Pulling Out of Recession

Post-Doc and Teaching Fellow at Alzahra University
Pulling Out of RecessionPulling Out of Recession

In light of the nuclear agreement between Iran and the six world powers (aka the Joint Comprehensive Plan of Action), Iranians obviously have high expectations from the deal.  The hope for early prosperity despite years of stagnation and recession is rather precarious, being based on the tendency to believe in a miracle following improvement in Tehran's international relations and the release of frozen assets.   

When dealing with recession, it is important for policymakers to have an unvarnished picture of the economy and decide whether the recession is demand driven or caused by difficulties in supply. It is clear that the supply side of Iran's economy suffered severely as a result of the decade plus sanctions, however now that has been translated into lack of demand caused by declining  purchasing power and deflationary expectations.  

Following the government's declared policy of reducing inflation, which was born out of the steep decline in oil prices and recession worldwide that further contributed to the lack of liquidity, we observe reduction in the price of some commodities. Given the relative stability in prices of many goods and rising inventories, it seems the economy is now suffering more from lack of demand created by the high expectations in the post-sanction era. The situation has drawn a quick response from the government's economic team as it has prepared a short-term exit recession plan.                

On Monday, President Hassan Rouhani said a new economic incentive package will be unveiled next week, but did not provide details. However, earlier reports have it that policies will be announced to, among other things, lift the sagging manufacturing sector and help stimulate growth in the second half of the fiscal year that ends in March 2016.

One area the president’s men are focusing on is the stagnant housing market. They are coming up with new rules in the hope of spurring home loans and ending the extended recession in the key housing industry. It seems the government is trying to incentivize trade in capital and housing markets, as it believes these two reflect the health of the economy. The strange and politically controversial open letter sent to Rouhani by four of his top ministers last week should be seen as an attempt to justify the upcoming government measures to tackle recession.

While details of the plan of action are not yet clear, it seems the government is trying hard to help and augment sales of domestically-produced goods and hence increase demand for consumer goods.

While some perceive that flagging demand will be “taken care of” rather automatically with the arrival of foreign companies, the toxic role of cheap foreign goods seems to be given a back seat. As the recession has been moved from the supply side to the demand sector, it is not clear how producers stuck with rising inventories can survive the competition. The producers are already frustrated by the amount of red tape and unfair high taxes, which is confirmed by the recent closure of many businesses.

Provision of facilities that is considered as an immediate solution to the painful recession is a short-term plan for a situation that demands workable and efficient policy in government budgeting. Support packages that normally squander the scarce government resources to increase sales have given rise to rumors that the government has panicked and could be taking a desperate and haphazard path to reverse the recession and thus create some breathing room for itself.

Despite the recession and Tehran Stock Exchange market losing one-third of its value, Iran Khodro, the top carmaker, and a listed company has seen prices fall in the range of 6-17% that was seemingly influenced by the “No to local cars” campaign in the social media.

The situation in the housing market is worse, as rents keep rising and there is a tiny decline in housing prices because the bulk of the demand comes from those who used to buy property as an investment but now see banks and their high interest rates as a safe haven.

Tehran’s competition on house prices with other major cities in the world is rather strange as it is mostly comparable in terms of population than urban facilities and income levels.

What needs to be clearly understood is that there is a crucial need for real prices. What makes prices unreal is partially the influence of the main players in the market such as public organizations and pension funds that intervene indirectly claiming that they cannot lose their stake because they serve the masses!

We could have done better if we had anticipated the depth of the recession and planned for policy actions. The government dealing with lack of liquidity that strives to curb inflation has to have consistent discipline, especially in fiscal and monetary affairs. While a smoother approach could have been taken by increasing government debt, the general public should be made aware of the conditions.

Pain of austerity should be acknowledged while emphasizing the gain of one-digit inflation. The pain will not vanish by injecting cash subsidies when we have sticky prices and inefficiency in markets that don’t respond to economic conditions.

The small support packages to a variety of underperforming industries could have been put to better use in improving market efficiency or channeled into the government development budget that has a multiplier effect. This could have helped boost confidence in the government and its commitment to fix the economy sooner rather than later.