Industrial Misfortunes: Internal, External Factors

EghtesadOnline: What should the underperformance of Iran’s manufacturing sector be attributed to—macroeconomic policies or the businesses themselves? Perhaps both are to blame.

News ID: ۷۷۸۳۴۶

14 August 2017

The Statistical Center of Iran’s data show industrial enterprises with more than 10 employees have seen a steep decline in their number: from over 17,000 in the fiscal 2009-10 to 14,452 in the fiscal 2014-15.

SCI has yet to release data for the past two fiscal years.

Chairman of Iran’s Industries and Industrial Parks Organization Ali Yazdani told Iran’s state TV on Saturday that as of the end of last fiscal year (March 20, 2017), 14.5% of the industrial units located in Iran’s industrial parks had been closed, according to Financial Tribune.

Experts expect the figures to show signs of improvement after the lifting of international sanctions in January last year, as part of a nuclear deal Iran signed with world powers earlier in 2015.

Iranian industries have been grappling with a longstanding recession in the past few years, mostly as a result of credit shortage, sanctions and bad policymaking in addition to causes pertaining to the businesses’ own management.

Interest Rates: Main Culprit?

Business owners blame high bank interest rates. But experts believe that much as the interest rates affect the funding costs, holding the rates 100% accountable for the bad performance of enterprises suggests business executives are seeking a pretext to hide their mismanagement.

In June 2016, Money and Credit Council allowed the banking sector to offer approximately 15% interest on term deposits, lowering the rate by 3%, and charge 18% for interbank lending.

In the face of growing backlash over high rates, the Central Bank of Iran has announced that it intends to fix the interest rate by setting it 2-3% higher than the inflation rate. The latest CBI report put inflation at 10.3% for the 12-month period ending July 22.

“It’s not as if this factor [high interest rate] is the most significant reason for the recession in industries. But, in general, considering the weak structure of financial markets and the absence of a replacement for bank loans, high interest rates can damage the enterprises’ performance,” Sajjad Ebrahimi, a lecturer at Money and Banking Research Institute, told the Persian weekly Tejarat-e Farda in an interview.

Critics of the current monetary policy argue that the gap between inflation and interest rates will undermine the manufacturing sector and exacerbate the recession.

This is while economists believe that to maintain the strong economic growth of 12.5% experienced in the last fiscal year (March 2015-16), stimulating Iran’s manufacturing sector is inevitable. This is because the staggering growth mostly owes to increased oil production following the removal of sanctions.

According to the Central Bank of Iran, GDP growth, without taking oil production into account, stood at 3.3%. In the World Bank’s words, growth prospects in the medium term are expected to be modest due to near-capacity oil production and weak non-oil sector activity.

Some say the government should take action and reduce interest rates to keep lending costs in check. They refer to the credit crunch Iranian banks are grappling with, arguing that shortage of liquidity has made it difficult for the banks to recoup their loans, in spite of high interest rates. Credit crunch also has a disruptive monetary effect on interbank interest rates.

Iran enjoyed sky-high crude prices over the past few years by adjusting its spending with high revenues. Oil revenues topped $110 billion in the Iranian year to March 2012 under the previous administration, but the bearish crude market pushed them down to $14-15 billion in the Iranian year ending March 19, 2016.

Oil prices fell drastically in 2014, from over $100 per barrel to the record low of $30 in 2016. Government revenues have seen the sharpest fall in history in recent years.

“Assessment of the stats for 280 companies listed in Tehran Stock Exchange from 2011-12 to 2015-16 show 60% of their assets were acquired through borrowing,” Ebrahimi said.

The lecturer, however, added that lending costs merely accounted for 23-55% of the companies’ profit, which is far less than the share of loans in their assets.

Ebrahimi believes that the interest rates have not been illogically high after all, therefore the fact that so many businesses have gone bankrupt could not be attributed to interest rates alone.

“Businesses have problems beyond funding and bank loans,” says economic scholar, Morteza Emadzadeh.

He refers to factors such as sanctions imposed over Iran’s nuclear program until January 2016, which cut industries’ access to the latest technologies, as one of the main external reasons for the failure of many industries.

However, Emadzadeh adds that a considerable part of the firms’ issues pertain to internal factors such as unskilled workforce, low productivity and lack of market research.

“Our companies lack an export-oriented vision. They often see their market restricted to national borders, even though the domestic market has limited demand,” he said.