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Economy + Policy E1:R2

Economy + Policy E1:R2

Key Developments

Iran agrees an "action plan" with the Financial Action Task Force to improve the integrity of the country's AML-CTF efforts

Inflation is at a 25 year low as the Rouhani administration reaches its goal of single-digit levels.


 

Iran Takes Steps to Improve Banking Integrity

The world’s leading banks remain hesitant to engage with Iranian counterparts due to ongoing concerns around transparency, compliance, and anti-money laundering (AML) practices. The intergovernmental body responsible for setting and monitoring global standards in these areas in order to ensure the integrity of the international financial system is the Financial Action Task Force (FATF).

FATF has had longstanding concerns over the operation of Iran’s banking sector, and during the sanctions period, the assessment of the FATF that Iran continued to enable money-laundering and the funding of illicit activities, including terrorism, was a cornerstone of the political justification for financial sanctions. Following the implementation of JCPOA, it was expected that FATF would reevaluate its position on Iran in light of the lifting of international sanctions.

On June 24th, FATF held a plenary in South Korea which addressed Iran’s new position in the global banking system. The statement acknowledged the important step taken by Iran to commit to an “Action Plan” in an effort “address its strategic deficiencies.” In order to provide time for Iran to begin the process of executing the plan, FATF “suspended counter-measures for 12 months in order to monitor Iran’s progress in implementing the Action Plan.”

Pro-deal and anti-deal voices saw the FATF statement as confirmation of their own views. Those optimistic about Iran’s capacity for reform saw the FATF report as positive international recognition for the country’s efforts, particularly as Iran’s parliament has recently passed AML-CTF legislation, subsequently approved by the Guardian Council, to protect against money laundering and terrorist-financing.

However, those skeptical of Iran’s reform capacity point to the fact that the country still remains on FATF’s blacklist. While suspended counter-measures are intended to improve the ability for Iranian banks to transact within the global banking system, the fact that Iran remains on the blacklist will certainly dissuade many international banks from taking the perceived risk.

Iranian frustration over its position in the global banking system has been an area of tension with foreign governments. Governor of the Central Bank of Iran (CBI), Valiollah Seif, during a recent trip to Washington D.C., expressed his frustration with the continued financial isolation of Iran. Bilateral meetings with US Treasury Secretary Jacob Lew focused largely on these concerns, and US assurances that FATF would make a fair assessment of Iran’s progress during its ongoing monitoring efforts. The assessment of FATF is also important if political support is to emerge in Washington to one day remove Iran’s Section 311 designation as a “primary money laundering concern.”

Inflation Reaches 25-Year Low

According to the latest report by the CBI, the production price index fell to 1.6% year-on-year in Khordad (May 21-June 20). The report also said that year-on-year inflation in the Iranian month reached 3.8%, the lowest since 25 years ago. In Khordad, the year-on-year inflation rate for industry was -1.5%, while in the service sector it grew by 7.78%. PPI has been falling largely due to the current recessionary effects in the Iranian economy.

Inflation fell to 9.7% in the Iranian month of Khordad (May 21-June 20), according to the CBI’s latest report, with the consumer price index (CPI) at 240.9 points. This marks the first time in 25 years that Iran’s inflation rate is below 10%. Given that managed inflation was among the first economic priorities of the Rouhani administration, the announcement was used to highlight the effectiveness of government monetary policy. However, the monthly increase in inflation exceeded the 0.8% redline set by the government for the second consecutive month, coming in at 1.2%.

Crossing the redline may signal that the Rouhani administration’s expansionary monetary policy may be causing some overheating effects. One of the major factors that could push inflation higher is the reduction in the interest rate that has taken effect. The gap existing between the deposit rate ceiling for ordinary savings accounts and that for fixed deposit accounts is now one percentage point only. This could encourage depositors to save their capital in short-term accounts, which can be liquidated more easily, causing inflationary pressure.

Trade Balance Positive in Q1

Iran’s Customs Administration has reported that Iran’s trade balance was positive in Q1 of the Iranian year 1395 (Q2 of 2016). Iran exported 27.78 million tons of goods with a value of USD $10.47 billion. Imports stood at 7.26 million tons of goods with a value USD $9 billion. However, despite the positive trade balance, non-oil exports fell 14.68% while imports declined 13.5% in Q1. This may reflect a faltering global economy. Key exports included USD $690 million worth of CNG, USD $354 million worth of iron and steel, and USD $343 million worth of propane.

In the same periods, key imports including USD $917 million worth of rice, USD $272 million worth of corn livestock feed, USD $221 million worth of soybeans, and USD $160 million dollars worth of auto parts. The average price per kilo of exported goods was USD $377 while for imports the average price was USD $239.

Despite the prospect of renewed trade with Europe, Iran’s key trading partners remain China (21.49% of exports), UAE (16.92%), Iraq (14.49%), South Korea (8.11%), and India (7.40%). However, the export share of the rest of Iran’s trading partners grew by 29.33% relative to the leaders. This indicates that Iran’s trading network is expanding inline with sanctions relief. 

Financial Markets E1:R2

Financial Markets E1:R2

Financial Markets E1:R1

Financial Markets E1:R1