Economist Outlines Prospective Priorities of New Government

EghtesadOnline: The economic priorities of the new government are: formation of its economic team and urgent actions, according to Ali Marvi, the director of Sharif Business Think Tank.

News ID: ۷۸۶۵۶۷

30 June 2021

Referring to the first issue, he said, “The economy can no longer withstand the trial and error of pseudo-economists. A coordinated team should advance the economic interests of the Cabinet under a single leadership, say an economic vice president, who should have mastered both the basic issues of economics as well as of the Iranian economy and its dangerous conditions.”

First Step: Reducing Inflation

Referring to the pressing needs of the Iranian economy, Marvi said the first step is to target a sustained containment of inflation, which depends on cutting off oil revenues from the government budget.

“The government has a very wide operating deficit, meaning that there is a significant gap between operating revenues and expenditures. Using oil money to fill this gap will lead to higher inflation or harm domestic production, as the economy has experienced the same results in the past five decades,” he wrote in an article published by the Persian daily Donya-e-Eqtesad.

But how should the gap be filled?

The economist explained that the government must first reduce this gap by reining in its spending, saying that a courageous step that the president-elect can take at the beginning of his term is to come up with an addendum to the fiscal 2021-22 budget, one that reduces government spending, because the current bill will lead to a very high operating deficit.

“Alongside the spending restraint, the government should also have a special plan for the transfer of assets over the next one or two years, be they the shares of state-owned companies or other assets that can significantly help fill this revenue and expenditure gap,” he added.

At the same time, the government should tap deeper into the debt market so that it can finance part of the gap with bonds.

Economy Minister Farhad Dejpasand has said that last fiscal year’s (March 2020-21) budget was balanced without borrowing a rial from the Central Bank of Iran.

“The government managed to successfully pass through the crisis-ridden fiscal 2020-21 while oil sale revenues accounted for as little as 126 trillion rials [$508 million] of its 5,710-trillion-rial budget ($23 billion). Instead of borrowing from the central bank, we borrowed from the people by selling bonds,” he was quoted as saying by IRNA.

According to the minister, a total of 2,130 trillion rials ($8.5 billion) worth of bonds were sold during the period.

Marvi noted that in the medium term, tax revenues can also fill the aforementioned gap, adding that the new president should start tax reform as soon as possible.

Another important reform, he said, is needed in the banking system amid the ever-increasing money supply experienced by the Iranian economy.

According to Masoud Nili, a well-known economist and a former aide to President Hassan Rouhani, growth in money supply per day now equals the sum used to increase each year in the late 1980s.

A Serious Catch

One serious catch facing the new government is the possible adoption of supportive measures against inflation.

One of the main campaign promises made by a couple of presidential candidates in the runup to the recent election was raising the sum of cash handouts as part of the Targeted Subsidy Program.

“High pressures on the livelihood of lower deciles, on the one hand, and expectations created during the electoral campaigns, on the other, make it possible to formulate supportive policies without providing sustainable resources. This is extremely dangerous and will exacerbate the current inflationary situation, which will mostly create a problem for the poor,” Marvi said.

The economist added that the government should regulate its massive energy subsidy payments in favor of the less privileged.

Iran was the largest fossil fuel subsidizer for the third year in a row in 2019, according to the International Energy Agency. Having spent $86.09 billion on fossil energy consumption subsidies in 2019, Iran ranked first globally, leaving behind China with $30.48 billion and Saudi Arabia with $28.72 billion.

The volume of Iranian fuel subsidies extended to its citizens in 2019, which increased by 10.9% year-on-year, equals 18.8% of Iran’s GDP. Iran’s average subsidization rate of fossil fuels (as a proportion of the full cost of supply) was 79%. The country paid $1,038 as fossil fuel subsidies per person in 2019.

Commenting on the issue of government pricing of private goods and suppression of foreign currencies by the central bank, Marvi said that after inflation has dropped to an acceptable level, the government should start abolishing its pricing of private goods.

“Foreign currency suppression is in fact an unintended consequence of the existence of oil money in the government budget; it strengthens imports and weakens exports, which harm domestic production,” he added.

Elsewhere in his remarks, Marvi said the new government should target economic growth for creating jobs at the same time.

Economic Diplomacy

The economist noted that the government should pursue economic diplomacy as one of the most important steps.

“Activation of Iran's optimal role in the Silk Road and revival of important international routes such as the Project Mausam and the International North-South Transportation Corridor will present important opportunities to move forward” he said.

“We know that the effective lifting of sanctions will considerably help the economy. Fortunately, Iran has unique geographical and geopolitical advantages, and sanctions have greatly reduced the attractiveness of investing in the country.”

Iran and the US are holding indirect talks on reviving the 2015 nuclear deal known as the Joint Comprehensive Plan of Action. The talks seek to revive a landmark pact under which Iran agreed to curb its nuclear program in return for the lifting of international sanctions, which opened the way for a brief thaw in decades of US-Iranian confrontation, according to Reuters. However, the twice-impeached president, Donald Trump, abandoned the deal in 2018 and reimposed sanctions.

Trump's successor Joe Biden has said he wants to restore the deal's nuclear limits and if possible extend them to cover issues such as Iran's missile program. Iran wants all sanctions lifted and no expansion of the terms.

“The lifting of sanctions will help remove these barriers. Of course, the lifting has other effects too; one of its effects is that it drastically reduces the cost of international financial relations in the country and allows Iran to take over part of the value chain in the region and in the world. At the same time, the abolition of foreign exchange suppression will increase the competitive advantage of Iranian workers compared to workers in other countries,” the economist said.

At the end of the article, Marvi touched upon the need to fight corruption – a goal promised by president-elect Ebrahim Raeisi in his election campaign.

“It is not possible to fight corruption unless we address the root causes,” he said, noting that the main problems are rooted in the existence of systemic conflicts of interest in the financial and health systems and the use of golden signatures – a metaphor used in Farsi to suggest influence peddling.