 2020.
If these are the US forecasts, we can imagine Iran’s geoeconomic difficulties, especially in a much more fragmented, competitive, non-OPEC oil market than the one which has characterized the religious Welfare State since 1979.
After the end of sanctions, however, Iran’s real problem is the lack of productive investment and the weakness of internal technologies for extraction and diversification.
Either they buy them abroad, but banks are mistrustful, or they produce them inside, with higher costs and less effective technological efficacy.
Here the book by the economist Arghiri Emmanuel comes to our mind, namely the Unequal Exchange, which takes place when the economic exchange between the First and the Third World stabilizes at an internationally equalized average rate of profit.
Thus it happens that the third world country’s terms of trade always tend to decrease in real terms.
Hence a similar phenomenon happens, though in a geopolitical context very different from the one of the 1960s, when Emmanuel wrote.
Iran’s average income tends to decrease even at exchange rate parity.
Considering their low quality in terms of certifications against money laundering, Iranian banks’ debts cannot be “internationalized” and contribute to increase, up to reaching exorbitant usury rates, the interest rate for domestic loans. Or they contribute to make banks themselves go bankrupt and hence move State money which could be better used elsewhere.
Obviously, in this case, the prevailing link is the one between creditors and politicians, or between government institutions, that get money anyway, and individuals, who basically remain outside the credit market.
The non-performing loans (NPL) account for at least 20% of the total loans granted by the Iranian banks. Hence, if international finance does not trust the Iranian banking market – and rightfully so – at least 37% of the capital needed in the short term to renew and diversify Iran’s productive structure would be lacking.
If this did not happen, in three-four years, at the maximum, the Iranian banking crisis would be followed by the resumption of a free rider behaviour by Iran, which would have no reason to reduce its points of strategic friction and attrition: Yemen, the Shiite networks in the Emirates, Iraq, the Golan border, Syria and, in the future, Central Asia.
The International Monetary Fund predicts a fall in GDP by 3 to 0.5% over the next two years, which will be crucial.
As we have seen, inflation tends to decline, but it is a cyclical effect of the lower prices of food and other basic commodities.
Optimistically the IMF has forecast that, after the end of sanctions, the GDP should rise to a yearly 5-6% rate but – as another economist of the Emmanuel’s Marxist tradition, James O’Connor, said – the real problem is Iran’s fiscal crisis.
International banks are asking to the Iranian financial holdings and the Shiite government to pursue strong disinflation (which also increases the debt duration) and greater autonomy for the Central Bank, which is still a direct expression of the Supreme Leader.
There is also the problem – shared by many oil-producing countries in the Middle East – of the subsidies to fuel consumption, but the Iranian organization distributing them has reached the break even point since 2015.
So far Iran’s crude oil exports have risen by about one fifth earlier this year, up to 1.5 million barrels per day.
Both for geological and technological reasons, the real production cost of the oil barrel is particularly low, even 1.5 US dollars per barrel.
During the sanctions the production cost per barrel was 5 US dollars. Today oil overproduction is 2%, but Iran wants to get to 500 billion barrels per year, which account for 0.5% of world production, so as to spread its credit weaknesses on a large mass of exports and acquire “easy money.”
It is true, however, that many calculate the break even point of the Iranian oil barrel at a much higher price, namely 136 dollars per barrel, but we must not forget that, in this case, the costs also include the FOB marketing expenses, transportation costs and taxes.
Iran, however, has a break even point which is lower than Nigeria’s and Venezuela’s (which is the most expensive oil barrel in the world in terms of extraction costs), but much higher than Bahrain’s, where there are many Shiites, and Saudi Arabia’s (93.1 US dollars) where the followers of Imam Ali are the majority precisely among oil workers and in the extraction areas.
With the money from large oil sales, Iran wants to renew its infrastructure, support economic diversification and, above all, expand its domestic market.
But will it be an operation without dangers? It is too early to say so, as Zhou Enlai said to Kissinger, when he asked him what the Chinese Communists thought of the French Revolution of 1789.
But the net cost for supporting the Iranian ruling classes is such as to make it difficult to reach these goals.
Ali Khamenei, the Supreme Guide, the Rahbar, has a personal business empire of 95 billion US dollars.
Other members of the Shiite nomenklatura manage similar assets.
As is happening in Italy and in other Western countries, we are faced with the ruling classes’ corruption, which becomes the main impediment to economic growth.
Nevertheless only Venezuela, Saudi Arabia and Canada have larger oil reserves than Iran.
Iran has more oil than Iraq, Kuwait and Libya put together.
Therefore, on the basis of these data and statistics, some geopolitical options can be inferred: the contrast with Saudi Arabia is bound to increase, while Iran will have every interest in limiting the Sunni expansion in Libya and Kuwait, as a Shiite minority survives in the latter.
Hence an oil geopolitics uniting all the followers of Imam Ali under Iran’s guidance and leadership, for a clash with Saudi Arabia which will be not only military, but also financial.
However, will Iran succeed in having capital available in the short to medium term, which will be used for oil production expansion without limiting the growth of the internal market, which is the key to its political stability?
If the “power circles” step aside, and Iranian banks’ efficiency improves, something positive could happen.
Conversely, if political and private corruption increases or remain stable, either the investments for the oil upgrade or the internal market’s growth, which could trigger off many and unpredictable mass revolts, will be negatively affected.
Nevertheless, if the ruling class’ liquidity decreases, also the right and left electoral base of a large part of the regime shrinks – an electoral base that is often patronage-based
At strategic level, whatever happens to the Iranian banking issue, the end of sanctions will bring Iran closer to the United States, which will probably not fail to support some sectoral investments of the Shiite regime.
While, in this new scenario, Saudi Arabia will play some of its cards as free rider in the Middle East, by funding – despite its financial crisis which is more severe than Iran’s – some proxy wars in the Gulf, in the Maghreb region and, possibly, even in Central Asia.
Bangladesh-Myanmar Economic Ties: Addressing the Next Generation Challenges
Bangladesh-Myanmar relations have developed through phases of cooperation and conflict. Conflict in this case is not meant in the sense of confrontation, but only in the sense of conflict of interests and resultant diplomatic face-offs. Myanmar is the only other neighbor that Bangladesh has on its border besides India. It is the potential gateway for an alternative land route opening towards China and South-East Asia other than the sea. Historically, these two countries have geographic and cultural linkages. These two bordering countries, located in separate geopolitical regions, have huge possibilities in developing their bilateral economic relations. At the initial phase of their statehood, both countries undertook numerous constructive initiatives to improve their relations. Nevertheless, different bilateral disputes and challenges troubled entire range of cooperation. Subsequent to these challenges, Bangladesh and Myanmar have started negotiation process on key dubious issues. The economic rationales over political tensions in Bangladesh-Myanmar relations prevail with new prospects and opportunities.
Bangladesh-Myanmar relations officially began from 13 January 1972, the date on which Myanmar, as the sixth state, recognized Bangladesh as a sovereign nation. They signed several agreements on trade and business such as general trade agreement in 1973. The two countries later initiated formal trade relations on 05 September 1995. To increase demand for Bangladeshi products in Myanmar, Bangladesh opened trade exhibitions from 1995 to 1996 in Yangon, former capital of Myanmar. However, that pleasant bilateral economic relations did not last for long, rather was soon interrupted mainly by Myanmar’s long term authoritarian rule and isolationist economic policy. In the twenty-first century, Bangladesh-Myanmar relations are expected to move towards greater economic cooperation facilitated by two significant factors. First, the victory of Myanmar’s pro-democratic leader, Aung San Suu Kyi, in 2011 has considerably brought new dimensions in the relations. Although this relation is now at stake since the state power has been taken over by military. Second, the peaceful settlement of Bangladesh-Myanmar maritime dispute in 2012 added new dimension in their economic relations.
Bangladesh and Myanmar don’t share a substantial volume of trade and neither is in the list of largest trading partners. Bangladesh’s total export and import with Myanmar is trifling compared to the total export and import and so do Myanmar’s. But gradually the trades between the countries are increasing and the trend is for the last 5 to 6 year is upward especially for Bangladesh; although Bangladesh is facing a negative trend in Balance of Payment. In 2018-2019 fiscal year, Bangladesh’s total export to Myanmar was $25.11 million which is more than double from that of the export in 2011-12. Bangladesh imported $90.91 million worth goods and services from Myanmar resulting in $65 Million deficit in Balance of Payment in 2018-2019 fiscal year. For the last six or seven years, Bangladesh’s Balance of Payment was continuously in deficit in case of trade with Myanmar. The outbreak of COVID-19, closure of border for eight months and recent coup in Myanmar have a negative impact on the trade between the countries.
Bangladesh mainly imports livestock, vegetable products including onion, prepared foodstuffs, beverages, tobacco, plastics, raw hides and skin, leather, wood and articles of woods, footwear, textiles and artificial human hair from Myanmar. Recently, due to India’s ban on cattle export, Myanmar has emerged as a new exporter of live animals to Bangladesh especially during the Eid ul-Adha with a cheaper rate than India. On the hand, Bangladesh exports frozen foods, chemicals, leather, agro-products, jute products, knitwear, fish, timber and woven garments to Myanmar.
Unresolved Rohingya crisis, Myanmar’s highly unpredictable political landscape, lack of bilateral connectivity, shadow economy created from illegal activities, distrust created due to different insurgent groups, maritime boundary dispute, illegal drugs and arms smuggling in border areas, skeptic mindset of the people in both fronts and alleged cross border movement of insurgents are acting as stumbling block in bolstering economic relations between Bangladesh and Myanmar.
Bangladesh-Myanmar relations are yet to blossom in full swing. The agreement signed by Sheikh Hasina in 2011 to establish a Joint Commission for Bilateral Cooperation is definitely a proactive step for enhancing trade. People to people contact can be increased for building mutual confidence and trust. Frequent visit by business, civil society, military and civil administration delegates may be organized for better understanding and communication. Both countries may explore economic potential and address common interest for enhancing economic co-operation. In order to augment trade, both countries may ease visa restrictions, deregulate currency restrictions and establish smooth channel of financial transactions. Coastal shipping (especially cargo vessels between Chittagong and Sittwe), air and road connectivity may be developed to inflate trade and tourism. Bangladesh and Myanmar may establish “Point of Contact” to facilitate first-hand information exchange for greater openness. Initiative may be taken to sign Preferential Trade Agreement (PTA) within the ambit of which potential export items from both countries would be allowed to enter duty free. In recent year, Bangladesh was badly affected by many unilateral decisions of India such as onion crisis. Myanmar can serve as an alternative import source of crops and animals for Bangladesh to lessen dependence upon India.
Myanmar’s currency is highly devaluated for a long time due to its political turmoil and sanctions by the west. Myanmar can strengthen its currency value by escalating trade volume with Bangladesh. These two countries can fortify their local economy in boarder areas by establishing border haats. Cooperation between these two countries on “Blue Economy” may be source of strategic advantages mainly by exporting marine goods and service. Last but not the least, the peaceful settlement of maritime boundary disputes between Bangladesh and Myanmar in 2012 may be capitalized to add new dimension in their bilateral economic relations. Both nations can expand trade and investment by utilizing the Memorandum of Understanding on the establishment of a Joint Business Council (JBC) between the Republic of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).
With the start of a new phase in Bangladesh-Myanmar relations, which has put the bilateral relations on an upswing, it is only natural that both sides should try to give a boost to bilateral trade. Bilateral trade is not challenge free but the issue is far easier to resolve than others. At the same time, closer economic ties could also help in resolving other bilateral disputes. For Myanmar, as it is facing currency devaluation and losing market, increased trade volume will make their economy vibrant. For Bangladesh, it is a good opportunity to use the momentum to minimize trade deficits and reduce dependency on any specific country.
The Monetary Policy of Pakistan: SBP Maintains the Policy Rate
The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.
The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.
Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22.
Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.
Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.
The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.
Reforms Key to Romania’s Resilient Recovery
Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.
Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.
The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.
Yet the road ahead remains highly uncertain, and Romania faces several important challenges.
The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.
Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.
Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.
The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.
How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?
Reforms in several key areas can pave the way forward.
First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.
Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.
Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.
Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.
Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.
None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.
Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.
I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.
First appeared in Romanian language in Digi24.ro, via World Bank
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