Experts Explore Sources of Economic Predicaments

EghtesadOnline: Iranian economist Hossein Raghfar said the decision-making establishment in the country is at the heart of all the problems Iranians faced in the current fiscal year (March 2017-18).

News ID: ۷۸۲۰۹۵

14 March 2018

Raghfar noted that this system has been in place for, at least, the past century and is unlikely to go away next year.

“Public resources change into economic opportunities for a select few through their inefficient allocation of the decision-making body. The establishment, which doles out economic opportunities, is to blame for the stark inequality in the country. Inequality spreads other economic diseases, including inflation, recession and unemployment,” Raghfar told the Persian news website Fararu.

“Bank loans and tax exemptions are offered to special groups and individuals. Similarly, some groups are given exclusive opportunities like the right to import cars. Changing the import tariffs and manipulating prices funnels billions of rials from the pockets of ordinary people to the circles of wealth and influence,” Financial Tribune quoted him as saying.

Many legislators say that by using the benefits of cronyism, selected auto importers have made fortunes from the volatile import rules and the chaotic market over the past several years.

According to reports by Majlis Research Center, the research arm of the parliament, Majlis Article 90 Commission (which handles complaints) and the General Inspection Organization of Iran, some car importers made millions of dollars in windfall profits by taking advantage of the uncertain market situation and using insider information.

Asadollah Qarekhani, Iranian parliamentarian, said the government’s sudden move to shut down Sabtaresh [the online auto import registration website that has been shut down several times in recent months] has further strengthened suspicions about insider information and nepotism.

“Shutting down the website disrupted the market and created conditions in which some made millions of dollars” by selling foreign cars at inflated prices, the MP added.

Inefficient Allocation of Resources

Public resources of oil, gas and energy are being distributed in the form of subsidies to major steel and petrochemical businesses, Raghfar said.

“The wrong site selection for these industrial plants has cost enormous public money. The money that could be used to create job opportunities was knowingly buried in the middle of deserts,” he said.

As water is essential for the production of steel and because of Iran’s semi-arid climate, there are only a few ideal locations for setting up a steel plant in the country, which is near the sea.

However, many of the country’s main steel mills and even most of the proposed steel plant projects are located in central Iran, away from any major source of water. A number of steel plants are being constructed in regions with no feasibility and the return of investment for them is zero. As a result, Iranian steel mills presently consume over 169 million cubic meters of water per year.

The provincial steel plants date back to 2006 when the government decided to implement eight steel projects in the provinces of Chaharmahal-Bakhtiari, Fars, Khuzestan, Yazd, Kerman, East Azarbaijan, South Khorasan, and Khorasan Razavi.

Hadi Haqshenas, the deputy head of Ports and Maritime Organization, recently said Iran took the wrong course in the development of its cities by investing heavily in oil and gas industries in the southern province of Khuzestan and petrochemical industry in central provinces.

“This is while advanced countries set up such industries along their coastlines to reduce their water and transportation costs. Our governments have been sidetracked by oil; they have been negligent about sea-driven economy. So much so that sales and export of raw materials constitute nearly 63.5% of non-oil exports. We are yet to escape the historical oil trap,” Haqshenas told the Persian daily Shahrvand.

Inept Taxation System

Raghfar believes Iran’s taxation system is not capable of identifying and taxing those who should rightfully pay their fair share of tax.

“Special construction groups rake in billions of rials but fail to pay tax. Overnight depreciation of the Iranian rial and purchasing power loss has become people’s recurring nightmare. The decision-making authority is directly responsible for this so-called ‘inflation tax’. People do not know how to protect themselves and their legal properties from decisions that the system imposes upon them on the daily basis,” he said.

Inflation tax is the metaphorical representation of economic disadvantage the bearers of cash or its equivalent face in a single currency denomination. In case of inflation tax, such disadvantages result from the impact of inflation, which functions as a hidden tax and subtract value from those assets.

Sometimes, Inflation tax affects the economy of a country negatively, when it puts into distress the middle-class population with low income. The government of a country raises the monetary amount by printing bills and banknotes. This, in turn, generates and increases revenues, initiating a change in the real money balance.

All these activities bring about inflation in the economy. The effects of raising the supply of money make money-holders pay the inflation tax, as the most evident cost of inflation.

“All these escalate inequality and increase costs of production. Unproductive businesses, including imports of luxury goods and real estate transactions, would replace productive investments when manufacturing becomes a high-risk, low-profit activity,” the economist concluded.

According to Chairman of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi, tax evasion stands at 30-40% of total tax revenues in Iran annually. He says tax evasion costs the country an estimated 400 trillion rials (about $9 billion) every year.