Iran’s Economic Woes Probed

EghtesadOnline: Iran Chamber of Commerce, Industries, Mines and Agriculture’s Research Center has recently submitted an economic overhaul plan to the government.

News ID: ۷۸۷۱۰۴

04 October 2021

Mohammad Qasemi, the head of the center, elaborated on the content of this plan and its insights into major problems that have plagued Iran’s economy for over a decade in an interview with the news outlet of ICCIMA (Otaghiranonline.ir).

“Studies conducted by ICCIMA Research Center show inflation, unemployment and weak economic growth are the pressing issues of Iran’s economy,” he said.

“Over the past three years, half of the Iranian people could not afford to eat an average of 2,100 calories per day, i.e., the minimum necessary for subsistence. Iran sits at bottom of the list of world countries in terms of economic growth and inflation suggesting that for a decade the country registered growth of nearly 0.3% and inflation rate of above 20%.”

The Statistical Center of Iran says the economy registered 7.6% year-on-year growth in the first quarter of the current fiscal year that started March 21. The Central Bank of Iran says the Iranian economy grew by 6.2% in Q1.

According to CBI, Iran’s gross domestic product in the last fiscal year (March 2020-21) registered a 3.6% growth while SCI announced that GDP expanded by 0.7% during the period compared with the year before. Discrepancies were also seen in SCI and CBI reports on Iran's economic growth in the fiscal 2019-20.

SCI noted that the Iranian economy experienced a -7% contraction in the fiscal 2019-20 while CBI put the fiscal 2019-20 growth at -6.5%.

Iran's GDP shrank by 4.9% in the fiscal 2018-19 year-on-year, it added.

The CBI did not release any report on the fiscal 2018-19 economic growth.

Iran’s economy emerged from recession in the fiscal 2014-15 with a 3% growth after two years of recession when the economy contracted 5.8% and 1.9% back to back, according to the Central Bank of Iran.

Growth in the fiscal 2015-16 has been put at -1.6% by CBI and 0.9% by SCI. The CBI has put 2016-17 growth at 12.5% while SCI says it was much lower and near 8.3%.

As for inflation, latest data released by the Statistical Center of Iran show the rising inflation in the country has kept its upward momentum in the sixth month of the current fiscal year (Aug. 23-Sept. 22).

The average goods and services Consumer Price Index in the 12-month period ending Sept. 22, which marks the end of the sixth Iranian month of the fiscal 2021-22, increased by 45.8% compared with the corresponding period of the year before, SCI says. This is a new high on record.

Economy Takes a Back Seat

Qasemi says economic woes have remained unaddressed and even compounded because domestic and foreign policies did not serve the economy. “Regrettably, the economy is the top priority of the country only on paper,” he said.

“A scientific perspective is missing when it comes to the management of economic challenges. Ask the members of Expediency Council, parliament or government about economic issues; they will display incoherent, traditional views.”

Noting that an economy encompasses all activities related to monetary gains and losses, finance and international trade, the head of ICCIMA Research Center said all these activities are directed toward promoting productivity and innovation once you accept the fact that the promotion of productivity is the main economic goal.

“Under the circumstances, you hear authorities say there is no need to be connected to the international banking network. That is practically incompatible with the promotion of productivity and innovation. Or, you hear them say that we’ll link up with the global network later,” he said.

“So when does this ‘later’ come? How long should the near-zero percent economic growth continue? An improvement in people’s livelihoods and living standards would be possible only if production uses global technology; without a connection to international value chains, it’s impossible.”

Criticizing the prevailing viewpoint that the economy needs to move toward self-sufficiency, he said, “You can have an introverted economy but it will come with listless, unproductive growth. In the long run, only economies that are capable of competing with international economy can bring about positive changes in the living conditions of their people. Otherwise, they are prone to constant exchange rate shocks and non-productive, costly manufacturing.”

Qasemi said the presence of dispersed economic decision-making powers is another cause of intractable economic stagnation in Iran.

“In our country, it is not clear which authority is in charge of financial, monetary or FX policy-making; all of them have been dispersed in numerous supreme councils and institutions.”

Petrodollars

The government’s perspective toward oil revenues is another reason behind economic uncertainties in the country, the head of ICCIMA Research Center said.

“What are we going to do with oil money once the sanctions are lifted? At present, oil revenues are being spent on the provision of essential goods and raw materials to some extent. How long will this approach continue? The world is moving toward new energies; sooner or later we’ll realize that part of our natural resources has lost its economic function,” he added.

As in spring, an increase in oil production was the main driver of growth in the last Iranian year, such that the sector saw a whopping 11.2% expansion by generating 858.24 trillion rials ($3 billion), according to CBI.

The oil sector expanded by 23.3% in Q1, it added.

Iran is determined to increase its oil exports despite sanctions imposed by the United States on Tehran's crude sales, Iranian Oil Minister Javad Owji said recently, adding that the use of oil sanctions as a "political tool" would harm the market.

"There is a strong will in Iran to increase oil exports despite the unjust and illegal US sanctions," Owji told state TV recently.

"I promise that good things will happen regarding Iran's oil sales in the coming months."

Oil exports, Iran’s main revenue source, have plunged under US sanctions, which were reimposed three years ago after Washington abandoned Tehran's 2015 nuclear deal with six powers.

Tehran does not disclose its crude export data, but assessments based on shipping and other sources suggest a fall from about 2.8 million barrels per day (bpd) in 2018 to as low as 200,000 bpd. One survey put exports at 600,000 bpd in June, Reuters reported.

"Iran will return to its pre-sanctions crude production level as soon as US sanctions on Iran are lifted," Owji said.

Prospective Remedies

The ICCIMA Research Center believes that the government’s economic agenda must follow three objectives: containing inflation as the leading cause of economic instability, addressing the lackluster economic growth and improving social welfare through targeted subsidies and taxation.

“The government needs to avoid employing pricing strategies, as our years of experience prove that it is a failed policy that only downgrades the macroeconomic issue of inflation to price gouging. It also needs to stay away from backroom decision-making; decisions which have been taken without consultations have either resulted in the lack of collaboration or turned into temporary opioids. It should refrain from trying to resolve economic challenges without first dealing with political issues,” Qasemi added.

And finally, the government needs to know that economy is an integrated system wherein inflation cannot be controlled without tackling the budget deficit that won’t go away without resolving issues related to pension funds, energy pricing or subsidy and welfare frameworks.

“The interior minister’s responsibilities are no less than those of the economy minister. Picking provincial governors with security and political preferences, or selecting those with economic preferences would produce different results. Comments made by foreign minister would have the same impact on FX market as those expressed by the central bank governor. The Cabinet needs to work in unison,” Qasemi concluded.