Sunday, 24 December, 2017

Iran must not rely on oil to rescue economy

Following the lifting of international sanctions, Iran has high hopes that its oil industry can be a key pillar in its plan to return to economic prosperity, but a senior official at the International Monetary Fund (IMF) is to warn the country that it has greater challenges ahead.

In a speech due to be given on Tuesday by David Lipton, the first deputy managing director of the IMF will warn that Iran can no longer rely on its main export commodity – oil – to be the source of its growth in future.

“I speak here today at a pivotal moment for Iran’s economy,” Lipton is expected to say during the speech at the Central Bank of Iran on Tuesday.

“With important sanctions lifted, your country has a new opportunity to deepen its integration into the global economy. That process has the potential over time to support faster growth and rising living standards for Iranians.”

“But positive results depend on overcoming two major obstacles as well. The first is navigating a difficult global economic situation. And the second is building a competitive and flexible domestic economy that will serve as a suitably strong platform for growth,” he will say, adding that only a non-oil based economy will bring Iran “sustainable growth.”

Iran returned to the global economic stage in January when years of sanctions imposed on the Islamic Republic for its disputed nuclear program were lifted, heralding a resetting of historically tense relations between the country and the West, particularly the U.S.

Since the lifting of restrictions on Iran’s banking and industrial sectors, the country has scrambled to get its economy back on track and oil is seen as a large component of that aim. However, the member of the 12-country oil producer group OPEC has rejoined the global oil market at a time of turbulence and low prices brought on by the failure of demand to keep pace with a glut in supply.

Iran and fellow OPEC member, the influential Saudi Arabian kingdom – countries which already have a traditionally tense relationship as they vie for influence in the Middle East on religious and geopolitical grounds – have also fallen out recently over Iran’s ambitions to ramp up oil production as it tries to accelerate growth.

Lipton will warn Iran that oil should not be viewed as a panacea, however. “Like other oil exporters, Iran has to manage the transition to lower oil prices. Although the impact of lower prices will be partly mitigated by higher oil export volumes, there are limited prospects for a large increase in Iran’s oil revenue because of high global output and weak demand.”

Reorienting the Iranian economy

In January, the IMF predicted that Iran’s real gross domestic product (GDP) could grow 4 to 5.5 percent in 2016 due to its higher oil output, lower costs for trade and its restored access to foreign assets but Lipton is to warn that the global economy remains weak and that Iran should look closer to home for growth.

“The bottom line for Iran is that in the near future the global economy is unlikely to be the driving force to lift up emerging economies that it was in the past,” he will state.

“Emerging and developing economies will still account for the lion’s share of world growth. But their prospects remain subdued, particularly for two reasons that are important to Iran: the sharp fall in commodity prices led by oil, and China’s economic rebalancing.”

As such, Lipton will suggest that while Iran “will gain from pursuing integration with the global economy, your ultimate success depends on what you do at home.”

“Future sustainable growth will depend increasingly on the performance of the non-oil sector, which is where almost all job creation will have to come. That, in turn, points to the need for a reorientation of the Iranian economy—both to take advantage of the opening to international trade and investment and to unleash entrepreneurial forces that can spur investment, lift productivity, provide jobs, and raise living standards,” Lipton will state.

Key to Iran’s ability to mitigate a weaker global environment is its approach to macro-economic policies and reforms, including an overhaul of the labor market and opening up its financial, products and services sectors to enable better competition, he will suggest.

“The opportunity for Iran to deepen integration into global economy is coming. Development that builds on the economic stabilization already achieved, combined with new reforms, can unleash creativity and entrepreneurship that hold great promise. By continuing to strengthen its economy, Iran can change the lives of its own people, particularly the younger generation, and build a legacy for the future,” Lipton will conclude.

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