Islamic Republic of Iran was formerly known as Persia until 1935, Iran with its long 2500 year history is continually evolving as a nation. The most recent fundamental change that will impact their national currency, the Iranian rial, is the dramatic change in demographics for this nation of 69 million people. At present, over 50 percent of the population are under age 25 and 70 percent are under age 35. As a nation of young people of which the majority were born after the 1979 Islamic religious revolution within Iran, this segment of Iranian society overwhelmingly support President Khatami and his free market reform policies. Unfortunately, progress with reforms has been slow and difficult as upwards of 40 percent of Iranians still live below the poverty line. The future for Iran is a nation shifting towards Western values and economics. The government leadership under President Khatami is pursuing free market reforms with closer economic ties with Western European investment, particularly for Iran’s oil industry. Today, Iran is considered to follow a political structure of a ‘theocratic regime’, a religious democracy where the Iranian Supreme Leader has final political authority. Although not a true democracy, Iran follows more of an authoritarian regime, there are democratic elements. Below is a summary currency analysis of BankINTRO.com’s research findings with regard to the Iran’s national currency, the Iranian rial.
Summary Overview of Present Iran - July 2004
Iran politically dramatically changed course in 1997 with the election of Liberal thinkers such as President Mohammad Khatami. By year 2000, further Liberal Reform candidates were elected in a landslide parliamentary election. Even with the control of both the executive and legislative branches, Liberals have had a difficult time implementing democratic reforms as hard-line cleric Conservatives who control the Judiciary and the Guardian Council have blocked legislation. The Guardian Council consists of 12 members appointed by Iran’s religious Supreme Leader, current leader is Ayatollah Ali Khamenei who holds great political power in Iran. The hard-line cleric Conservatives are close to the Guardian Council and their views thus enables them to hold immense political power as they are able to use its veto power to reject Liberal reforms. Further, the Judiciary has great influence with the media and politicians who have criticized the Conservatives have been arrested and/or thrown in prison. By early 2004, Liberals were defeated as the Judiciary disqualified 2,400 Liberal/Reform candidates to participate in the February 2004 parliamentary elections as many of those disqualified were indifferent and/or in opposition to Islam ideology. Conservatives then won the election on low voter turnout and thus will hold legislative power for the next 4 years.
Internationally, Iran is following a controversial foreign policy platform to be further detailed below in this currency analysis. In January 2002 at the time, U.S. President George W. Bush labelled Iran along with North Korea and Iraq as part of an axis of evil club. At present, the United States does not have diplomatic relations with Iran. It should be noted that although much of Iran follows Islamic views, Iranian Islam is different to Arab Islam. Iran is not an Arab country and holds a much different independent culture to countries in the Muslim world.
POLITICS: a nation of political extremes and wide differences in philosophy and stewardship for the future. The current administration is under the leadership of moderate President Khatami and his pro-Reform Liberal government which was first elected in 1997 and re-elected in a landslide in June 2001. Next Presidential election is scheduled for June 2005. President Khatami wishes to preserve Islamic democracy that maintains religious values but permits Western style political ideals such as free expression, free market economic reforms including privatization and a lifestyle similar to those in the West with a higher standard of living. In opposition to Khatami are the Conservative clerical forces that made Iran an Islamic republic on April 1, 1979 when then Supreme Leader Ayatollah Ruhollah Khomeini took over power and dismantled Westernizing forces and implemented change to strict Iranian Islamic views. President Khatami and his Reform government are basically govern under the authority of the ruling Conservative clerics, Revolutionary Guard, Guardian Council and the Supreme Leader.
Since year 2000 when the Conservative hard-line clerics lost control of parliament, they have influenced public policy by having the Judiciary and Conservatives who hold many influential positions within the entrenched bureaucracy as a method to maintaining their views. In February 2004, the hard-line Conservative regained control of the parliament as they continue to support repression as a means with the closing of Liberal newspapers and social issues with respect to Western dress/entertainment. However, the hard-line clerics are now attempting to brand themselves differently as new Conservatives that wish to regain popularity, slow the pace of reform while relaxing their views with a goal of increasing Iranian living standards. The Conservatives have also politcally moderated their tone by making warmer overtures to the United States wishing for better relations and open to the idea of having American companies invest in Iran’s oil & natural gas sector. The future of Iran lies with the young Iranians as domographics overwhelmingly are in their favour, it is the young that may revolt and quite possilby derail any economic progress in the near term.
Reform President Khatami was given a mandate by the people to open society and fix the economy when he took office in 1997. Political risk include the possibility of social unrest with the current fractional political structure within Iran, the Reformers versus the Conservative clerics. Challenges include the elements of hard line repression that is present as noticed with the sentencing of opposition Reformers and others to prison.
Key question to President Khatami and the opposition Conservatives who control the parliament, how quickly should Iran open up to modern Western reforms and influences?
The government plans to diversify the economy, increase international investment from the West and for Iran to seek World Trade Organization (WTO) membership. President Khatami is attempting to establish closer relations with the United States, thus setting the stage for America to consider dropping economic sanctions that are preventing Iran from attaining a higher standard of living. Iran is also taking a course to improve economic relations with several other country’s including Thailand, Egypt, Saudi Arabia and their 1980’s bitter enemy Iraq which is now under new political leadership. Iranian foreign policy now follows an outward looking vision as President Khatami realizes the importance of opening up Iran’s economy to Western direct foreign investment. As the economy strengthens coupled with Iran’s young population, the culture is slowly changing more towards Western values. This is a dramatic strategic shift in thinking when compared to 1979 Iran, this shift will be very supportive for the Iranian rial looking forward.
ECONOMY: the current situation is manageable and improving although a socialist state style spending economic structure remains. The economy consists of a mix of central planning, state ownership of oil and other industries. For the most part, private enterprise is minimal as inefficient state planning remains with an economy enduring moderate to high inflation. Industries include petroleum, petrochemicals, textiles, construction, food processing, agriculture, small trading ventures, etc. The oil industry dominates the financial landscape for Iran. Over the last few years, higher world oil prices when compared to years prior to 1998 have boosted fiscal revenues which have helped Iran turnaround financially. From years 1994-98, the government ran a budget deficit but this sharply turned around in 1999 with the higher oil price. Iran’s service sector accounts for 45 percent of GDP. Unemployment is a national problem as the official rate is 14 percent but the actual unofficial rate is more like 25 percent of the workforce. Inefficient state subsidies still play a large economic role within Iran with subsidies available for energy (ie. gasoline). Oil exports and expected increases from natural gas revenues represent the majority of foreign exchange earnings for Iran.
In 1996, America passed a very damaging law to Iran ‘1996 Iran-Libya Sanctions Act’ which implemented strict economic sanctions prohibiting U.S. companies from doing business with Iran.. In 1998, the Iranian government updated their mining laws to encourage foreign investment to capitalize on Iranian mineral assets with modern Western technology, this was noticed in year 2001 when a Canadian mining firm joint ventured with an Iranian company in the area of zinc mining. Foreign technology and capital will create high paying jobs for Iran’s mining industry. It is in this natural resources industries that Iran has huge economic development potential to propel the nation to a much higher standard of living. Iran also in 2001 announced a new car production line for the ‘Sinad’, a sport utility vehicle for the Iranian market. In March 2000, the U.S. lifted certain sanctions against Iranian luxury goods. In 2002, Iran passed liberalized foreign investment laws to attract FDI in order to open up the economy and to diversify away from the nation’s dependence on petroleum energy resources.
Future economic growth for Iran to be more tied to Europe and Asia with increased trade via Iranian energy exports and a goal of joining the WTO thus integrating into the global economy. Expect the ruling Conservatives in parliament to keep their tight control/repression on social issues and political control while gradually implementing slow economic liberalization. The Reformers have had some great successes including simplifying the tax code, opening up of the economy to investment and in areas of modest privatization and the removal of some subsidies.
Economic Statistics
GDP stands at $478 billion USD (2003) as measured by purchasing power parity with corresponding GDP/Capita at $7,000 USD (2003). Conversely, market GDP stands at $135 billion USD (2003). Real GDP for 2004 is projected at 6.5 percent of GDP, year 2005 at 5.8 percent. Growth rates have had year 2003 at 6 percent, 2002 at 5.8 percent, 2001 at 4 percent and 2000 at 3.5 percent. Inflation figures are as follows: year 2004 to date is running at the 15 percent level, year 2003 at 18 percent, 2001 came in at 11.5 percent, year 2000 at 16 percent, 1999 at 21 percent, 1996 at 28.9 percent and 1995 at 49.7 percent. Iran recorded a fiscal deficit of 2.3 percent of GDP for 2003 after recording a surplus of 1.8 percent in 2002 due to the cost of unification of its exchange rate. Iran mostly runs a surplus in its current account with year 2003 at 3 percent of GDP, 2002 at 5.3 percent, year 2001 at 6.8 percent. Trade surplus stood at $4.6 billion USD for 2003. Military spending for Iran came in at 3.3 percent of GDP for year 2003. Exports: Japan, China. Imports: Germany, Switzerland.
Oil & Natural Gas Industry
Oil & natural gas account for over 75 percent of hard currency earnings, 50 percent of government revenues and 85 percent of export earnings. As an oil reliant economy, President Khatami wishes to diversify away from oil and to encourage foreign investment in the development of new industries. As OPEC’s second largest producer, production for October 2003 came in at 3.74 million bpd of which 2 million bpd was destined for exports representing domestic oil consumption of 1.7 million bpd. Iran currently holds 133 billion barrels of proven oil reserves (according to the OPEC.org website) or about 7 percent of the world’s total. Iran also holds the world’s second largest reserves of natural gas reserves behind that of only Russia at 27.6 trillion cu m. It certainly appears that natural gas will be a huge financial windfall for Iran with new foreign exchange earnings as the pipeline from Iran to Anakara, Turkey will feed energy markets in Euorpe.
At present, over 50 percent of Iranian oil goes to markets in Asia, rest goes to Europe & Africa. At times Iran has threatened to leave OPEC and does have a goal of producing 10 million bpd within 10 years. Iran has a 13 percent share (2002) of OPEC’s quota. In order to achieve this production goal, it is projected that Iran will require $30 billion USD equivalent over the next 10 years for capital investment just to keep oil output at 3 to 4 million bpd. Over $12 billion USD has been committed for development of Iran’s rich energy resources. Many of these oil & gas projects are being snapped up by large European & Asian energy congolomerates as American companies are barred from doing business with Iran in lieu of the US law of the 1996 Iran-Libya Sanctions Act. Of concern to FDI is the bureaucratic nature of the Iranian oil industry as red-tape can slow down progress of development.
POSITIVE: privatization and free market reforms are taking hold, the government is moving towards adopting internationally accepted accounting rules. Tehran Stock Excahnge (TSE) is in operation. CONCERN: limited political expression, environmental air pollution, droughts & floods, earthquakes, media restrictions (ie. Reformist news), upwards of 2 million Iranians addicted to opium, telecommunication system.
BANKING SYSTEM: Islamic banking, Iran created the first Islamic bank. For the most part, the banking system is all state-owned since it was nationalized with the Islamic movement in 1979. However, new reforms and change is taking hold as private banks with no government shareholders are now being licensed. Privatization will make the system more efficient and provide for a real return to depositors unlike Islamic banking. During year 2001, the Central Bank of Iran ‘Bank Markazi’ received in excess of 30 applications for establishing a private bank with the first private bank granted status, ‘Modern Economic Bank’. These changes are required as Iran cannot afford to subsidize the industry as it has in the past. During year 2001, the government subsidized the banking system to the tune of $625 million USD to recapitalize 7 state-run banks. At present, state banks remain unprofitable and inefficient with a high cost structure. The economy and banking system with modernization is presently tapping international capital markets for raising monies. The Central Bank is responsible for monetary policy and issuing of banknotes & coinage. With the rise in energy prices over the last few years, Iran has benifitted as it now holds $22 billion USD in foreign exchange reserves representing 6 months of import coverage. Of immediate concern is the alarming rate of increase over the last 5 years in the domestic money supply. During year 2003 alone, money supply component M3 increased 30 percent in value while at the same time a large increase in private sector credit took place accounting for the rise in Iranian real estate values reflecting the global trend.
REGIONAL: Afghanistan, Iraq and Iran’s Foreign Policy Quagmire<
The military defeat of the Taliban regime in Afhanistan is positive with a new government under that of President Karzai although terrorist networks and difficulties with regional war-lords remain. This positive political change within relatively peaceful Afghanistan will help the Iranian economy in the areas of energy exploration, selling consumer goods within Afghanistan and its transportation networks. It should be noted that Iran did not support the Taliban regime. The Iraq transition to domestic democratic leadership is positive as Iran is happy to see former Iraqi leader Saddam Hussein removed from power as a painful 8 year war with Iraq during the 1980’s still scars Iran, future Iraqi military threat is greatly minimized. To date, the new government in Iraq did not result in any significant Iranian influence as much of southern Iraq with the Shiites share similar religious values with Iran. Elsewhere in the Middle East region, further domestic political stability risk within Saudia Arabia is prevalent as the ruling House of Saud is facing violent opposition now from various groups. Iran with its destabilizing foreign policy objectives such as Iran’s support of militant Arab groups in the Israeli-Palestinian dispute coupled with negative statements toward Israel certainly does not help Iran in areas of FDI.
KNOWLEDGE: Iran’s Nuclear Program At present, Iran has been working on a controversial nuclear program that the Iranian government says is for peaceful electrical energy purposes but criticized by those in the West including the United States as a secret program for development of nuclear weapons. Iran’s nuclear program is a major source of national pride. Iranian officials have apparently volunteered to stop a program of enriching uranium for weapons systems although rumours are persist that Iran has had nuclear technology knowledge transferred from Pakistan. Back in year 2001, Israeli foreign minister Peres alleged that former powerful Iranian President Rafsanjani was obtaining nuclear weapons materials to destroy Israel and undermine Western interests. However, that hard-line opinion was not shared by Iran’s current Reformers and President Khatami. The risk for Iran with its nuclear ambitions and risky foreign policy stand is that economic superpowers such as the United States along with other large economies may yield influence over Iran by increasing funding and support for Iranian opposition groups until these conflicting issues are resolved. Iran’s nuclear programme is thought to be in place to counterbalance the threat from Israel which is believed to have upwards of 100 nuclear weapons. To date, Iran is cooperating with inspectors from the International Atomic Energy Agency (IAEA). Russia is also had talks with regard to supplying nuclear energy plants and military hardware to Iran. The significant risk for Iran and its currency is the possibility for a United States or Israeli military strike against Iranian nuclear facilities. Foreign investors want long term stability and Iran’s nuclear program raises this risk level and discourages FDI.
CURRENCY: ISO Symbol ‘IRR’, Iranian rial. At the time of review on July 19, 2004, the Iranian rial had an exchange valuation of 8665 IRR to the US-dollar (‘USD’) or equivalent to 10,755 IRR to the Euroland euro (‘EUR’). Since exchange unification in March 2002, the rial has been relatively stable in the market. The rial’s official exchange rate was pegged at 1752 rials to the USD in 2001 before unification of offical and market exchange rates. Exchange unification essentially wiped out the black market for the rial. Currency controls on current account tranasactions are in place although expected to be phased out. At present, Iran follows a managed floating exchange rate regime since unification 2 years ago. Iran’s Central Bank smoothes out exchange valuations from time to time against a basket of currencies.
CURRENCY HISTORY: on December 23, 2001, President Khatami announced that Iran would switch to a single exchange rate for the rial. This was one of the biggest reforms to date for his presidency. This was the end of the official rate of 1750 rials to the USD as it was replaced by a rate closer to the black market rate of 8000 IRR to the USD although it is believed that the rate being used by the Tehran Stock Exchange of 7863 to the USD (year 2001) will be used. This currency move was designed to help with the transparency of transactions which diminished a large source of rackateering. Other historical quotes include: year 2003 at 8194 IRR to the USD, year 2002 average at 6906, May 2002 market rate at 7930 IRR to the USD, January 7, 2000 official rate at 1752, and February 1999 (low - market rate) at 8750 IRR to the USD. Prior to exchange unification in 2002, Iran basically had 3 different official exchange rates in place which included 1750 IRR to the USD for state transactions, a second rate of 3,000 for licensed exporters and an exchange rate of 5,700 for some authorized travellers.
CURRENCY FORECAST: mixed with fallout from nuclear debate and flawed foreign policy ideology as set by Iran’s Islamic political leadership. Conversely, President Khatami’s outreach to the West in the past may result in a payoff down the road if the United States completely lifts economic sanctions, particularly allowing for U.S. cooperation in the Iranian oil industry. Iran is rich in oil & natural gas reserves and the near term ability of increasing these reserves dramatically with Caspian Sea oil. This region is home to the the world’s fourth largest oil & natural gas basin which is shared amongst several neighbouring countries including Russia. Iran with its extensive network of energy pipelines and its strategic geography can take advantage financially and play a significant role as a transit centre for transporting these energy resources for other countries from the Caspian Sea region to markets in Asia. The rial will strengthen over the long term in terms of purchasing power parity as the majority of the Iranian population are under the age of 35 who support President Khatami’s pro-Reform ideology but most importantly from an expected huge world energy demand with Iran supplying it with Iran’s rich petroleum reserves.
The young people of Iran want a lifestyle similar to those enjoyed in the West as they dislike Iran’s strict Islamic laws. The younger gereration of Iran have taken notice to the new freedoms enjoyed to those in Iraq. Surprisingly today, the majority of Iranians living in Tehran support closer relations with the United States. The currency risk is the stability of the young and the potential of the students for significant urban uprisings, civil disobedience resulting in widespread violence and the looming inherent political instability risk within Iran’s theocratic political structure. Many young Iranians are angered with the authorities over social restrictions and difficult job market. Some thinkers believe that Iran is positioning itself for a domestic revolution similar to the threat taking place within Saudi Arabia today. The medium term economic threat to Iran is finding jobs for the young now graduating en masse as many are leaving Iran for work abroad to seek opportunities.
Market valuation for the rial will largely depend on the value of the world crude oil price and by Iran’s ability to control inflation below the authorities subjective price ceiling of 18 percent. Rapid money supply growth averaging 20 to 30 percent per annum over the last 5 years has built in price pressures supplying a realistic inflation risk in the near to medium term. Potential rial appreciation pressure will be further aided by an improvement in foreign exchange reserves which were almost depleted by year-end 1998 from surplus capital inflows with higher levels of foreign direct investment, particularly if and when the United States removes economic sanctions. The immediate challenges for Iran and its currency the rial is the political stability of the Islamic leadership with its backwards and controversial foreign policy which may result in lower foreign direct investment until their foreign policy platform is corrected and resolved. Further economic constraints by major economies abroad such as the United States and/or European countries may result in lower GDP growth for Iran going forward than what could have been expected. In the long term, another viable option that is taking place within the Islamic world is the introduction of a new currency backed by gold, the gold dinar, which may begin to circulate as a parallel currency to the rial.
UPDATED: July 19, 2004
