Iran and the Economy After the JCPOA

After the implementation of the JCPOA, to what extent has the environment for investment in Iran been facilitated, and does the current market in Iran hold any appeal for foreign investors? Aliya Mobiz has answered Radio Farda's questions in this regard: We are speaking at the anniversary of Iran's agreement with the P5+1 on the nuclear deal. In your opinion, as a result of this agreement, are we witnessing a change in the global economy? Aliya Mobiz is the Director of Middle East and North Africa Research at Barclays Bank in London. She previously served as a senior economist at the World Bank for about six years and was also an advisor to the Lebanese Minister of Economy. The JCPOA (Joint Comprehensive Plan of Action) between Iran and the P5+1 led to direct and indirect outcomes at the domestic level in Iran, at the regional level, and also globally. I will address these three areas separately. First, at the domestic level in Iran, we must see that the implementation of the nuclear agreement, which resulted in the partial lifting of U.S. sanctions, UN sanctions, and EU sanctions, has led to relative progress in the influx of resources into the Iranian economy. Oil exports reached 2.4 million barrels per day, which is double the amount before the nuclear agreement was implemented. Iran has also gradually been able to access its blocked assets worth several billion dollars. The country has also been able to reconnect to the SWIFT financial system, which allows financial and trade transactions between Iran and other countries, although some sanctions remain in place. In the macroeconomic sphere, the inflation rate reached a historic low of 7 percent, down from 45 percent three years ago, and according to the Central Bank Governor, the plan is to keep this rate in single digits. The exchange rate has stabilized, and some key reforms have applied a form of stability to the currency. This should help increase Iran's growth rate to over four percent this year (2016), and with progress in domestic and foreign demand and increased investment, this rate should also rise next year, possibly reaching 4.8 percent. These are significant advancements, although issues such as low oil prices and remaining sanctions still pose challenges for this economy. Iran's economic achievements following the lifting of sanctions remain limited as the primary U.S. sanctions are still in effect, and structural factors that have long overshadowed Iran's business environment still exist. We predict that most of the Iranian government's efforts will focus on addressing these obstacles in cooperation with its partners. The second area affected by the nuclear agreement is its significant impact on recent mechanisms in the global oil market, which has had repercussions on regional economies and the global community. Currently, Iran's crude oil production is about 3.6 million barrels per day, and exports are also on the rise. Iran's faster-than-expected increase in production and exports has fundamentally affected the balance of supply and demand, and consequently impacted oil prices and the international financial market. After the supply glut at the end of last year and early this year, Iran's increased exports partially compensated for losses incurred from supply reductions by countries like Nigeria and Canada, thus mitigating some of the price fluctuations witnessed in recent months. The third issue is the geopolitical risks that have been reduced with the achievement of the nuclear agreement, preventing an all-out war in the Middle East. This is important for the economic outlook of the region and oil prices, although it is also true that tensions in this region still persist and overshadow economic progress. However, international efforts to resolve conflicts in Syria and Yemen, and to prevent ethnic tensions elsewhere by encouraging dialogue between Saudi Arabia and Iran, should help reduce the level of risk and threats. Ms. Mobiz, you mentioned the remaining challenges for Iran; how much do you think the remaining primary U.S. sanctions deter investors from considering the Iranian market? The remaining primary U.S. sanctions are one of the factors that cast a shadow over the investment outlook in Iran and deter investors from considering the Iranian market. These primary sanctions still prevent U.S. financial institutions from conducting dollar transactions with the Iranian government and prohibit U.S. businesses from trading with entities owned or controlled by the Iranian government. Regarding non-U.S. entities, although many activities are permitted under the JCPOA, significant restrictions remain. Since many Iranian officials and other legal entities are still on the U.S. and EU (and also UK) sanctions lists, non-U.S. financial institutions are at risk. This risk arises when companies do not conduct thorough studies about the individuals they are trading with or who benefit from this trade. This situation increases the cost of doing business with Iran compared to other countries. Moreover, the differing approaches and objectives of the EU and the U.S. regarding the remaining primary sanctions, which directly and indirectly prevent U.S. entities and individuals from trading with Iran, add to the uncertainty surrounding potential trade with Iran. Another related issue that affects investors' transactions with Iran's banking system is concerns about Iran's legal frameworks regarding anti-money laundering and counter-terrorism financing. Another concern for investors is the possibility of the re-imposition of sanctions or 'snapback' that may occur under certain conditions if Iran violates or fails to adhere to the JCPOA. Although this is a hypothetical scenario, it is on investors' minds, and it may take time for foreign investors to learn to adapt to such uncertainties. Despite all this, some investors are also concerned about the legal and regulatory frameworks governing trade in Iran. If we look at Iran's rankings in international assessments, including the World Bank's ease of doing business rankings and the competitiveness index published by the World Economic Forum, the business environment in Iran appears to remain constrained. Although recent improvements have been recorded, issues such as a lack of transparency and weak oversight over companies remain problematic. You are the Director of Research in the Middle East at Barclays Bank. Given all these circumstances, do you still think that, considering the current situation in the Middle East, the Iranian market holds appeal for investors? Iran is the second-largest economy in the Middle East and the most populous country in the region. Its large market size, high number of young and skilled labor, diverse economic framework, strong industrial sector, and abundant mineral wealth all contribute to its attractiveness and help encourage investors. One might compare today's Iranian market to Turkey years ago, although one must also consider the vast oil resources and lower average wages. Additionally, Iran's ongoing government efforts to promote integration with Asian countries in trade and investment also add to the attractiveness of the country as an investment destination, especially if some of the agreements currently under negotiation yield results; whether with Pakistan, India, Indonesia, the Eurasian Economic Union, or Japan. Nevertheless, despite the uncertainty surrounding the lifting of sanctions, structural factors have long served as barriers to private investment, thus hindering competitive space and placing Iran in a less favorable position compared to other emerging markets and countries in the region. These factors include the business environment in Iran, which is significantly lower than that of neighboring countries and emerging economies. In the World Bank's ease of doing business index for this year, Iran ranked 118th among 189 countries. Additionally, the oversized public and semi-public sector is another issue. The public sector dominates Iran's economy. Furthermore, in many key industries, the line between the public and private sectors is not clearly defined. This also applies to some areas related to infrastructure issues. Another problem for Iran is that it is underperforming in terms of infrastructure compared to other emerging markets and is dominated by state institutions. The World Economic Forum states that the overall quality of infrastructure in Iran is only 4, which is behind its neighbors. The country also does not rank highly in the logistics performance index, lagging behind emerging economies. A lack of competition and weak regulatory quality can hinder growth and modernization. Iran's financial system lacks significant capital and suffers from poor asset quality. The Iranian government has ambitious plans to address these fundamental aspects of the business environment in Iran to reach its potentials and increase investment levels, issues that the country desperately needs to create jobs and improve the quality of social services and infrastructure. Accelerating the implementation of reforms is essential for Iran to become a competitive environment. In recent weeks, some have emphasized that Iran's challenges in returning to the global economy are due to issues within its financial system. Do you think this is the case, and if so, how can Iran address these challenges? Iran's financial and banking system faces numerous challenges that, if not addressed, could pose serious obstacles to reviving economic growth in Iran at the level that was potentially anticipated after the nuclear agreement. As Iranian officials themselves have stated, slow growth rates and previous policies regarding loans, along with multiple external shocks, have led banks to face severe capital shortages and declining financial quality. According to available information from the International Monetary Fund and the Iranian government, the capital adequacy ratio for most banks is only 8 percent, while in neighboring countries, it ranges from 12 to 19 percent, and non-performing loans (NPLs) account for about 17 percent of total loans, which is very high compared to neighboring countries that generally have single-digit rates in this regard. This situation diminishes banks' ability to provide financing for large investments after the nuclear agreement. More importantly, Mr. Valiollah Seif, the Governor of the Central Bank of Iran, has stated (as reported by the Financial Times) that Iranian banks are outdated and inherit "poor management and inadequate oversight." He has called for the implementation of banking regulations in line with global standards to revive foreign relations and investment in the Iranian market. One of these key regulations is what the International Monetary Fund encourages, which is the "anti-money laundering and counter-terrorism financing framework" (AML/CTF) that facilitates the reintegration of domestic financial oversight into the global economy, reduces transaction costs, and decreases the extent of the informal sector. Therefore, Iran needs to continue working on modernizing its legal and regulatory frameworks governing its financial sector and align them with international AML/CTF requirements. Concurrently, ongoing efforts by the Central Bank to improve disrupted balance sheets, restructure banks, and inject capital back into some of them, as well as strengthen the Central Bank's supervisory capacity, are all actions that are moving in the right direction. My last question to you is about the oil market. How much do you think the current instability in this market is related to the political competition in the Middle East? The current instability in the oil market stems from multiple issues, including supply and demand mechanisms and geopolitical matters. Limiting balances, production cuts by non-OPEC countries, and geopolitical developments have all contributed to the current situation regarding oil prices. In terms of fundamentals, our forecasts for the stock market next year are steeper, and it is expected that major oil producers outside OPEC, such as Canada, Mexico, and Brazil, will reduce their production faster than expected. The second unpredictable issue is unplanned production cuts. Some of these issues arise from geopolitical conflicts, while others occur because oil-producing countries and their national oil companies suffer from low oil prices. Thirdly, the adjustment of supply outside North America is happening very quickly, where decreasing capital costs and drilling activities have rapidly accelerated the rate of recession. Geoeconomic and geopolitical rivalries in the Middle East have also added to these issues, increasing the level of instability that either delays or accelerates supply adjustments. Nonetheless, tensions among OPEC producers remain high, as we particularly witnessed in the April meeting of OPEC members with non-OPEC countries in Doha, Qatar. However, efforts have also been made to improve these troubled relations, as seen in the recent OPEC meeting in Vienna. The Saudi oil minister stated, "We should focus on areas where we have consensus and worry less about our differences." The Iranian oil minister also stated that if the quotas are fair...