Growth Faces New Challenges

The latest report of the central bank illustrates that Iran’s growth has rebounded beyond the expectations of many economists.

Although the report mentions that all sectors grew significantly, the main force behind the recovery is higher oil production since the implementation of the Joint Comprehensive Plan of Action.  

The oil production's return to the pre-sanctions level reignited economic activities, as a result of which GDP grew 7.4% in the first half of the current fiscal year (started March 20).

The new challenge now is to sustain the GDP growth. There is no more room for oil production jump in the short run, so the growth level is poised to decline.

Nevertheless, it is essential to keep growth at more than 5%, as per capita income is unchanged compared to a decade ago.

There exist two huge obstacles to sustained growth: fiscal imbalance and lack of financial stability. If the government cannot sort the two troubles out, not only the real GDP will not increase, but inflation may also rise again.

The government should decrease current spending while finding space to help growth. This seems to be a mission impossible; however, a rational fiscal policy can prove successful.

Based on the sixth five-year development plan (2016-21), whose outlines were approved by the parliament this week, the administration plans to reduce fiscal deficit by allocating efficient spending to upgrade infrastructure and support growth.

To realize its full potential, Iran also needs to reform the financial system. Restructuring banks is an urgent requirement to maintain financial stability.

As time goes by, the banking system becomes weaker since banks pay high interest rates to attract liquidity and have enough cash to run their business. As a result, they become more and more reliant on central bank’s funding.

To address the financial troubles, the monetary authorities introduced a financial reform plan based on which the Central Bank Bill and Banking Reform Bill were prepared, which are pending parliamentary approval.

The central bank intends to modernize monetary policy procedures and enhance its supervisory role to guarantee the financial stability through the reform plan.

The government faces many problems in implementing these reforms and achieving steady growth, but so far it seems that the administration of President Hassan Rouhani has identified the obstacles and knows how to tackle them.

As long as inflation remains a single digit and the real GDP grows by around 5%, the government can rest assured that its reforms will pay off.