Lecture on International Financial Crisis & Its Impact on the Iranian Economy

The speakers discussed the various effects they believe the current global economic crisis will have on Iran's economy. Dr. Mahdavian warned that the falling price of oil will hurt Iran's government budget as well as the country's balance of payment. A price of $75 to $80 a barrel is the break-even point at which the government's budget can survive without any positive or negative impact on its Oil Stabilization Fund. If Iran's keeps up its growth in imports as the price of oil falls, the government will have a problem keeping its balance of payment in a sustainable state, Dr. Mahdavian said. He added that all macroeconomic indicators show that there will be heavy depreciation pressure on the rial in coming months if the oil price continues to be low.

Dr. Naeeni said oil prices have fallen sharply like other commodity prices since July mainly because of economic contraction. He believes that OPEC will reduce its supply at its December 17th meeting by at least one million barrels, a move that will send prices up to around $70, which is a consensus equilibrium price in OPEC these days. Because of falling oil prices, Dr. Naeeni predicts Iran�s growth rate will be about one percentage point lower than was expected.

Dr. Adeli said he believes that the overall impact of the global economic crisis will be limited in Iran because of the seclusion of its economy. This is especially true of Iran�s capital market and the stock exchange.

However, he listed a few impacts of the global financial crisis on the Iranian economy:
1. Iran's $20 billion dollars of official investment abroad is not going to be affected very much, although Dr. Adeli estimated there will be a roughly 30% decline in its value.
2. Sanctions are already creating problems for Iran to secure foreign investment and financial investment resources. With the recession, this will become more difficult.
3. Iranians abroad who are facing financial problems may search for solutions in the Iranian market. For example, some may want to borrow more money from Iran.
4. Because of the current low oil prices, Iran's oil revenues of $95 billion last year will likely be cut in half this year.
Dr. Adeli predicted that Iran's government will be unable to reduce is current expenditures much, creating "galloping inflation" in the next six months and leading to the depreciation of the rial. He expects monetary problems to follow fiscal ones.

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