Our next newsletter (Issue 63) will be published in October 2016.
:In this issue
- The refusal of two of Iran’s largest banks to do business with the Islamic Revolutionary Guards Corp (IRGC) has caused considerable controversy in Iran, with critics accusing the authorities of “self-sanctioning” Iran’s banks.
- On the contrary, Banks Mellah and Sepah are spearheading efforts to reassert the international reputation of Iranian banks. The result will be of benefit to the entire Iranian economy, and should be applauded.
- The toxicity of the dispute reveals the scale of the challenge facing the Rouhani administration’s economic reform agenda. “Opening up” will mean compliance with many more international regulatory and legal frameworks, designed without Iran’s own sensibilities in mind.
- The Central Bank of Iran has taken positive measures to strengthen the financial sector: further widening access to the open market foreign exchange rate and establishing a stress-testing system for Iran’s domestic banks.
- Finally, thirty percent of Iranians are hungry or do not have nightly bread, according to the Ministry of Health, serving a stark reminder of the real costs of foot-dragging over economic reforms.
- With nine months to go to the Iranian Presidential election, time is running out for President Rouhani to prove the value of the JCPOA to the voting public. Latest figures suggest the economy underperformed last year with GDP growth of 0.7%.
- Nonetheless, Iran’s oil sector has quickly recovered market share, with exports now very close to the pre-sanctions level of 2.2 million barrels per day (mbpd).
- To reach its stated goal of 5mbpd crude output, Iran must invest heavily in its long-neglected oilfields, which have been starved of investment for decades. The new Iranian Petroleum Contract (IPC) will be vital to unlocking that investment.
- The Central Bank of Iran is making real progress towards a unification of the country’s dual exchange rates. Recent moves have given hard currency earners more confidence in depositing their hard currency earnings and will deliver efficiency savings and reduce the opportunity for graft.
- A recent study by the World Economic Forum found empirical evidence of the impact deeply-embedded corruption can have on the economy. Iran bears the hallmarks of an economy under the strain of endemic mismanagement and corruption across both the private and public sectors.
- Many commentators in Iran blame the US for Iran’s stagnant economy, but to continue to blame external parties delays progress. Verity Iran’s sources consistently point to the risks and uncertainties within the Iranian business environment as the chief cause for concern amongst foreign investors.
- One year away from the Presidential election, one year since the signing of the JCPOA, the Rouhani administration still has its work cut out to convince the Iranian people of the merits of the nuclear deal.
- The Rouhani government can take credit for a generally sound and stable stewardship of the economy but the economic dividends that many hoped would follow the signing of the JCPOA have been slow to materialise. Ordinary households are still struggling to see a real difference in their pockets.
- The same obstacles continue to face foreign investors: a lack of assurances about the rule of law, opaque ownership structures, the role of the security services and intelligence agencies in the economy and widespread corruption.
- The recent salary scandal in the state sector has highlighted what appears to be an intractable corruption problem. Senior officials say the problem was inherited from the previous administration, which is true to an extent.
- But corruption and rent-seeking are so deeply embedded in the Iranian economy, small measures are futile, only a significant shift in the economic system will correct it. This will be a defining factor in Iran’s economic resurgence.
- The Central Bank of Iran has published its roadmap for banking reform with two new bills set to enter Parliament that could shake up how banking and business are done.
- As part of the reforms, the government will aim to leverage the bond markets to repay its debts to the banking sector, which could help stimulate lending activity in the economy.
- The JCPOA was given a boost by the US Secretary of State’s public assurances about the legalities of doing business with Iran. Secretary of State Kerry met with European banks in London to discuss the issues involved in rebuilding relationships with Iranian entities.
- The constructive engagement between Iranian and US authorities is a sign of how much bilateral relations have matured. Banks however will ultimately look for assurances from the US regulatory and law-enforcement authorities as well as the State Department if they are to change their behaviour.
- Even if the sanctions threat can be eased, there are other sizeable obstacles to overcome in attracting foreign investment to Iran. The Iranian Foreign Ministry acknowledged that corruption, money-laundering, uncertain regulatory boundaries and opaque ownership eat away at the sense of security and control foreign businesses need to feel in their overseas investments.
- The Rouhani administration recognises this and will require time to get it right. Rouhani claims “only 3 months have passed since implementation day, not 30 years”.
- There are signs of positive activity, including a constant flow of visitors exploring Iranian opportunities and Europeans raising capital for Iranian investments.
- A report by the International Energy Agency (IEA) also suggested Iran’s crude oil production had risen to pre-sanctions levels and could rise further.
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