Uncertainty Conundrum

Uncertainty ConundrumUncertainty Conundrum

In order to elevate Iranian economy to the level that it is admirable and gathering popularity for his government, President Hassan Rouhani must, under all circumstances, put his highest priority to vitalize the national economy. Iranian officials must know, no matter how persuasive political triumphs and in the other areas are, they cannot persist unless they are led to visible economic accomplishments.

Like other oil-exporting countries, Iran depends greatly on oil revenues to finance government expenditures and pay for imports. When these revenues go down, the economy suffers. International sanctions and domestic mismanagement led to a meager economy and stagnation. The decline speeded up in 2012 as the Western powers commenced new sanctions against Iran’s oil exports and put pressure on countries that were importing hydrocarbon products from Iran. Although the Ahmadinejad administration put most of the fault for this decline on sanctions, critics of his government argued that his own policies caused more damage to the economy than did the sanctions.

Fortunately preliminary data from the last quarter performance of Iran economy showed some very promising signs for gradually moving out of recession. But I think at this time, we face two different dilemmas.

The first one is about degree of deepness of this recession. We need to remember recent recession was the deepest in last a quarter of century. In a mild recession, a few positive economic signals will bring the economic actors back to the stage. But a deep recession is qualitatively different, because the signals stop flowing; preventing the very activity needed to generate those signals and turn things around.

In other words we are caught in “uncertainty trap.” This phrase means a kind of information void that paralyzes economic players even after economic fundamentals improve. Latest case studies show that business firm and enterprises don’t like uncertainty. If they are worried about the state of the economy, they are going to stop investing. They wait and see.

Where uncertainty is high and the economy is not producing very much, everyone is waiting for others to invest, which leads to no one investing. Rouhani government attempted to reduce any uncertainty and refuse to make surprising policies

Second dilemma is related to prolonging of Iran nuclear negations without reaching a clear result. This situation also creates a “subjective uncertainty trap” that can persist in a low-volatility context.

An economic shock that occurs amidst a perfectly transparent can be quickly reversed because the flow of information is high, but the same shock when the situation is non-transparent can have a long-term effect because little information is flowing.

President Rouhani has to navigate in the hostile sea of politics and his success to anchoring the ship of nuclear talks safely determines his performance in the economic arena.