Economy

A Degree of Normalcy Will Take Three to Four Years: Talking with Bijan Khajehpour

November 28, 2013
Azadeh Moaveni
8 min read
A Degree of Normalcy Will Take Three to Four Years: Talking with Bijan Khajehpour
A Degree of Normalcy Will Take Three to Four Years: Talking with Bijan Khajehpour

A Degree of Normalcy Will Take Three to Four Years: Talking with Bijan Khajehpour

Iranians have greeted the interim agreement in Geneva between Iran and the P5+1 nations with great relief, hopeful that the deal will signal an end to Iran's isolation and the crippling sanctions that have helped sink the Iranian economy. Currency traders, businessmen, and ordinary Iranians are hopeful that even at this interim stage, the agreement will make some small difference ahead of the wider changes that will hopefully accompany a final deal. I spoke to the Vienna-based economist and expert on the Iranian business sector Bijan Khajehpour about the short-term economic horizon.

The Iranian Rial has responded positively to the Geneva agreement, what does this reflect and do you think the jump will last?

The dollar rate is always a reflection of investor confidence in the future of the Iranian economy. A lot of the dollar trading or hard currency trading is a result of either hedging for lots of companies or basically the dollar being seen as an investment rate. When you have a situation when people start to sell dollar or hard currency, as has happened after the Geneva agreement, it's always a sign that people expect rates to come down over the next few months as a result of political and economic developments. But soon as it comes down too much, like on the first or second day after the agreement it fell below 29000 rials, then it doesn't make economic sense anymore.

But I think the reaction positive, I predict that rate will stay around 30000, and hope that the dollar will gradually lose value and attraction as investment vehicle. People often only invest in it when they feel it is going up, but in time, hopefully people will invest in more productive activities.

The agreement gives some confidence and hope to the business community in Iran, but are there any tangible benefits on the economic scene to be had at this stage? Seven billion of $50 billion in released Iranian foreign exchange doesn't seem like that much.

The first tangible impact will generate economic momentum. While the funds repatriated to  government are around $7 billion, they will help the government pay off some of its debts, especially to sub-contractors and project owners in key industries like oil and gas. There are a number of project delays and difficulties occurring in industry basically as consequence of the government owing a lot of money to its own sub-contractors and project owners. It's a new cycle that will start, with the government paying its debt, the companies becoming more cash rich, and they can start continuing or implementing delayed projects. All in all, the first step will be a re-starting of some of the economic activities that have more or less been undermined by the government's difficulty in pay its debts to various stakeholders in the economy.

Another element that is very important is the uncertainty that has been facing the business community over the last four or five years. The fact that businesspeople never knew what new sanctions were on the horizon, whether a company was going to be blacklisted, it was never possible to invest beyond a horizon of six months. There has always been that worry that the next set of sanctions and pressures from external forces will hit us. But now the business community is feeling like it's looking at a sustainable phase over the next few years, with the Rouhani government doing everything to ensure there are no new sanctions, to secure further sanctions relief, and maintain relative stability in key parameters, exchange rate, liquidity, over the next few years. The whole notion of a degree of sustainability will regenerate a lot of economic momentum and also investment in the economy.

The Iranian press has been very focused on the immediate economic questions following the deal. What are the main issues being discussed?

The media is divided into those who are euphoric about this agreement and believe this is the solution to resolve the economic problems, and also have those who are generally critical of the government and highlighting the idea that maybe Iran has given away too much for too little relief. There are those who've continuously insisted that key economic issues, unemployment, high inflation, stagflation, are not going to be resolved as a result of this agreement. There will be a need for more intelligent and strategic economic policymaking and so on, and depending on which you media you are looking at, you'll find a lot of political slant in the analyses of what this can produce. My personal analysis and those who are looking more long-term at development is that this is just beginning, there is a lot of work still to be done, from empowering Iranian industry to benefit from new atmosphere, for example, but the fact is that you will also need a very healthy and strong banking sector to extend loan capability and fill financial gaps that companies will have. To also other policies and government interventions, all in all, definitely there has been a positive reaction to Geneva, but the more sober analysts looking at a medium to long term perspective are saying that there is still a great deal of work to do.

President Rouhani recently said himself sanctions are only part of Iran's economic problems. How do you think this government is doing managing people's expectations around what this deal can do?

I think they are doing a good job in managing expectations. When you listen to Rouhani's televised interviews and presentations on economy, there are two aspects. One is to highlight all the mismanagement and all the misguided policy of the previous government and remind everyone that Rouhani inherited a situation that was almost unprecedented in terms of high debt from the banking sector to industry, and financial gaps that the Ahmadinejad government left behind. But also to manage expectations and say, don't expect that all these economic problems will disappear, both he and the minister of economy have continuously said that we are just about coming out of a serious stagnation of the economy, and at best this year will experience zero growth; inflation and unemployment will remain high no matter what you do, there no quick fixes, generally when you read their comments on all levels, they are trying to manage expectations.

The people wish to see a completely different economic dynamic, people who have suffered as a result of misguided policy, but to fix current problems and all these key negative indicators, will take at least three to four years, to return to a certain degree of normalcy. In his first term, if he doesn't manage to achieve that, it will certainly disillusion people. But the Iranian people are a lot more politically aware than many give them credit. They do understand some of these connections, are happy that things moving forward, even though a lot will be disappointed come next Iranian year.  We will have to see how income levels will be adjusted with inflation of over 40 percent even, if we are optimistic and say by end of year inflation will be at 35 per cent, then by law salaries have to be increased by 35 percent and we know that in itself self will be inflationary, will increase money supply. So it's important to see how they will manage different pressures coming from within the current structure of Iranian economy.

The oil sanctions haven't been lifted of course, but is there any prospect of Iran negotiating better deals under these present circumstances? There's some talk of the Oil Minister, Mr. Zangeneh, coming up with some creative terms with India?

There are ways to increase levels of export right now, especially as under the terms of the agreement Iran is allowed to import gold or precious metals.  This is one sanction lifted and will allow Iran to manoeuvre around oil for gold, we know gold actually is valuable in Iran, Turkey paid for most of imports with gold, so that possibly will return as an option. Also international players going to start positioning themselves in reaction to the Geneva agreement, they understand there's a  good possibility of sanctions relief on the horizon and want to book place in the new integrated Iran in international trade. Some things that are happening they may not talk about, but new customers are coming up with new creative formulae for oil for good. Zangeneh is more focused on Chiense and Indian buyers of oil is their refineries more attuned to Iranian oil quality, so those are the more likely customers when we want to expand. The other factor is that Iran is trying to revamp its contractual framework for internal investment in the oil and gas sector, it's making a serious effort to make its framework more attractive to international investors and attract them. The point here is that that yes, terms have always been unattractive to investors, but more than contractual terms, Iran needs to improve the overall operational framework and general legal framework. I hope they will pay as much attention to this, as beyond the contracts there are many operations factors, delays, that all need to be revised to make Iran a more attractive place for investment.

 

Just the Beginning: An Interview With Iran Expert David Menashri

A Boneheaded Illegitimate Regime Trying to Survive

What Would Critics Recommend Instead? A Conversation With Ploughshares

Zarif, Ashton & Jalili: A Diplomatic Dance in Ugly Satire

comments

Politics

"A Boneheaded Illegitimate Regime Trying to Survive"

November 28, 2013
Roland Elliott Brown
8 min read
"A Boneheaded Illegitimate Regime Trying to Survive"