The Gravest Concern for Iran’s Economy

Excerpts of his write-up in the Persian daily Etemaad follow:

Iran’s economy suffered a severe recession from the fiscal 2008-9 to 2015-16, the ramifications of which are still lingering.

Figures by the Central Bank of Iran indicate that per capita income in 2015-16 was about 28% less than in 1390 (March 2011-12). The decrease in average income led to a sharp decline in general welfare and put economic strain on the less-privileged.

Following the stability of prices and a relative boom in production in 2016-17 and 2017-18, the downward trend in per capita income and other economic indexes came to a halt and recovery began. Yet, there are concerns about the future of the economy.

The main concern is that the administration of Hassan Rouhani might continue the populist redistribution policies of the past and give up on the so-called “economic surgery” to stave off public dissatisfaction.

Over the past decades, wealth redistribution policies resulted in substantial inequality in the Iranian economy. The incumbent government followed in the footsteps of previous governments and continued policies, such as granting energy subsidy, paying across-the-board cash subsidies, manipulating foreign exchange rates, continuing the guaranteed purchase of wheat, intervening in pricing and pursuing other policies to appeal to the ordinary people.

These policies are popular with people, but have destructive consequences like budget deficit, macroeconomic instability and drop in economic competitiveness, while they encourage people to consume more than what is domestically produced.

Procrastination in carrying out economic reforms will worsen challenges facing the country, particularly those related to pension funds and banking sector.

The government and parliament have no other option but to introduce economic reforms. They have to adopt measures for scaling down cash subsidy payments, reducing trade tariffs, overhauling support policies to the agriculture sector, avoiding the manipulation of foreign currency rates, reforming banking system, promoting transparency and optimizing the public budget.

The gravest concern is for the government to have second thoughts about economic reforms while carrying on with populist yet unsustainable policies such as paying energy subsidies and interfering in the market, which would widen the gap between resources and spending, increase debts, and expand the monetary base.

There are opportunities regarding Iran’s economic growth but a change of economic policymaking is needed to tap into the country’s potential and encourage production, investment and competitiveness. Such reforms need two preconditions, namely consensus and determination among authorities and national solidarity for undertaking reforms.