The quality of arguments used in televised presidential debates has raised concerns among economic analysts over the future of Iran’s economy, decisions that will be made and the consequences of those decisions.
What follows is a translation of a write-up by Masoud Nili, a well-known economist and a former senior aide to President Hassan Rouhani, for the Persian-daily Donya-e-Eqtesad.
Presidential debates have now reduced to slamming the government for its handling of the economy, for holding fiscal auctions and making promises mostly involving handing out money to people, the unrealistic nature of which was apparent to even inexpert persons.
When the treasury is under such financial pressure to even pay government workers’ monthly wages, hearing most candidates promise the moon reveals this bitter fact that either politicians have lost touch with the economic reality of the country or are unaware of public knowledge and perception, or else rely on people’s forgetfulness after the election time.
The country’s budget imbalance is at 50% (most similar to how it was in the year ending March 1989, the worst fiscal year of the country); government expenditure, using constant prices, is at 20-year lows.
The government managed to dodge a bullet of hyperinflation temporarily, and through the simplest way, by relying on treasury bonds to finance more than 50% of last year’s [March 2020-21] budget. But the relief won’t last long, as current year’s budget [deficit] and then the next year’s are just around the corner.
Expenses will soon outgrow resources and increase the likelihood of future defaults unless the general condition of the country improves.
Oil exports per capita when compared with constant prices of the year ending March 1960 (the earliest available data) have never been as low as the year ending March 2021.
Financial imbalances are adding to the sheer volume of money supply: growth in money supply each day equals the sum used to increase each year in the late 1980s. But sadly, no attention has been paid to this critical, complicated situation; not a single question was raised by presidential hopefuls in this regard.
The situation provides virtually no grounds for the promises made during debates for the upcoming government. This paradox results from either the candidates’ ignorance about the serious financial impasse currently facing the country, or maybe openings they have formed in their minds based on miscalculations, or else they have braced themselves for deep structural reforms and their outcomes.
Holding nonpartisan elections and the presence of unfit candidates at this critical economic juncture has turned the very costly issue of people’s economic lives and their insignificant welfare to a workshop for practice of politicians.
The next administration needs to either change political or economic presumptions around budget 2021-22 and coming years or submit itself to austerity measures or else plunge the country into accelerating inflation and again embrace itself for public criticisms and even worse economic indicators in the next round of election. I can’t think of a fifth option.
The change in political presumptions suggests the resolving of sanctions issue, resumption of oil exports and an increase to the tune of $50-60 billion to national resources, which needs a very strong domestic political support for the next government.
Although this sum of revenues seems tempting and making use of it is very vital, it is not enough to have a lasting effect on budgetary imbalances. Secondly, the sudden outpouring of this amount of money into the economy just to win over people would exert the same shock brought about by the termination of oil incomes in winter 2017-18.
The removal of sanctions is one imperative issue but how these oil revenues would return to the economy and budget is another pressing issue, considering the fact that over many years these two were unfortunately seen as one. Deluging the economy with oil money would seriously hurt production and employment; foreign exchange rates will destabilize and rebound.
Change in economic presumptions suggests the introduction of structural reforms to the economy; they were never introduced even at the best integrated political state of the country over the past decades and naturally won’t have any chance in this day and age.
Structural economic reforms require two technical and political prerequisites: the first would occur with the improvement of bureaucracy and the power to design reform plans and the second requires a full support from the political system in its entirety. One group of our politicians has the ability to create the first but not the second. And the second group can meet the second prerequisite but not the first one. Failure to implement political and economic reforms around budget (in other words, pursuing the agenda of creating financial balance despite the continuation of sanctions-related restrictions and squandering of large resources as a result of misguided economic policies) requires significant reduction of the pressure of expenses or implementation of austerity budget.
In this approach, wages and public services must be reduced considerably. That would translate into placing more pressure on people who have seen their basket of consumption shrink continuously for 20 years now.
Investment by government has lost its meaning for years. For an economy that needs 3-5% of GDP to be spent on investment in the public sector, the figure has dropped below 1%.
Financial compensation provided in exchange for employees’ services, water and electricity services as well as subsidies account for the lion’s share of budget expenditure for years now.
The winner of the election, particularly if he wins by a small margin, won’t be able to carry out the aforementioned options and will entangle the country in a web of a strategic mistake known as “shifting the flow of money supply”.
It is a strategic mistake if the policymaker supposes that he can solve financial problems by directing money toward production. The principles of economics tell us how money supply, which has been directed toward consumption, would first increase the prices of consumer goods and, when directed toward production, then increase the prices of goods and services on the part of the producer.
Iran’s economic governance is like a group of drivers all sitting behind the wheel, their mutual interest is to step on the gas pedal (by creating money supply) for a vehicle that is already moving downhill. Anyone who tries to make the vehicle slow down a bit would be accused of being a “naysayer”.
One of the candidates will be elected in a few days; he’ll have to implement the current year’s imbalanced budget with the help of his mental power and skills of his colleagues. He needs to write next year’s budget as soon as he finds his feet. He is supposed to make decisions regarding the ailing banking system and social welfare funds, as well as the bankrupt pension system. If he decides to step on the gas pedal, he’ll be in harmony with the rest of the divers and would fan the flames of inflation in the very large brazier of money supply.
If you put aside the second and third choices out of the above four (they are unlikely to happen after all), you are left with first and fourth options, i.e., the removal of sanctions and outpouring of oil money into the economy without reforms or creating money supply and fueling inflation.
There is no place for structural reforms in these two choices. The first one is like injecting a stimulus into the economy that would last for around two years and the fourth choice would implicate the economy with high inflation at the onset.
In sum, financial restraints ahead of the next government seem to be more pressing than our choices. Budget has yet to punish our policymakers; they, who happen to be very impactful on the fate of the country, have been kept out of the realities of the country.
Perhaps this election would make them familiar with the inevitable consequences of restricted resources and their next four-year workshop might lead to long-term openings for future generations.
