World economies

05 May 2008



The economic situation in Iran remains bleak. The state-dominated Iranian economy is also struggling with double-digit inflation, which critics blame on the government’s profligate spending of petrodollars. Inflation is currently at 19 per cent, general unemployment is in double figures, with joblessness for youth estimated at 21 per cent. Although Iran is the fourth largest oil producing country in the world, the Iranian people are facing gasoline shortages and rationing. With revenue from oil sales, the Iranian President has supported massive government subsidies for certain goods, such as sugar, wheat, gas and cooking oils. Many economists agree that the subsidies have led to increasing inflation, and have not helped to create jobs.

Iranian economists say that inflation is the killer of poor people. Hundreds of thousands of people will go under the poverty line because of the inflation rate. At the same time, Iran is facing difficulties because of its refusal to comply with United Nations Security Council mandates to suspend its uranium enrichment programme. The Security Council has imposed three rounds of sanctions against Iran. The sanctions include restrictions on trade, freezing of some Iranian foreign assets, and the call to all countries to exercise vigilance in dealing with Iranian financial institutions.

Iran’s unemployment rate dropped to 10.3 per cent in the 2007-2008 from 11.3 per cent the previous year. Minister of labour and social affairs said improvements in the housing, industry and mining sectors helped cut the jobless rate in the world’s fourth-largest oil producer. The Minister claims that unemployment rate in the country has dropped to around 10 percent. It had been as high as 14-15 per cent in previous years. Some economists have said that unemployment rate is higher than the official figure, estimating it at 25 per cent in some parts of the country.

Meanwhile, the United States has taken measures to restrict Iran’s access to the international financial system in order to prevent Iran from using that system to finance its nuclear program and support terrorism. The UN Security Council is also considering a fresh round of sanctions on the Islamic republic over its refusal to halt atomic work. The draft UN resolution calls for asset freezes and mandatory travel bans for specific Iranian officials and vigilance on all banks in Iran. The US, leading efforts to isolate Tehran over its nuclear work, has imposed its own sanctions targeting four of Iran’s major banks and is also encouraging banks and firms from other countries to stop doing business with the country.

However, the economic minister claims that sanctions have had no impact on Iran’s economic condition and the economy, despite unilateral economic pressure from America, has achieved stable growth. Iran has reaped windfall gains in recent years from the high oil price on world markets. Its economy has grown by about six percent annually, despite tightening international sanctions over its disputed nuclear plans. Analysts say western companies are becoming more wary of investing in Iran, the world’s fourth-largest oil exporter, due to perceived political risk and increasing difficulties in securing trade finance as a result of US pressure.

The minister has painted an upbeat picture of Iran’s economy, saying foreign investment hit $10.27 billion last year. Iran’s foreign debt ratio has declined and its economic growth is expected to increase, shrugging off the impact of international sanctions over Tehran’s nuclear programme. Iran’s foreign debt has declined to 13.5 of gross domestic product from 17.4 per cent. As oil prices are higher than $100 per barrel, state treasury is flush with oil revenues.

According to NIC’s February report, total foreign debts of the country were $20.1 billion (nine percent of gross domestic product (GDP) last year. The figure is estimated to reach $20.7 billion (8.1 percent of GDP) this year. The figure would be $20 billion and $19.1 billion during the years to March 2009 and 2010 respectively. Iran would have foreign debts of 5 percent of its GDP by end March 2011 and 4.1 per cent of GDP in 2012.

Foreign exchange reserves are estimated to reach $80 billion by March. The deputy governor of the Central Bank of Iran for foreign exchange affairs put the current hard currency reserves at $70 billion. Most foreign exchange reserves are in euros and a small part of them are in yen or dollar. Oil transactions by Opec’s second largest producer are no longer conducted in dollars since ’the greenback is unreliable’. For nearly two years, world’s fourth biggest exporter has been reducing its reliance on the dollar, saying the weak US currency is eroding its purchasing power.

The Central Bank Governor believes that Washington’s “hostile actions” will cause some difficulties but no major problems for Iran. Earnings from oil and gas exports have been a windfall for the government. At the same time the government has been extremely aggressive in diversifying its customers and attracting foreign investment, despite US opposition Iran’s president says that the government will enact major projects to eradicate existing economic problems.


Kuwait’s economy grew about 12 per cent for the second year in a row in 2007. The growth is among the highest in the Arabian Gulf region and is a continuation of the past five years’ trend. Kuwait’s gross domestic product (GDP) increased to KD30mn and public spending rose to about KD12bn, 27 per cent rise in the financial year 2007/2008. The Central Bank of Kuwait (CBK) plans to tighten commercial lending rules after restricting consumer lending in an effort to tame the growing inflation.

The country’s GDP has grown at over 5 per cent a year for five consecutive years to 2006. The combination of high oil revenues, which reached 14.8 billion dinars (US$54 billion) in 2006 (95 per cent of government revenues), massive budget surpluses and the highest national savings rate in the world has led to the emergence of a vision of Kuwait as a oasis of stability. In its Global Competitiveness Report for 2007-2008, the World Economic Forum rated Kuwait the most competitive economy in the GCC, largely by virtue of these firm moorings.

The main event in the country’s economy during 2007 was the surprise de-pegging of the Kuwaiti dinar from the dollar. The Central Bank of Kuwait’s move from a dollar peg to a heavily dollar-weighted basket of currencies took place in May, as the declining US currency threatened monetary stability throughout the Gulf. Nevertheless, a number of challenges to Kuwait’s stability are now appearing on the horizon. Inflationary pressures are building up, although they remain much lower than in other regional economies. The annual inflation rate reached a record high in September at over six per cent. Despite the dollar de-peg, high global food prices will continue to contribute to price-escalation.

Kuwait posted a record actual revenue of KD18.93 billion in the last fiscal year that ended in March 31. The figure is a mammoth 127 percent higher than budget projections of KD8.32bn. Figures issued by the ministry showed revenues are also up 22 per cent from that in 2006/2007 of KD15.5 billion. Actual oil revenue also reached a record KD17.72bn, up 138 percent on budget projections of KD7.45bn. Kuwait, which has been pumping 2.5 million barrels per day, calculated last year’s budget at a conservative price of $36 a barrel, when the actual average price topped $75.

Preliminary figures for spending reached KD7.49 billion, sharply lower than the budget projections of KD11.3 billion. The figure is likely to increase after the government completes its year-end accounts adjustments. The price of Kuwaiti crude oil has topped $100 a barrel for the first time after world crude prices raced to a record above $115 a barrel. The interim figures for Kuwait’s budget released by the ministry of finance covering the first 11 months of the fiscal year 2007/08 showed a substantial increase in the preliminary surplus over the same period last year. The budget surplus rose to KD 10.5 billion. Total revenues rose 18 per cent to KD 17 billion, largely driven by higher oil prices. The expenditures dropped 5.7 per cent to KD 6.6 billion, which largely reflects the presence of extraordinary transfers in the previous fiscal year of KD 2.0 billion to the public institution for social security and a KD 203 million cash grant to Kuwaiti nationals.

It is worth noting that growth in government spending should be taken as indicative only of the fiscal stance since expenditure figures will be adjusted upward significantly after the close of the fiscal year. NBK expects the spending rate (actual to budget) to rise from a reported 64 per cent at the end of February to somewhere between 90 and 95 per cent. Even with this upward revision, Kuwait is still likely realize a record budget surplus possibly exceeding KD 8 billion, in contrast to a projected deficit of KD 2.9 billion before allocation to the RFFG.

Oil revenue surge as oil prices break new records. It reached a record high of KD 16 billion, fuelled by the recent surge in the price of crude. Oil revenue growth was 18 compared to 15 per cent during the same period last year. With KEC prices averaging $90 per barrel in February, actual oil revenues exceeded the government’s projections by more than two-fold. The price of Kuwait export crude (KEC) during the period averaged $72.1 per barrel, 26 per cent higher than the same period a year ago. Growth in non-oil revenue tops that from oil.

Non-oil revenues saw even stronger growth of 30 per cent to top KD 1 billion, which improved their contribution to total revenues to roughly six per cent. Indeed, non oil revenues exceeded budget projections by 28 per cent.