IRAN’s economy relies heavily on oil export revenues - around 80-90 per cent of total export earnings and 40-50 per cent of the government budget. Strong oil prices in the past few years have helped Iran’s economic situation. For 2004, Iran’s real GDP increased by around 5.8 per cent; for 2005 and 2006, it is expected to grow around 5.4 per cent and 4.5 per cent, respectively. Despite higher oil revenues, Iranian budget deficits remain a chronic problem, in part due to large-scale state subsidies on foodstuffs, gasoline, etc. Expenditures on fuels were estimated at $4.7 billion in 2004. The country’s parliament has rejected measures to raise consumer prices. To the contrary, in January 2005, it decided to freeze domestic prices for gasoline and other fuels at 2003 levels.
To pay for sharply increased subsidy expenditures, the government budget proposal calls for withdrawing $7.7 billion from the country’s oil stabilization fund (OSF). In late November 2004, the Iranian parliament agreed to allow the government to withdraw $825 million from the OSF to pay for rapidly increasing gasoline import costs.
Iran is attempting to diversify by investing some of its oil revenues in other areas, including petrochemicals. In 2004, non-oil exports rose by a reported 9 per cent. Iran also is hoping to attract billions of dollars worth of foreign investment to the country by creating a more favourable investment climate (i.e., reduced restrictions and duties on imports, creation of free-trade zones).
Iran holds roughly 10 per cent of the world’s total proven oil reserves. In July 2004, the country’s proven oil reserves had increased to 132 billion barrels. The vast majority of Iran’s crude oil reserves are located in giant onshore fields in the south-western Khuzestan region near the Iraqi border and the Persian Gulf. Iran has 32 producing oil fields, of which 25 are onshore and seven offshore.
During 2004, Iran produced about 4.1 million bbl/d of oil (of which 3.9 million bbl/d was crude oil), up about 200,000 bbl/d from 2003. Some analysts believe that Iran’s capacity is lower, and that it could fall even further until new oilfield developments (Azadegan, Bangestan) come online in a few years.
Iran’s existing oilfields have a natural decline rate estimated at 8-13 per cent per year (300,000-500,000 bbl/d) and are in need of upgrading, modernization, and enhanced oil recovery efforts. With sufficient investment, it is widely believed that Iran could increase its crude oil production capacity significantly.
The country is counting on billions of dollars in foreign investment to accomplish this, but this is unlikely to be achieved without a significant change in policy to attract such investment.
The country subsidizes the price of oil products heavily, resulting in a large amount of waste and inefficiency in oil consumption.
Enhanced oil recovery (EOR) programs, including natural gas injection, are underway at a number of fields, including Marun and Karanj. Iran’s oil sector is considered old and inefficient, needing thorough revamping, advanced technology, and foreign investment.
Iraq
IRAQ’s economy is dominated by the oil sector, which has traditionally provided about 95 per cent of foreign exchange earnings.
Following the 2003 invasion of Iraq, the economy has to a great extent shut down and attempts are underway to revive it from the damages of the war and rampant crime. As the supreme authority in Iraq, Ambassador Paul Bremer issued a series of orders designed to restructure Iraq’s broadly socialist economy in line with neo-liberal thinking.
Order 39 laid out the framework for the privatization of everything in Iraq aside from the “primary extraction and initial processing” of the oil reserves themselves, and permitted 100 per cent foreign ownership of Iraqi assets. Other orders established a flat tax of 15 per cent and permitted foreign corporations to repatriate 100 per cent of profits earned in Iraq. However, Bremer’s privatization plan was not implemented during his reign, though his Orders remain in place.
The second attempt to liberalize Iraq’s economy is linked to the Iran-Iraq war debt. The creditors who financed the Iran-Iraq war had presented post-Saddam Iraq with a bill of nearly $130 billion of debt and past-due-interest, which had not been serviced during the 13 years of sanctions. The Jubilee Iraq campaign argued that these debts were odious and should therefore be written off unconditionally.
The creditors however only offered a partial reduction and rescheduling of their claims in return for an Iraqi commitment to implement an International Monetary Fund economic program. This deal, with the Paris Club cartel of creditors including the US and Britain, was signed on 20 November 2004.
However, since the invasion of Iraq in 2003 and subsequent transformation of the political and economic landscape, the economy of Iraq has been growing every year. The inflation, now down to 20 per cent, has contributed to this economic recovery in the midst of an insurgency. However, the world’s third largest crude oil reserves, is currently facing severe fuel shortages.
According to a latest report by the IMF staff, much has been achieved in the past two years taking into account the extremely difficult conditions on the ground. The IMF Executive Board has, however, noted that the economy remains fragile, and much work remains to be done.
A recent IMF staff analysis found that Iraq’s economy had rebounded by 50 per cent in 2004 (mostly reflecting a recovery in oil production), but growth is slowing down in 2005, with no significant increase in oil production expected. Inflation, which spiked in the latter half of 2004, has been low thus far in 2005.
UK
THE slowdown in the UK economic growth is gathering momentum. The Q1 GDP growth was revised down, to 0.5 per cent qtr-on-qtr and to 2.7 per cent yr-on-yr. Q1 manufacturing output quarterly growth was revised down sharply, to –0.7 per cent. Q1 consumer spending rose by a minimal 0.5 per cent over six months to end-March, well below the growth seen in the previous half year. The housing market is still slowing. Q1 total investment was flat; business investment fell slightly, while Q1 exports fell by 1.0 per cent quarter-on-quarter.
The UK April CPI inflation was unchanged, at 1.9 per cent, marginally below the 2 per cent target. The annual rate of growth in average earnings, excluding bonuses, was 4.1 per cent in the three months to March 2005, down from 4.3 per cent in the three months to February. Our UK GDP forecast is lowered to 2.4 per cent for 2005 and is unchanged for 2006, at 2.3 per cent, both below the Budget forecast. The OECD has also cut its 2005 UK GDP forecast, to 2.4 per cent. The risk of an early rise in the UK interest rates is now very low.
The new financial year 2005/06 has started on a positive note for the Chancellor. In April 2005, the public sector showed a deficit on current budget of £0.2bn, compared with a deficit of £2.3bn in April 2004. Total public sector net borrowing was £1.3bn in April 2005 compared with £2.8bn in April 2004. However, revisions to earlier figures show a worse performance in the previous financial year. The estimated outcome for the Current Budget Balance in 2004/05 was -£17.4bn, £1.5bn worse than the -£16.1bn forecast in the March Budget. The estimated outcome for the PSNB in 2004/5 was £35.4bn, £1bn higher than the £34.4bn forecast in the March Budget. While the fiscal position has improved recently, the scale of the improvement is limited and does not alter the basic assessment of virtually all independent commentators, both in the UK and internationally, that tax increases, totalling some £10bn, will be needed from 2006 to prevent a breach of the Golden Rule in the next economic cycle.
Business confidence is weakening. Slowing UK growth, worsening Eurozone uncertainties and the prospect that public spending and borrowing will remain too high are negative factors. Businesses are particularly worried that they will be required to bear a disproportionate share of the additional tax increases that most people expect over the next 2-3 years. Businesses also fear sizable increases in business rates. Large fiscal deficits will complicate the job of the Bank of England, increasing the risk that the MPC may decide to raise interest rates later this year.
The risk of an early increase in the UK interest rates is now very low, because of evidence that economic activity, mainly consumer spending, is weakening. The central inflation projection in the UK May Quarterly Inflation Report was benign. The CPI inflation is forecast to move above the two per cent target in the near term, but is then expected to drop back, before settling around the target.
The new inflation projection, focusing on the next two years, is higher in the first year than in the February Report, but is lower further out. The central growth projection shows output remaining close to trend over the next two years, but the profile is a little weaker than in the February Inflation Report.
