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Dr. Masoud Nili,
Senior Economist |
Dr. Masoud Nili, Professor of Economics
at Sharif University of Technology, explained what effects the global oil
price hike has on the Iranian economy during a ceremony held to mark the 40th
anniversary of the inauguration of that university. Elaborating on the recent
oil shock’s effects on global markets, he said, “Although actual oil price in
global markets is lower than its price in 1970s, this is the second biggest
oil shock in the history of the oil industry.”
Iran’s oil earning has stood at an
annual average of 15 billion dollars since 1989, but its oil revenues in the
current year alone, is projected to reach about 50 billion dollars. After
explaining about various dimensions of the current oil price shock, Nili
elaborated about excessive increase in revenues of oil exporting countries and
noted that despite the fact that shortage of revenues is not good from an
economic viewpoint, increase in revenues of oil exporting countries enjoys
special importance from two special angles.
On the one hand, per capita revenues of
oil exporting countries have been on the fall, contrary to other countries,
over the past 30 years. On the other hand, welfare level of people in oil
exporting countries has fallen in comparison to early 1980s; so that, the
current per capita income of every Iranian at fixed prices of (the Iranian
year) 1378 (1999-2000) is equivalent to per capita income in 1356 (1977-78).
Apart from this, while the Iranian
government is facing surplus foreign exchange revenues, budget deficit has
intensified remarkably; so that, less than three months before the end of the
current (Iranian calendar) year (started March 21, 2005), the government has
announced budget deficit at 85,000 billion rials and if the current trend
continues, Treasury deposits will hit zero in less than two months from now.
The economics professor of Sharif
University of Technology stressed that the country has been facing many
riddles during the current year and explained about problems resulting from
those riddles saying, “Naturally, when global oil price rises, import of parts
and raw materials rises in parallel and paves the way for increasing domestic
production. Also, due to increase in importing capital goods, there will be
suitable conditions for boosting investment and production. However, in
another process, expansion of production will lead to increased importing of
consumer goods due to increased revenues and higher demand. At the same time,
when foreign revenues increase, rial revenues increase in parallel, thus
escalating government’s expenses. Therefore, government’s services grow and
more production will set the stage for growth of tax revenues. This will
certainly increase production costs. Therefore, increased oil revenues will
boost imports both in the short term and the long run.”
Referring to problems resulting from the
way foreign exchange revenues are spent he said, “When the Central Bank of
Iran does not sell petrodollars or they cannot be converted to national
currency, foreign assets of banks increase and, subsequently, liquidity will
start to grow, thus putting inflation on an upward course.”
Even when there is no obstacle to
supplying foreign currency, selling foreign currency to importers will
increase foreign exchange supply. If this does not reduce the parity rate, it
will certainly stabilize that rate. Now when foreign exchange rate has
increased less than 20 percent since 1999, and due to an annual inflation rate
of about 15 percent, competitiveness of domestic goods is lost to foreign
imported commodities, price of foreign commodities continues to fall and, as a
result, increased oil revenues encourage imports. At the same time, despite
fixing foreign exchange and inflation rates, our export goods become more
expensive. Therefore, we have lost the domestic market while presence in
international markets has become increasingly difficult.”
Nili then mentioned spending
petrodollars as another malady of the Iranian economy stating, “If the
government opts for withdrawing from the Oil Stabilization Fund, the said
cycle will be fostered in both directions. Therefore, if the government covers
$6 billion of its budgetary shortage through the Oil Stabilization Fund, it
would certainly be facing liquidity growth in the upcoming three months, which
will hit 178,000 billion rials.”
The oil sector will continue to
marginalize competitive sectors. Growth of oil revenues will also lead to
disturbance in the macroeconomy and also raise unemployment and inflation.
Iran’s average economic growth rate has been two-digit from 1959 to 1973,
while inflation rate was single digit. However, since 1974, which coincided
with burgeoning oil revenues from $1.5 billion to $22 billion, economic growth
rate became single-digit while inflation rate turned two-digit.
Nili then explained about economic
problems resulting from oil price shocks in the form of Dutch Disease and
elaborated on social costs of that disease, saying, “Since increase in state
expenses would mean increased expenses in big cities; regional gaps widen
under such circumstances and the end result would be more immigration,
emergence of slums around big cities, intensification of class divide,
corruption and drug addiction.”
Under such circumstances, there is
propensity for redistribution of oil revenues to increase opportunities for
physical investments instead of increasing investment in human capital.
Figures also show that educational expenditures in oil-rich countries are less
than the world’s average.
State rent in conditions of increased
oil revenues will boost inefficiency of subsidies system and disrupt pricing
system. Under conditions of economic rent, it is natural for people to prefer
rent-seeking which entails small risks, over high risk entrepreneurship. At
the same time, non-oil economies enjoy more streamlined economic structure and
index of unofficial economic sector is lower. In addition, governments in
non-oil countries are more accountable.
