Economist Urges New Gov’t to Address Super Challenges

EghtesadOnline: The new government needs to address super challenges, as the country will not be an oil exporter by the end of the next decade, says Vahid Shaqaqi-Shahri, an economist and university professor.

News ID: ۷۸۶۵۲۹

27 June 2021

“The unfavorable economic governance over the past 50 years has created and accumulated challenges in the Iranian economy,” he wrote for the Persian newspaper Iran.

The economist believes that water crisis, bankruptcy of pension funds and the end of Iran's oil export era top the list of challenges.

“Seventy percent of Iran's land area are experiencing water stress and population growth last year reached its lowest level in 50 years, with 0.7%. The imbalance of our pension funds has also become a major problem, such that the liabilities and debts of pension funds have been estimated at 1,500 trillion rials [$6 billion]. On the other hand, at the end of this decade, we are approaching the end of oil exports and countries are moving toward the use of clean and low-cost energy,” he said.

Shaqaqi-Shahri named imbalance in the banking system, growing inequality, unemployment of young and educated people, environmental pollution, government debt and bad business environment along with monopoly and corruption as other major problems.

“We also have thousands of dollars in banking imbalance, which we have dealt with through oil revenues,” he added, noting that there is need for action plans for undertaking structural reform to face those challenges in the decade to come.

“The new government has to start addressing these challenges … because Iran will not be an oil exporter at the end of the next decade. We must reduce the government's dependence on oil … and prepare for a stable situation by the end of this decade.”

In another write-up for the Persian daily Jahan-e Sanat, the economist said high inflation rates have been roiling the Iranian economy for 50 years now and no definite solution has been provided to fight this economic-social issue despite knowing fully well how to control it.

“The first signs of high inflation emerged in the 1970s: one was a 13.5% inflation rate in the year ending March 1975 and the other was a 25% inflation rate in the year ending March 1978. After the 1979 Islamic Revolution and despite years of policymaking, Iran has always been placed among countries with high inflation rates. At present, our country ranks fourth highest in the world in terms of inflation. The average inflation rate stood at 24% in the 2010s. Over the past three years, the country’s inflation rate has exceeded 115% in total.”

The average goods and services Consumer Price Index in the 12-month period ending June 21, which marks the end of the third Iranian month of fiscal 2021-22, increased by 43% compared with the corresponding period of the year before, latest data released by the Statistical Center of Iran show.

For the 10th consecutive month, the annualized inflation has been on the rise.

“High inflation in Iran’s economy stems from three imbalances. Unless these imbalances are addressed, inflation will remain uncontrollably high. In the event of an increase in oil revenue, we might manage to artificially, unrealistically and unsustainably improve the situation through imports but if the country is aiming for a sustainable control of inflation, it needs to resolve three major imbalances: budgetary, banking and foreign trade.”

To address the imbalances, he explained, tough decisions and structural reforms need to be implemented.

“Financial discipline must be applied via operational budgeting. Banking system must undergo a structural reform in order to prevent the creation of liquidity and reduce the burden of mandated loans on banks. And to tackle imbalances of foreign trade, imports must be controlled and exports must increase. But none of these will come to pass by sloganeering, speeches, or command. For instance, the development of non-oil exports requires a plan for improving competitive production. Economic diplomacy, lending support to production, development of private sector, eliminating rent-seeking practices and monopolistic behaviors are required to achieve sustainable non-oil exports,” he said.

Shaqaqi-Shahri stressed that reforming the banking system needs a large, long-term project, as budgetary reforms require an operational budgeting that hasn’t gone beyond words after 20 years of sloganeering.

“Besides, financial discipline has not been enforced, trade deficits have not been controlled, governments’ use of banking resources continue and the supervision of the central bank over banks has not been effective and integrated. As a result, inflation rates have been high over the past 50 years despite occasional controls due to the rise in oil revenues. The absence of oil income has always generated these three imbalances and sharp increases in inflation rates,” he concluded.