Jan 8, 2015

The Iranian economy has embarked on 2015 with a number of challenges that will directly influence the overall economic performance of the country. Low and falling oil prices as well as the wait-and-see mode in the nuclear negotiations are inducing massive uncertainties into Iran’s economic outlook.

Since the extension of the nuclear talks on Nov. 24, the Iranian rial has lost 7% of its value on the free currency market and is now trading at 35,000 rials to the dollar. The concern about the outcome of negotiations as well as worries about the negative impact of a low oil price on the government’s financial position are driving the market, despite reassurances by the Central Bank of Iran (CBI) that a collapse of the rial would not be on the horizon. Nonetheless, the markets are nervous and the overall trend is to use the hedging effect of hard currency investments in an uncertain economic environment. The same can be witnessed in investor behavior at the Tehran Stock Exchange, which remains a depressed capital market because of political uncertainties. In this context, the government and CBI will have to keep an eye on the hard currency and stock markets to fulfill their commitment to maintaining a degree of stability in the value of the national currency.

Of course, key concerns are related to the fall of the international oil price that has caused headaches for the government and private sector alike. While the government projected a per barrel oil price of $72 in the submitted budget bill, the parliamentarians will have to revise the price in the final budget law for the next Iranian year that will start March 21. In fact, leading Majles deputies are working on a law that would eventually make Iran’s state budgets independent of oil export revenue. The new law, if passed, would provide for the payment of the entire oil export revenue into the National Development Fund as opposed to currently only 20%. Though the new law will not take effect in the immediate future, it indicates Iranian officials' desire to reduce the economy’s vulnerability to oil price fluctuations.

As far as next year’s budget is concerned, the government has already tried to reduce the dependence on oil export revenues by increasing the planned proceeds from taxation and privatization. In addition to increasing tax revenues in the short run, the government has two main sources to ease the emerging financial tensions: First and foremost, it can privatize some large state-owned enterprises. Initially, the Hassan Rouhani administration had decided to pursue a slower pace of privatization that had resulted in a reduction of privatization proceeds in the current Iranian year. In fact, privatization proceeds peaked in the year ending on March 20, 2013, totaling $18 billion, but in the current Iranian year, privatization proceeds have so far amounted to $1.4 billion, which is both a reflection of government policy as well as investor disinterest. For the next Iranian year, the administration has projected some $38 billion in privatization proceeds (both in transfer of shares as well as sale of financial assets) that can only be achieved if some of the lucrative state companies are privatized.

Another potential for easing the financial pressure will be the policy on cash handouts within the continued subsidy reform process. It is now well established that the government wishes to remove higher income classes from the list of cash handout recipients. Any reduction of the actual bill for cash handouts accompanied by higher revenues through an upward correction of fuel prices will help ease the government’s financial position.