Business Prospects Dim in Q4

EghtesadOnlne: Iran’s business environment deteriorated in winter (Dec. 22, 2019-March 19) on a quarter-on-quarter basis, ending its four-season streak of improvement registered in autumn, Iran Chamber of Commerce, Industries, Mines and Agriculture reported.

News ID: ۷۵۰۰۱۱

11 May 2020

Iran’s National Business Environment Index stood at 6.05 points in Q4 of last fiscal year (ended March 19, 2020) to register an increase of 0.33% compared with the preceding quarter and a decline of 3.51% over the same quarter of last year, the chamber said in a report published on its website.

The index calculated by ICCIMA measures business friendliness of Iran’s economy, with 10 indicating the worst grade. In other words, the decline in index is indicative of an improving business environment.

Iran’s National Business Environment Index stood at 6.03 in Q3 of the fiscal 2019-20 and 6.49 in Q4 of the fiscal 2018-19.

Unpredictability and fluctuations in raw material prices, uncertainty about policies, rules, regulations and business formalities, as well as difficulties with getting credit, were the most undesirable factors affecting Iran’s business environment during the period under review, according to the findings of the 14th round of this report.

In fact, unpredictability and fluctuations of raw material prices have been the most unfavorable factor in Iran’s business environment during the 10 quarters leading to March 19, according to the respondents of the survey.

On the other hand, access to water, energy carriers (electricity, gas and diesel), mobile networks and the internet were identified as the most prominent factors in improving the business environment.

The chamber also measures the index for each of the 31 Iranian provinces. The report names Sistan-Baluchestan (6.40), Tehran (6.37) and Kurdestan (6.20) as the provinces with the least favorable environment to do business in, and Markazi Province (5.42), West Azarbaijan (5.43) and Qazvin (5.52) as the best.

The services sector had the worst business environment in Q4 with 6.08 points and was followed by agriculture (6.02) and industry (5.96).

As for 21 fields of business, the worst three were “other services”, “administrative and support services” and “construction”. The top tier included “arts, leisure and recreation”, “real estate and properties” and “education”.

Enterprises with 50-100 employees had the best business environment with a score of 5.97 while those with six to 10 employees had the worst business environment with a score of 6.15.

Businesses operating for 11 to 15 years indicated the worst business environment (6.13) while those under two years old were the best (5.79).

The ICCIMA index is fashioned after World Bank’s “Ease of Doing Business” index, the latest edition of which was published in November 2019.

According to the World Bank, Iran’s ease of doing business ranking improved by one place to stand at 127th among 190 economies.

The World Bank’s Ease of Doing Business Report 2020 shows the country's distance to frontier score saw a decline of 0.1 percentage point, from last year’s 58.6 to 58.5 in the new report.

New Zealand topped the list of 190 countries in the ease of doing business with a score of 86.8, which was followed by Singapore with 86.2 and Hong Kong with 85.3, while Somalia was in last place with a score of 20.

Coronavirus Impact

The fourth quarter index would stand at 6.10, if the impact of coronavirus outbreak on the country’s businesses, surveyed as an independent variable, is taken into consideration.

Estimates show 15% of Iran’s economy will be affected by the coronavirus outbreak, Economy Minister Farhad Dejpasand has said, though the precise economic cost of the new coronavirus outbreak in Iran has yet to be determined.

What's evident is that the economy, already battered by years of punishing sanctions, is facing one of its toughest years in history.

“The country is bound to face a serious inflationary recession in the coming months, given the falling oil prices and the outbreak of coronavirus,” says Parviz Javeed, a member of Iranian Economists Association.

“Due to sanctions and complications associated with the country’s blacklisting by FATF, importation, particularly that of intermediate goods needed by factories, will become more difficult. Nearly 60-70% of Iranian factories rely on imported raw materials. In case these raw materials are not supplied at an appropriate time and adequately, factories will be forced to reduce their production capacity and lay off workers,” he told the Persian-language daily Shahrvand.

The Financial Action Task Force put Iran on its blacklist on Feb 21 after Tehran failed to comply with its anti-terrorism funding norms. FATF had asked Iran to pass four bills as part of the “Action Plan” to escape the watchdog’s blacklist.

Tehran managed to approve and enact amendments to counter-terrorist financing and anti-money laundering rules. Two remaining bills, namely Palermo (convention against transnational organized crime) and terrorist financing conventions (CFT), failed to get the approval of top legislative bodies.

As per the government plan dubbed Smart Distancing Initiative, low-risk businesses resumed activities starting April 11 in all provinces, except Tehran, that can follow suit on April 18. Government offices will be open from 7 a.m. to 2 p.m. The scheme allows one-third of employees in each workplace to undertake remote work.

PMI Plummets to Record Low

The Purchasing Managers’ Index, known by its Farsi acronym Shamekh, for Iran’s overall economy tumbled to 31.39 for the 12th month of last fiscal year (Feb. 20-March 19), indicating the biggest monthly drop since the index was first calculated by the Statistics and Economic Analysis Center of the Iran Chamber of Commerce, Industries, Mines and Agriculture in October 2019.

The overall PMI for the economy improved from 44.26 in the month ending Jan. 20 to 47.62 in the month ending Feb. 19 but plummeted to 31.39 in the month to March 19, as business activities in the country collapsed following the outbreak of the novel coronavirus.

The center says the numbers point to an economic contraction of 51.7% or 16.23 points month-on-month.

The headline PMI is a number from 0 to 100, such that over 50 shows an expansion of the economy when compared with the previous month. A PMI reading under 50 indicates contraction and a reading of 50 implies no change.

PMI is an index of the prevailing direction of economic trends, aiming to provide information about business conditions to company directors, analysts and purchasing managers.

According to the report, the “business output” sub-index increased from 42.65 in the 10th fiscal month (Dec. 22, 2019-Jan. 20, 2020) to 48.77 in the 11th fiscal month (Jan. 21-Feb. 19) but sank to 28.10 in the 12th fiscal month (Feb. 20-March 19, 2020)

The “new orders” sub-index improved from 40.41 in the 10th month to 46.33 in the 11th month but fell to 28.60 in the 12th month.

The “supplier deliveries” sub-index, which measures how fast deliveries are made, increased from 50.67 in the 10th month to 50.35 in the 11th month but dropped to 36.51 in the 12th month.

The “raw materials inventory” sub-index fell from 41.81 in the month ending Jan. 20 to 37.76 in the month ending Feb. 19 to 32.23 in the month ending March 19.

The PMI reading of “employment” sub-index climbed from 48.52 in the 10th month to 51.03 in the 11th month but tumbled to 35.42 in the 12th month.

To calculate PMI, seven secondary criteria were also surveyed by the center, namely raw materials purchase prices, warehouse inventory, exports, product price, fuel consumption, sales and production expectations.

The “raw materials purchase prices” sub-index increased from 74.79 in the month ending Jan. 20 to 84.05 in the month ending Feb. 19 but fell to 61.98 in the month ending March 19.

The “warehouse inventory” sub-index plunged from 45.88 in the month ending Jan. 20 to 42.55 in the month ending Dec. 21 to 36.30 in the month ending March 19.

The “exports” sub-index improved from 40.97 in the 10th month to 45.29 in the 11th month, but fell to 30.30 in the 12th month.

The “prices of manufactured products or services” sub-index increased from 54.66 in the 10th month to 63.13 in the 11th month, but slid to 44.98 in the 12th month.

The “fuel consumption” sub-index climbed from 60.59 in the month ending Jan. 20 to 66.92 in the month ending Feb. 19, but decreased to 35.37 in the month ending March 19.

The “sales” sub-index improved from 42.55 in the 10th month to 47.35 in the 11th month, but dipped to 29.17 in the month ending March 19.

The “Business output forecasts” sub-index declined from 58.35 in the month ending Jan. 20 to 50.49 in the month leading to Feb. 19 to 23.82 in the month ending March 19.