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Frank Gallagher

Tough Times Ahead for the Iranian Economy - Brookings Institution - 0 views

www.brookings.edu/...0406_iran_salehi_isfahani.aspx

Iran Economy Inflation Debt Blance of Payments Brookings

shared by Frank Gallagher on 09 Jun 09 - Cached
  • Iran’s economy is facing at least three large imbalances. The most acute is in the balance of payments.
  • Already some candidates are whispering that they favor lowering the exchange rate (increasing the value of the rial relative to other currencies) in order to fight inflation. These candidates would lead voters to believe that they can have their cake and eat it too
  • In these times of frozen international credit markets and economic sanctions against Iran, the second option of foreign borrowing is less likely than it was in the 1990s, but the risk of state-owned enterprises racking up foreign debts using short-term credit from eager overseas suppliers is not altogether gone. This is precisely what they did in the early 1990s, which deepened the post-oil boom slump and halted Rafsanjani’s reforms. Anticipating devaluation and government bailout, these enterprises incurred $10 billion in new short term debt alone between 1991 and 1993. Their actions forced the highly anticipated devaluation of the rial by a factor of 27 during the same period and forced the government to accept this debt as its own.
  • ...5 more annotations...
  • Repeating the past is more likely to come in the form of the politically more palatable option of simply cutting imports. Such a policy will be costly in terms of jobs and growth, but will unfortunately appeal to any one of the current leading candidates (Mehdi Karroubi, Mir Hossein Moussavi, and Ahmadinejad), all of whom have strong dirigiste tendencies and would welcome the power over the private sector which comes with overseeing the allocation of the anticipated $40 billion of oil earnings to industries and individuals.
  • The second imbalance is in the government budget.
  • if the past is any guide, investment will take the biggest hit.
    • Frank Gallagher
      Frank Gallagher on 09 Jun 09
       
      This pattern has been repeated during Ahmadinejad's term. Soft loans were given out in order to spur the construction of new businesses, but investment levels fell as the new money was either consumed (from imports) or poured into the real estate bubble.
  • The third imbalance is in the country’s financial markets
  • Frank Gallagher on 09 Jun 09
     
    Good backgrounder on the economic hurdles for whoever wins this Friday
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