Iran energy riches fail to bring prosperity
Economy hobbled despite being world’s fourth largest oil producer and having the second biggest reserves of gas after Russia. Why?
LONDON: Civil unrest has flared in Iran even as it powered out of recession following the easing of international sanctions last year.
But economic recovery hasn’t yet fed through to the mass of the people, experts told Arab News.
Sanam Vakil, associate fellow at Chatham House said: “After negative growth, Iranian GDP was at 7 percent in 2016/17, 6 percent driven by hydrocarbon exports.”
Iran is energy-rich, holding the world’s fourth-largest proved crude oil reserves and second-largest when it comes to natural gas, said the US Energy Information Administration.
And yet, despite its lavish endowment of oil and gas, the energy premium had not kicked in — “we should expect a ‘trickle down effect’ that will take time, said Vakil.
The protests were about increased expectations following the nuclear deal which was “oversold” to the Iranian populace, she added.
“It wasn’t as impactful as people thought it would be,” said Vakil.
There was a lack of acknowledgement that there would continue to be a number of obstacles as a result of secondary US sanctions.
A paper from London-based BMI Research, emailed to Arab News said: “Inflation has declined substantially since President Hassan Rouhani entered office in 2013 — but it remains elevated, standing at 9.6 percent year-on-year in November (up from 8.4 percent in October).”
BMI adds: “Unemployment, meanwhile, has risen as upticks in hydrocarbon exports and foreign investment have failed to spur large-scale job creation: It was officially recorded at 12.6 percent of the labor force in July, but is widely assumed to be significantly higher.”
According to BMI, Iranians’ expectations for economic conditions to improve on the back of the 2015 nuclear deal and 2016 lifting of most international sanctions have not been met.
Many (particularly in the more rural areas of the country) perceive the political establishment to be highly corrupt, and not acting in the best interest of ordinary Iranians, said BMI.
Vakil said the Iranian government faces “political obstacles and need to be communicating more.”
“Rouhani is trying to curb corruption, and make institutions more transparent. But some of these institutions are pushing back. There are tensions, the government is running up against clerical foundations … people that account for quite a big percentage of government budget, but don’t want any strings attached (such as transparency),” said Vakil.
Additionally, Rouhani had to pursue banking reform because Iranian banks have a massive percentage of non-performing loans, she said.
A 2017 International Monetary Fund (IMF) report said global banks still face an extremely high compliance burden to do business with Iran.
How can Iran better ramp-up its energy resources to spread prosperity? Vakil said Iranian gas hasn’t really taken off and needs massive investment.
The IMF pointed out that Iran’s natural gas sector had been expanding, but production growth had been lower than expected as a result of the lack of foreign investment and technology.
Located offshore in the Gulf, the South Pars natural gas field holds almost 40 percent of Iran’s gas reserves, but it is being developed mostly by Iranian companies because most international companies have pulled out. The IMF said its development has faced numerous delays.
When it comes to oil, there are several factors at play. Prices are weak, and as the second largest member of OPEC, Iran must comply with production cuts agreed last year. On the other hand, like other countries, it is seeking to boost income from outside the energy sector to cut its dependance on hydrocarbons.
Iran shipped 777 million barrels of crude last year, the state news agency Shana said recently in a report used by Reuters. The same report said Iran exported 490,000 barrels per day of gas condensate.
The combined daily exports of crude oil and condensate were said to be on a par with what the country used to export in oil and condensate before the imposition of economic sanctions because of its nuclear program, according to Shana.
An IMF mission to Iran in December 2017 found that growth had begun to broaden to the nonoil sector.
“Real GDP growth is projected to reach 4.2 percent in 2017/18 and is expected to be sustained or even rise toward 4.5 percent over the medium-term if financial sector reform takes hold,” said the IMF.
But the IMF also argued for faster implementation of structural reforms, completion of anti-money laundering/combating the financing of terrorism reforms, and the removal of obstacles to private sector development that would allow growth to become more diversified, resilient and job intensive.
Credit institutions and banks needed urgent restructuring and recapitalization, it added.
“Despite recent improvements in the business environment, Iran needed to reduce red tape, reform state-owned enterprises and improve transparency about corporate beneficial ownership to attract investment and develop the private sector,” said the IMF.