Diversifying economy: Lessons from Iran

Over the years, the abundant crude oil in the country has been termed a curse owing to the fact that the huge earnings accruing from the natural resource has not positively impacted the lives of most citizens. The region that bears the oil has continued to lament years of neglect and environmental degradation as a result of exploration and exploitation activities.

More than 90 percent of the country’s revenues come from exporting crude oil. But crude oil has lost almost 60 percent of its value over the last one year. Apart from the problems of decline in oil prices and production in the country, rising cases of piracy, absence of no new investments in the industry, Nigeria is also contending with low demand for its oil.

In addition, Nigeria is said to be increasingly depleting its oil reserves. It is feared that within the next three decades, the country may not have enough crude oil to export. More and more countries are successfully exploring oil within Nigeria’s borders, thus depleting the pool of Nigeria’s customers.

To combat these problems, Nigeria has managed to weather the economic storm created by plunging oil prices the Central Bank devalued the currency and raised interest rates. It followed up by not raising interest rates any further, and has been burning through its cash reserves as well to prop up the currency. Government revenue has dropped dramatically, civil-service salaries are delayed, many construction projects have been suspended and layoffs have begun.

The economy of Africa’s largest country, by GDP, after peaking at 6.54 percent in the second quarter of 2014, moved lower to 6.23 percent in the third quarter and then settled at 5.94 percent in the fourth quarter, according to the National Bureau of Statistics (NBS).

However, the Vice President sees things differently, as he particularly noted the fact that slowing growth is a global phenomenon, while soothing nerves that Nigeria will come out stronger. Vice President Yemi Osinbanjo, allayed fears of a possible recession as he spoke to select journalists in Abuja, assuring that government is putting in place pro-people policies that would quickly reverse the trend, especially when the implementation of the 2016 budget begins in earnest.

“And some of the policies that we want to put in place would also be helpful. We expect that agriculture will also kick in; we expect that funding for MSMEs will kick in. So, we think the trajectory will be good”, said Osibajo.

“Some have suggested that a recession is inevitable, I don’t think so. I think that we are well on the way, especially if we are able to implement our budget well. We are well on the way to getting out of the worst part of where we are today. And I think things will improve,” said the Vice President.

In the midst of the Vice President’s optimism, Nigeria do not need to re-invent the wheel. There are lessons to be learnt from Iran.

Iran earns more from taxes than oil

Iran’s oil revenues took a nosedive in recent years due to sanctions imposed on the country’s energy sector by the European Union and the United States over Tehran’s civilian nuclear program and also because of falling global crude prices.

However, today, more than half of Iran’s state revenue is coming from taxes over oil for the first time in 50 years. A new report says Iranian President Hassan Rouhani’s economic strategy to reduce country’s oil dependence has borne fruit as government in currently earning more through taxes than oil sales.

The report said the “Iranian government is earning more from tax than oil” as a result of its policy to “shift its traditional reliance on oil money to taxes in the face of plummeting oil prices.”

Ali Kardor, the deputy managing director of the National Iranian Oil Company (NIOC), was quoted as saying that President Rouhani’s economic strategy is to significantly reduce the government’s dependency on oil and instead collect tax more systematically.

“For the first time in 50 years, the government’s share of the oil revenue is less than what it is earning from tax, including VAT (value-added tax)”.

“Only around 10 percent of Iran’s GDP is currently dependent on oil,” the official said, adding that almost 20 percent of oil income goes into a sovereign wealth fund, which is reserved for development purposes.

Sanctions against Iran’s oil sector are expected to be lifted when the International Atomic Energy Agency verifies Tehran’s compliance with its commitments as per an agreement reached between Iran and the P5+1 group of countries – the US, the UK, France, China, and Russia plus Germany – in mid-July, also known as the Joint Comprehensive Plan of Action (JCPOA).

According to JCPOA, the six countries have agreed to remove sanctions against Iran’s economic sectors, including oil and gas industry, in return for limitations in Iran’s nuclear program.

Iran’s NIOC is going to offer a set of new contracts to foreign investors, worth more than USD $100 billion, for about 45 potential onshore and offshore fields by November.

Iran currently produce 3 million barrels of oil a day, of which 1.3 million are exported but expect that to increase to 2.3 million in May or June next year.

FRANK UZUEGBUNAM