Monday, October 22, 2012

Is Obama Biden ticket right about Iran?!

During the VP debate Joe Biden argued that the policy of the United States vis-à-vis Iran is working as evident by the economic hardships in Iran. His statement was made at a time when the far right is calling for military action sighting the ineffectiveness of the sanctions, and on the far pro-"Iranian regime" side one constantly reads that the sanctions have no effect on Iran whatsoever. 

Let's try to cut through the economic complexities and the political propaganda and see if we can grasp the big picture.

For the uninitiated I would like to point out that the Iranian budget is nearly totally dependent on oil revenues, and even though it is calculated in the official Iranian currency, the rial, petrodollars are the true currency of Iran when it comes to the budget.

Oil prices have been hovering in the $80s and $90s range, with a few spikes, in the past two years (3). The Iranian annual budget is calculated based on projected oil revenues and as such it is based on an estimated crude oil price for the upcoming year. The Iranian budgets were based on an estimated oil price of $65 per barrel in 2010-2011 and  ~$80 in 2011-2012 and 2012-2013. It is important to point out that the budget always estimates oil prices on the lower end of expected range to avoid budget shortfalls.

A very well know secret of the Iranian regime is that any surplus oil revenue resulting from underestimating oil prices goes into a separate fund which doesn't fall under the parliament's control (despite rules to the contrary) and serves as a miscellaneous fund through which the government appears to pay for unexpected expenses without any parliament oversight or public disclosure. One example of such miscellaneous expenses is the sustained security show of force in major Iranian cities for the past two years. There is no expense item in the Iranian budget for extra security forces on every corner, or for payments to the basij forces for their services as the instrument of the regime's brutal crackdown. (A historical note: The pro-government thugs were part of the political scene in the 1979 revolution too, they were called "chomaghdar" who were sometimes trucked in from rural areas into major cities to attack protestors). 
The suitcase full of dollars paid to the office of the president of Afghanistan every year (11), and the frequent travels of Ahmadinejad are made possible by the billions in oil revenue surplus set aside for expenditures not covered in the parliament approved budget.

Let's look at the Iranian budget for the past few years to try to see if Joe Bidden is right about the impact of the sanctions and the impending economic collapse in Iran. 

Keep in mind that the Iranian fiscal year starts with the Persian new year in March of every year. This actually makes it very difficult at times to understand what budget is being used, especially when there are bureaucratic delays in budget submission and approval/implementation.

2010-2011 fiscal year 
-Budget: $347 billion

-Ahmadinejad proposed a $368.4 billion budget based on an estimated oil price of $60. This was a boom year despite the post election turmoil given that the prior year's estimated oil price in the budget was ~$34. The hike in oil prices meant that Ahmadinejad had almost twice as much money to spend within and outside the budget.
-The parliament (majlis) approved a lower budget of $347 with an adjustment to the estimated price of oil to $65 per barrel (2).
Note the higher estimate of oil price by majlis which can be interpreted as an attempt to bring more of the "unaccounted for" surplus oil revenue under their budgetary oversight.

Subsidy reform was proposed during this fiscal year year (4). The subsidies are estimated to amount to 30% of Iran's GDP. The government was set to save ~$100 billion dollars per year due to subsidy reform. $90 billion from energy subsidies and the remaining $10 billion dollars from the subsidize to public transportation, agriculture, industries, and some food items, etc. 
The plan was supposed to take 5 years and be completed in two stages. The first stage was eventually competed after much delay, but the second phase of subsidy reform was postponed this month as the parliament stepped in due to worries about increased hardship and inflation (9).

2011-2012 fiscal year
-The budget was $508 billion.

-The budget was based on an oil price of $81.5 per barrel (5).
-Iranian oil exports at the time was reported by OPEC to be 3.2 million barrels per day.
-First payments to citizens to offset subsidy elimination started on Feb 2011, before the start of the fiscal year 2011-2012.

2012-2013 fiscal year

-The Budget was $416 billion (5.1 quadrillion rials using the official exchange rate of 11,500 rials for the dollar) (10). 
If the same budget were to be calculated using the less artificial  40,000 rial to the dollar exchange rate, the real dollar value of the Iranian budget for this fiscal year would be $119.9 billion which is probably closer to the actual oil revenue for this year.

-Budget was based on $85 dollar a barrel oil (10)
-Oil exports are less than one million barrels a day (3), roughly one third of what it was during the prior fiscal year. It is unknown what projected oil export (barrels per day) benchmark was used for this year's budget. It would be hard to imagine that the Iranian government expected and planned for a 2/3 reduction in oil exports and revenue.
-Doubling military spending (7). An unavoidable added expense at a time decreased revenues.
-With the global banking sanctions against Iran, the government is not receiving all of its oil revenue in hard currency adding to their predicament. Iran has developed a barter system with India and other countries to receive goods in return for its oil (8). Under this system Iran receives payments in local currency (i.e. Indian Rupee) and is permitted to purchase local products and ship them back to Iran. Needless to say that this practice deprives the regime from badly needed cash liquidity, and forces it to limit its import choices to fewer markets at potentially uncompetitive prices. It doesn't take an economist to figure out that in light of the currency collapse and soaring inflation (25% by most conservative estimates) this increase in imported goods coupled with a simultaneous decrease in dollars reserves spells disaster for the already fragile economy.

So why should the average Iranian care about all this?

According to the Iranian regime, the average Iranians have nothing to worry about, but
contrary to this wishful thinking, the economic realities of Iran are becoming more apparent by the day, even to non-economists like me.

In Feb 2011 the government started paying the equivalent of ~$45 per citizen per month  to compensate for the partial elimination of government subsidies. At a rate of ~12,000 rials per dollar in 2011, these payments amounted to ~450,000 rials per person for ~80% of Iranians, regardless of income. 

The Iranian currency has plummeted in recent months to an all time low, trading at ~40,000 rials for the dollar (compared to ~12,000 a year ago). The Iranian central bank tried selling some of its dollar reserve to stop the hemorrhaging to no avail. In fact that futile action appeared to be made under tremendous political pressure from the parliament.  As of today the downward spiral of the rial continues as the demand for dollars is up and the regime's ability to part with its reserve currency diminishes. Like in the case of other problem, the regime resorted to "force" to deal with the currency crisis, forcing the public to stay away from the currency traders and putting a few traders in jail accusing them of causing the currency collapse. According to the governments official line it took around 50 people to cause the currency collapse and they're now in prison(12). Traders in the free market were given a price of 28,500 to post on their charts and so for a while the exchange stores were open by there was no trading; When trading finally resumed the rial was traded at its true junk status of ~35,000-40,000 rials for the dollar.

The government, worried about running out of cash, is now divided on whether or not to increase the monthly cash payments to match inflation. Ahmadinejad wants to use the oil dollars in the free market to get more rials to make higher payments, but the parliament is opposed to this and even passed a bill yesterday that makes it illegal for the Ahmadinejad to do so (6).

If you are a low income Iranian you would see the value of the government cash payout slashed due to currency collapse. The cash payment in rials which was worth ~$45 last year is worth less than $12 by today's exchange rate.

The silver-lining is that Islamic Republic will be deprived of its latest instrument to keep the populous financially and psychologically dependent on the regime for their basic daily needs. With subsidies almost entirely gone, and the government cash payments worthless, Iranians may start thinking that they have nothing to fear from a regime collapse, as their financial difficulties can't possibly get any worse.

To some who continue to argue that the loss of subsidies combined with the currency collapse is not causing any food price increases or hardships for the poor, please consider the following:
-The government subsidy for agricultural products is no longer there.
-The subsidy for the fuel used in agricultural production and the transport of agricultural products is now gone. The added fuel cost to the farmers is passed on to he consumers in the form of higher food prices across the board.
-Food imports are diminished due to sanctions and payment issues, causing decreased supply. Local demand is unchanged while supplies decrease, this can not but cause food prices to go up.
-Farmers are incentivized to charge more for their products regardless of their current fuel and operational cost since they expect that the money they get today will be worth much less tomorrow, when they try to buy seeds, diesel, and other products for their farms.

If that's not enough, many Iranians are on fixed income or live day to day. With no economic growth and no prospect for adequate salary raises, they see their purchasing power decline by the day, and the poorer they are the harder it will hit them. The only strata immune to the economic downturn are the super elites, the top government officials, the military, and last but not least, the security forces (including the cyber-basij) as the government can ill afford to underpay them for their much needed services. It is probably the reason that despite all the hardships, not a month passes by without a military parade or drill. One they can afford it, second they want to tell the populous "don't even think about it"!

On the propaganda front it is becoming apparent that the regime is focusing on a sequential blame system, starting with blaming the global economic downturn (hence the headlines emphasizing the European economic crisis), followed by blaming the sanctions (reluctantly), and ends with blaming the lame duck president Ahmadinejad by using the parliament to attack him as the sole responsible party for the economic mismanagement. In the end they may get disparate enough to conclude that Rafsanjani is a perfect choice for president in June, but that's another story all together assuming they last that long.

So is Joe Biden right? 
I'd say he's more right than wrong. He's definitely right about the Iranian economy and the regime being in a bad shape secondary to the sanctions, but he maybe underestimating how determined this regime is to stay in power. Recent experiences in the region tell us that dictators are oblivious to the obvious realities around them up to the last few days before  their demise. 

Ps. If readers have different figures about the budget etc., please submit with a reference and I'll make the necessary corrections.

TEHRAN, April 26 | Tue Apr 26, 2011 12:36pm EDT
Press TV Mon, 08 Mar 2010 15:07:00 GMT
Iran Parliament approves $347-billion budget


Anonymous said...

nicely done

Mark Pyruz said...

Jabbar, HERE's a graph illustrating Iran's oil income. It's estimated that the current sanction regime which includes the UE will set the Iranians back to 2006 levels, which is sustainable for Iran.

The government is deciding what part of Iranian society it will support through these emergency conditions, predictably that of the more vulnerable and numerous section of the Iranian population which also happens to be their principal source of political support. Those less fortunate are the middle class and upper middle class, particularly those with family extensions in Western countries, which is where the dollar crunch is especially felt.

Anonymous said...

Yeah,but the mullah class and their servants won't be effected.

Unknown said...

@anon 6:41

Unknown said...

@mark 6:56
Thanks Mark.
I don't doubt that the Government's oil revenue increased as oil prices increased, but the situation has changed since July of this year.

Poor economy effects the poor no mater which country we are talking about.

We are analyzing the sutuation from the comfort of our homes in the west but many poor Iranians with no links to the west are living the economic hardship day in and day out. I doubt they would agree with you that their lives are not affected because they are poor and cared for by the regime.

Anonymous said...

The only part of what you said that made sense was, "even to non-economists like me".

If you are not an economist why the heck are you writing an economic piece. It is like saying I am not a doctor but I will write a piece on HIV and its spread throughout the body.

Unknown said...

@anon 8:39
If you and Ahmadinejad can do it, why can't I?

Does that mean you agree with everything else in the peice?!

Matt said...

The IMF on Iran