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.
Transitioning from least developed country status: Are countries better off?
The Least Developed Countries (LDCs) are an internationally defined group of highly vulnerable and structurally constrained economies with extreme levels of poverty. Since the category was created in 1971, on the basis of selected vulnerability indicators, only five countries have graduated and the number of LDCs has doubled. One would intuitively have thought that graduation from LDC status would be something that all LDCs would want to achieve since it seems to suggest that transitioning countries are likely to benefit from increased economic growth, improved human development and reduced susceptibility to natural disasters and trade shocks.
However, when countries graduate they lose international support measures (ISMs) provided by the international community. There is no established institutional mechanism for the phasing out of LDC country-specific benefits. As a result, entities such as the World Bank and the International Monetary Fund may not always be able to support a country’s smooth transition process.
Currently, 14 out of 53 members of the Commonwealth are classified as LDCs and the number is likely to reduce as Bangladesh, Solomon Islands and Vanuatu transition from LDC status by 2021. The three criteria used to assess LDC transition are: Economic Vulnerability Index (EVI), Human Assets Index (HAI) and Gross National Income per capita (GNI). Many of the forthcoming LDC graduates will transition based only on their GNI. This GNI level is normally set at US $ 1,230 but if the GNI reaches twice this level at US $ 2,460 a country can graduate.
So what’s the issue? A recent Commonwealth – Trade Hot Topic publication confirms that most countries graduate only on the basis of their GNI, some of which have not attained significant improvements in human development (HAI) and even more of which fall below the graduation threshold for economic development due to persistent vulnerabilities (EVI). This latter aspect raises the question as to whether transitioning countries will, actually, be better off after they graduate.
Given the loss of ISMs and the persistent economic vulnerabilities of many LDCs, it is no surprise that some countries are actually seeking to delay graduation, Kiribati and Tuvalu being two such Commonwealth countries despite easily surpassing twice the GNI threshold for graduation.
How is it possible that a country can achieve economic growth but not have appreciable improvements in resilience to economic vulnerability? Based on a statistical analysis discussed in the Trade Hot Topic paper, a regression model, based on all forty-seven LDCs, was produced. The model revealed that there was no statistically significant relationship between economic vulnerability and gross national income per capita. The analysis was repeated just for Commonwealth countries and similar results were obtained.
Most importantly, analysis revealed that there was a positive relationship between GNI and EVI. In other words, increases in wealth (using GNI as a proxy) is likely to result in an increase in economic vulnerability. This latter result is counterintuitive since one would expect more wealth to result in less economic vulnerability.
So what’s the take away?
The statistical results do not necessarily imply that improving the factors affecting economic vulnerability cannot result in improvements to economic prosperity. It does suggest, however, that either insufficient efforts have gone into effecting such improvements or that there are natural limits to the extent to which such improvements can be effected.
One thing is clear, the multilateral lending agencies should revisit the removal of measures supporting climate change or other vulnerabilities for LDCs on graduation, since the empirical evidence suggests that countries could fall back into LDC status or stagnate and be unable to achieve sustainable development. Whilst transitioning from LDC status should be desirable, it should not be an end in itself. Rather than to transition and remain extremely vulnerable, countries should be resistant to such change or continue to receive more targeted support until vulnerabilities are reduced to more acceptable levels.
What are your thoughts?
U.S. policy and the Turkish Economic Crisis: Lessons for Pakistan
Over the last week, the Turkish Lira has been dominating headlines the world over as the currency continues to plunge against the US dollar. Currently at the dead center of a series of verbal ripostes between Presidents Donald Trump and Recep Tayyip Erdogan, the rapidly depreciating Lira has taken center stage amidst deteriorating US-Turkey relations that are wreaking havoc across international financial markets. Considering Pakistan’s current economic predicament, the events unfolding in Turkey offer important lessons to the dangers of unsustainable and unrealistic economic policies, within a dramatically changing international scenario. This holds particular importance for Pak-US relations within the context of the impending IMF bailout.
In his most recent statements, Mr. Erdogan has attributed his economy’s dire state of affairs as an ‘Economic War’ being waged against it by the United States. President Trump too has made it evident that the latest rounds of US sanctions that have been placed on Turkey are directly linked to its dissatisfaction with Ankara for detaining American Pastor Andrew Brunson. Mr Bruson along with dozens of others has been charged with terrorism and espionage for his purported links to the 2016 attempted coup against President Erdogan and his government. There is thus a modicum of truth to Mr. Erdogan’s claims that the US sanctions are in fact, being used as leverage against the weakening Lira and the Turkish economy as part of a broader US policy.
However, to say that the latest US sanctions alone are the sole cause of Turkey’s economic woes is a gross understatement. The Lira has for some time remained the worst performing currency in the world; losing half of its value in a year, and dropping by another 20% in just the last week. Just to put the scale of this loss in to perspective, the embattled currency was trading at about 2 Liras to the dollar in mid-2014. The day before yesterday, it was trading at about 7 Liras to the dollar.
While the Pakistani Rupee has also depreciated quite considerably over the last few months, its recent drop (-17% against the dollar over the past 12 months) pales in comparison to the sustained and exponential downfall of the Lira. Yet, both the Turkish and Pakistani economies are at a point where they are experiencing an alarming dearth of foreign exchange reserves that have in turn dramatically increased their international debt obligations.
The ongoing financial crises in both Turkey and Pakistan are similar to the extent that both countries have pursued unsustainable economic policies for the last few years. These have been centered on increased borrowing on the back of overvalued currencies. While this approach had allowed both governments to finance a series of government investments in various projects, the long term implications of this accumulating debt has now caught up with them dramatically. As a result, both countries may soon desperately require IMF assistance; assistance, that in recent times, has become even more overtly conditional on meeting certain US foreign policy requirements.
In the case of Pakistan, these objectives may coincide with recent US pressures to ‘do more’ regarding the Haqqani network; or a deeper examination of the scale and viability of the China- Pakistan Economic Corridor. With regards to the latter, US Secretary of State Mike Pompeo has clearly stated that American Dollars, in the form of IMF funds, to Pakistan should not be used to bailout Chinese investors. The rationale being that a cash-strapped Pakistan is more likely to adversely affect Chinese interests as opposed to US interests in the region at the present. The politics behind the ongoing US-China trade war add even further relevance to this argument.
In the case of Turkey however, which is a major NATO ally, an important emerging market, and a deeply integrated part of the European financial system, there is a lot more at stake in terms of US interests. Turkey’s main lenders comprise largely of Spanish, French and Italian banks whose exposure to the Lira has caused a drastic knock on effect on the Euro. The ensuing uncertainty and volatility that has arisen is likely to prove detrimental to the US’s allies in the EU as well as in key emerging markets across South America, Africa and Asia. This marks the latest example of the US’s departure from maintaining and ensuring the health of the global financial system, as a leading economic power.
Yet, what’s even more unsettling is the fact that while the US is wholly cognizant of these wide-ranging impacts, it remains unfazed in pursuing its unilateral objectives. This is perhaps most evident in the diminishing sanctity of the NATO alliance as a direct outcome of these actions. After the US, Turkey is the second biggest contributor of troops within the NATO framework. As relations between both members continue to deteriorate, Turkey has been more inclined to gravitate towards expanding Russian influence. In effect, contributing to the very anti-thesis of the NATO alliance. The recent dialogues between Presidents Erdogan and Putin, in the wake of US sanctions point markedly towards this dramatic shift.
Based on the above, it has become increasingly evident that US actions have come to stand in direct contrast to the Post-Cold War status quo, which it had itself help set up and maintain over the last three decades. It is rather, the US’s unilateral interests that have now taken increasing precedence over its commitments and leadership of major multilateral frameworks such as the NATO, and the Bretton Woods institutions. This approach while allowing greater flexibility to the US has however come at the cost of ceding space to a fast rising China and an increasingly assertive Russia. The acceleration of both Pak-China and Russo-Turkish cooperation present poignant examples of these developments.
However, while it remains unclear as to how much international influence US policy-makers are willing to cede to the likes of China and Russia over the long-term, their actions have made it clear that US policy and the pursuit of its unilateral objectives would no longer be made hostage to the Geo-Politics of key regions. These include key states at the cross-roads of the world’s potential flash-points such as Turkey and Pakistan.
Therefore, both Turkey and Pakistan would be well advised to factor in these reasons behind the US’s disinterest in their economic and financial predicaments. Especially since both Russia and China are still quite a way from being able to completely supplant the US’s financial and military influence across the world; perhaps a greater modicum of self-sufficiency and sustainability is in order to weather through these shifting dynamics.
Social Mobility and Stronger Private Sector Role are Keys to Growth in the Arab World
In spite of unprecedented improvements in technological readiness, the Arab World continues to struggle to innovate and create broad-based opportunities for its youth. Government-led investment alone will not suffice to channel the energies of society toward more private sector initiative, better education and ultimately more productive jobs and increased social mobility. The Arab World Competitiveness Report 2018 published by the World Economic Forum and the World Bank Group outlines recommendations for the Arab countries to prepare for a new economic context.
The gap between the competitiveness of the Gulf Cooperation Council (GCC) and of the other economies of the region, especially the ones affected by conflict and violence, has further increased over the last decade. However, similarities exist as the drop in oil prices of the past few years has forced even the most affluent countries in the region to question their existing social and economic models. Across the entire region, education is currently not rewarded with better opportunities to the point where the more educated the Arab youth is, the more likely they are to remain unemployed. Financial resources, while available through banks, are rarely distributed out of a small circle of large and established companies; and a complex legal system limits access to resources locked in place and distorts private initiative.
At the same time, a number of countries in the region are trying out new solutions to previously existing barriers to competitiveness.
- In ten years, Morocco has nearly halved its average import tariff from 18.9 to 10.5 percent, facilitated trade and investment and benefited from sustained growth.
- The United Arab Emirates has increased equity investment in technology firms from 100 million to 1.7 billion USD in just two years.
- Bahrain is piloting a new flexi-permit for foreign workers to go beyond the usual sponsorship system that has segmented and created inefficiencies in the labour market of most GCC countries.
- Saudi Arabia has committed to significant changes to its economy and society as part of its Vision 2030 reform plan, and Algeria has tripled internet access among its population in just five years.
“We hope that the 2018 Arab World Competitiveness Report will stimulate discussions resulting in government reforms that could unlock the entrepreneurial potential of the region and its youth,” said Philippe Le Houérou, IFC’s CEO. “We must accelerate progress toward an innovation-driven economic model that creates productive jobs and widespread opportunities.”
“The world is adapting to unprecedented technological changes, shifts in income distribution and the need for more sustainable pathways to economic growth, “added Mirek Dusek, Deputy Head of Geopolitical and Regional Affairs at the World Economic Forum. “Diversification and entrepreneurship are important in generating opportunities for the Arab youth and preparing their countries for the Fourth Industrial Revolution.”
With a few exceptions, such as Jordan, Tunisia and Lebanon, most Arab countries have much less diversified economies than countries in other regions with a similar level of income. For all of them, the way toward less oil-dependent economies is through robust macroeconomic policies that facilitate investment and trade, promotion of exports, improvements in education and initiatives to increase innovation and technological adoption among firms.
Entrepreneurship and broad-based private sector initiative must be a key ingredient to any diversification recipe.
The Arab Competitiveness Report 2018 also features country profiles, available here: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates.
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