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Confounding Numbers

Confounding Numbers

Let’s call a spade a spade and move on – this time by taking a closer look at some critical numbers with which the government has to make do. When Hassan Rouhani took office in July 2013 one of the fiascos he inherited from his predecessor was an ocean of red ink despite the fact that oil was at or near $110/barrel and the outgoing government was taking in close to $120 billion a year only in oil receipts.

The country was fast descending into freefall for a gazillion of reasons, namely gross mismanagement, international sanctions over the disputed nuclear program, declining productivity, unemployment and graft. The unprecedented earnings from oil exports notwithstanding, GDP growth when President Rouhani was elected was deep into negative territory (-6%) while inflation was galloping at 40%.  Today the growth rate is a bit positive and inflation down to 15%.

Prominent economists, pundits and analysts of different political stripes at the time were warning that if the messy pattern continued “we would soon slide into economic oblivion.”

That was then and now is this. In the fiscal year that will end next March the government’s current expenditure will be in the region of $50 billion. Development spending is set at a paltry $16 billion with a budget deficit of $15 billion. Government debt to banks alone is in the neighborhood of $50 billion. Keep in mind that oil is at historic lows and selling for less than $50/barrel.

So, what is in store for the government next year? According to available official figures and budgetary projections for fiscal March 2016-17, oil exports will earn $16 billion and tax revenues $30 billion. Current expenditure will swallow $51 billion and funds for development projects are set at $13 billion.

If these alarming figures are not a cause for real concern, then here is the icing on the cake: every month the government must find a whopping $1.1 billion to pay cash subsidies to 74 million Iranians, thanks to the contentious and costly subsidy reform program of the former administration.

The magnitude of the economic burden that has befallen the government can be better understood by doing the above numbers, which at best are unsustainable and at worst nightmarish.

As we wake up to our fiscal folly, a daunting choice lies ahead. Damage control can and must begin with the universal covenant that we have to learn to live within our means. If households and businesses can learn how to allocate scarce resources more efficiently and judiciously, so too can the government, albeit with a lot of courage and foresight.

If not now then when is the time to rethink and reconsider the present course of action? Conventional wisdom has it that if we want to keep the patient from dying in the operation theater, the surgery has to begin now not later.

Of course some strategies will not be politically palatable if the nation and decision makers are really determined to embark on meaningful economic reforms, embrace fiscal responsibility and finally realize what can and cannot be afforded.  

The insanity of throwing money at loss-making state-owned enterprises has to stop. If the past years of unending trial and error programs has taught us one thing it is that this economy can no longer be subsidized. There can be no more something for nothing.

Debt and deficit are the country’s most pressing problems, if not the only ones, and a serious handicap.  With the people united behind him, the president and his men should first move on the arduous path of cost cutting, defeat the debt/deficit and stay the course.

By bringing its spending under control the government will have sent a clear message to the people convincing them of the necessity of what it is doing, that the reforms are genuine and the public good is the centerpiece of its economic roadmap. There is no room for complacency and waiting for the next election is not an option.

Shaken by recession and restrictions, successive governments apparently wanted to do most of the heavy lifting, but it is clear that they could not. Three decades of pumping limited financial resources into the large state-owned enterprises seemed simple but turned out to be simplistic.

Senior officials have publicly said that many of the subsidized SOEs are in the red and have become a major liability, the half-century-old bloated, loss-making and incompetent auto industry is a prime example. Reversing course and bringing the small and medium enterprises into play could make a difference and very likely deliver.

It is indeed ironic that there is absolutely no mention of the SMEs in the various stimulus programs of the government designed to ease the recession and boost consumption. It is equally puzzling that the SMEs have been starved of funds as banks prefer to lend to the biggies and SOEs.  

Supporting and sustaining the SMEs has been successful in most countries, especially those bending under the weight of poor skills, high employment and low productivity of state firms. Given the trials and tribulations of heavy lifting and the absurdity of “too big to fail” terribly demonstrated over three decades of economic chaos, we need to test the path of reviving and empowering the SMEs.

By doing so the nation will benefit from their contribution to sustainable growth, employment and decent standards of living the political leadership has promised on more occasions than one.

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