Iran Gov't Bailout Package Opts for Inflation Instead of Recession

EghtesadOnline: Coronavirus bailout loans will ultimately increase money supply but that’s the lesser evil when it comes to making a choice between inflation and recession.

News ID: ۷۵۰۱۳۸

01 June 2020

The 750-trillion-rial ($4.41 billion) rescue package that the government has prepared following the outbreak of coronavirus in March includes 400 trillion rials ($2.35 billion) in loans to help prevent small- and medium-sized enterprises from collapsing.

As the payout process enters its final stage, experts have expressed concerns whether recipients will definitely use the money to shore up production.

Zahra Karimi, economist and university professor, believes that companies receiving the loans are highly likely to spend a part of the money in high-yield markets such as stock market rather than channeling it into the production cycle.

“Economic stability has declined; the outlook for production is gloomy. There is no guarantee that all loans will enter the manufacturing sector because on the one hand, some financial markets like the stock market, gold coin, housing and car markets are proving to be stronger money-spinners and on the other hand, manufacturers might argue that by investment in high-yield markets, they intend to raise money and recoup some of their losses,” she said.

Karimi noted that production has lost its attraction and everyone is interested in profitable economic activities, hence some manufacturers might only invest a fraction of their loans on keeping their production units afloat.

“Turbulence in different markets and the growth of money supply and inflation are the direct consequences of loans not entering the production cycle. That had been predicted by the government, but there’s no other option as the closure of economic enterprises, along with the ensuing unemployment, would drag the economy into a much worse condition,” she said in an interview with the Persian-language daily Shahrvand.

Stressing that some distressed business owners might be shut out of the government’s rescue package, Karimi said, “Unlike other countries, the law has not envisioned a serious penalty for fraudulent claims.”

Asked about a smart way to detect troubled businesses, the economist said, “The government needs to invite guild factions to supervise the distribution of facilities. Cooperation between the private sector, i.e. the guilds, and the government, must improve as the latter cannot control everything on its own.”

According to the latest reports, more than 18,000 employers and economic operators have registered at the Ministry of Cooperatives, Labor and Social Welfare’s Kara.mcls.gov.ir for coronavirus bailout assistance since May 13.

About three million insured employees are working with more than one million coronavirus-stricken economic enterprises, according to Alaeddin Azvaji, a senior official with the Cooperatives Ministry.

“The Cooperatives Ministry will grant 120 million rials [$705] in loans for each employee, provided businesses retain workers and maintain their payroll at this unprecedented juncture. Businesses forced to shut down will receive 160 million rials [$941] for each employee. The two-year repayment period will start as of October,” he was quoted as saying by Tasnim News Agency.

CBI's List of Coronavirus-Hit Businesses

In early May, the Central Bank of Iran updated and communicated to banks the list of businesses directly hurt by the outbreak of coronavirus, and therefore eligible to receive loans.

The list published on CBI’s website includes the following businesses and jobs:

1. Businesses, institutions and companies responsible for any meal prepared outside home, such as restaurants, reception halls and coffee houses. The Ministry of Industries, Mining and Trade is responsible for determining whether these businesses would be eligible to receive government aid.

2. Businesses active in the tourism and hospitality sector, namely hotels, apartment hotels, tourist centers, centers receiving pilgrims, guesthouses, eco-lodges, leisure centers and museums. The onus is on the Ministry of Cultural Heritage, Handicrafts and Tourism to determine whether these businesses qualify to receive government aid.

3. Transportation companies, namely air, road, rail and marine transportation firms. The Ministry of Roads and Urban Development is responsible to determine whether these businesses are eligible to receive government aid.

4. Intra-city public transport companies. The Interior Ministry will decide whether they qualify to receive government loans.

5. Travel agencies. The onus is on the Ministry of Cultural Heritage, Handicrafts and Tourism to conclude whether these businesses qualify for aid.

6. Apparel manufacturers and distributors. The Ministry of Industries, Mining and Trade will determine the eligibility of these businesses.

7. Manufacturers and distributors of footwear and bags. The Ministry of Industries, Mining and Trade will determine the eligibility of these businesses.

8. Confectionaries and shops selling nuts, dried fruits, ice-cream and fresh juice. The Ministry of Industries, Mining and Trade will establish the eligibility of these businesses.

9. Gyms, sports and leisure centers. The Ministry of Sports and Youth will verify whether these businesses qualify to receive government aid.

10. Cultural, educational and art centers as well as media groups. The onus is on the Ministry of Culture and Islamic Guidance, Education Ministry and the Ministry of Science, Research and Technology to determine whether these businesses qualify for the government’s financial support.

11. Handicraft manufacturers and distributors. The Ministry of Cultural Heritage, Handicrafts and Tourism will ascertain whether these businesses are eligible to receive government aid.

12. Health Ministry’s licensed private-run health and treatment centers, including laboratories and those providing para-clinical services.

13. Driving schools, barber shops and beauty salons. The Ministry of Industries, Mining and Trade will determine the eligibility of these businesses.

The Ministry of Culture and Islamic Guidance will also determine whether a bookstore or publisher is qualified to receive the government loan.

CBI Governor Abdolnasser Hemmati said the lending rate for the government aid package will be 12% to be repaid within two years.

Commenting on the interest rate, Hemmati said it is reasonable, given the high inflation rate in the country.

“Even if banks set 18% interest on loans, the real interest rate would still be negative when compared to the annual inflation. Any rate below 12% would apparently impose further financial strain on banks,” he said.

Hemmati said only businesses that did not lay off workers during the corona crisis would be eligible for the loans. He instructed banks to process the loans soon and cut red tape.