As the seven certified candidates are heading for the June 18 presidential election, Masoud Khansari, the head of Tehran Chamber of Commerce, Industries, Mines and Agriculture, draws their attention to the main challenges facing Iran’s economy.
“When it comes to economy, everything is reduced to livelihood; this is while the livelihood crises arise from underlying macroeconomic factors,” he was quoted as saying by the Persian economic daily Donya-e-Eqtesad.
Khansari believes that the next president must have a precise understanding of inflation and its dynamics, causes of capital flight, negative investment growth, reasons behind brain drain, necessity of reforming budget structure, banking problems, insurance, customs and social security reform, the complex system of sanctions and the real potential of Iran's economy.
Noting that the new government should know that Iran’s economy is facing five major challenges, the TCCIM chief said if these challenges are neglected, the country’s development will come to a standstill.
Runaway Inflation
Referring to the decline in social capital, the TCCIM chief said the biggest problem of youth and the educated population, employment, got worse in the past four years.
“In the past 16 years, about 17 million people were added to the county’s working population, while the average employment in these years stood at 3 million people. In addition, the average 10-year economic growth stands at zero percent, as the average inflation rate hit 18% while it stands at 6-9% in the region. In fact, Iran’s inflation rate currently equals that of countries such as Sudan and Argentina. The point is that among 186 countries, only eight countries are experiencing double-digit inflation rate and sadly, Iran is one of them. Iran’s current economy needs employment growth,” he said.
Latest data released by the Statistical Center of Iran show the average goods and services Consumer Price Index in the 12-month period ending May 21, which marks the end of the second Iranian month of fiscal 2021-22, increased by 41% compared with the corresponding period of the year before.
Consumer inflation for the month under review (April 21-May 21) registered an increase of 46.9% compared with the similar month of previous Iranian year.
The overall CPI (using the Iranian year to March 2017 as the base year) stood at 308.4, indicating a 0.7% rise compared with the month before. Month-on-month consumer inflation was 2.7% for the preceding month.
SCI put urban and rural 12-month inflation for the month under review at 40.5% and 43.2%, respectively.
CPI registered a year-on-year increase of 46.1% for urban areas and 51% for rural areas in the month ending May 21.
The overall CPI reached 304.9 for urban households and 327.8 for rural households, indicating a month-on-month increase of 0.7% for both.
Poverty Alleviation
Khansari noted that eradication of poverty must be high on the agenda of the next government, noting that there has been a 40% decline in people’s average purchasing power in the last decade.
The decline combined with growth in Gini coefficient, he added, indicates that the purchasing power of lower income deciles has declined more drastically, which intensifies concerns about the rise in poverty and its social consequences.
“Therefore, non-inflationary poverty alleviation must be one of the other priorities of the future government. If fighting poverty is pursued by increasing the monetary base and borrowing, it will have the opposite effect and will definitely move the country toward super inflations, the likes of which is happening in Venezuela,” he said.
The Iran–Iraq War (1980-88), direct payments to individuals in the form of cash payments and sanctions have affected the dynamics of wealth inequality in Iran over the past 36 years.
According to a report by the Macroeconomics Department of the Plan and Budget Organization, the imposition of international sanctions in the early 2010s resulted in a 10-20% decline in the welfare of all income deciles in Iran despite the continuation of the government’s direct subsidy programs.
The preliminary nuclear agreement in the Iranian year ending March 2014 and the start of negotiations with world powers and ease of some international transactions benefited households in different income deciles but the real improvement in their spending and welfare was realized in 2016 as sanctions were officially lifted.
The welfare of families living in urban areas improved by 5-10% during the two-year period after the implementation of the Joint Comprehensive Plan of Action. The sharpest decline has been recorded for food in the households’ consumer basket over the past decade.
Since the year ending March 2017 and the implementation of Health Reform Plan, health spending began to rise exponentially, particularly in rural areas.
The Health Reform Plan was introduced in 2014 to fulfill President Hassan Rouhani’s election campaign promise of healthcare for all Iranians by 2018 under a nationwide health insurance program.
Government payments, including the payment of cash subsidies and health insurance premiums, have decreased steadily and quickly from the year ending March 2012. As a result, payments at constant prices in the year ending March 2019 reached one-third of what it was in the year ending March 2012.
When constant prices are used, per capita income dropped by 11% over the period. A 15% decline was recorded in per capita income during a single year: March 2018-19.
Government payments, including cash subsidies, account for 26% of total income of households in the first income decile (those with the lowest income), while it constitutes less than 4% of total revenues of families in the 10th decile (those with the highest income).
Miscellaneous salaries and revenues, which are usually exempt from tax, account for 35% and 41% of the income of high-income families, respectively.
The removal of sanctions, together with economic growth, between March 2016-18 resulted in a considerable improvement in household welfare. Job creation and economic growth were apparently the main causes of decline in wealth inequality and poverty then.
Economic Instability
Noting that economic instability is one of the most important challenges for Iran's economy, Khansari said years of sanctions have had a big impact.
“A survey conducted by the Islamic Republic of Iran’s Ministry of Industries, Mining and Trade with a statistical population of 950 entrepreneurs also confirms that the main problem of economic players is instability. In fact, the most important issue that paralyzes entrepreneurship is the issue of economic instability, which has reduced the incentives to invest. At the same time, the outflow of capital from the country has accelerated; even with the foreign exchange rates rising, we are still witnessing capital outflow,” he said, adding that the future government needs to send a message of stability to the economic community.
According to the International Monetary Fund, Iran experienced a 13.4% growth in 2016, the year Iran’s nuclear deal with world powers, formally known as the Joint Comprehensive Plan of Action, was implemented, i.e. international sanctions against the Islamic Republic were lifted. The massive growth was followed by a further 3.8% jump in 2017. But with the withdrawal of the US from JCPOA under the administration of Donald Trump and introduction of new rounds of sanctions, the Iranian economy shrank by 6% and 6.8% in the following two years.
According to the Central Bank of Iran’s latest reports, Iran’s gross domestic product in the first nine months of last Iranian year (March 20, 2020), using constant prices of the year ending March 2012 registered a 2.2% year-on-year growth. Economic growth, excluding oil, expanded by 1.9%, the bank says.
The central bank’s sectoral breakdown of growth rates shows that agriculture, oil, and industries and mining groups experienced a respective growth of 4.6%, 3.9% and 6%. The services sector was the main laggard of economic growth with a 0.3% contraction. Construction, which is a subsector of industries and mining group, expanded by 3.6%.
The Statistical Center of Iran says Iran’s gross domestic product contracted by 1.2% during the nine-month period leading to Dec. 20, 2020 (Q1-3), compared with the corresponding period of the year before.
Economic growth, excluding oil, saw a 1% decline, according to the center, such that the nine-month period saw the agriculture, industries and mining, as well as industries and mining, excluding oil sectors experienced growth rates of 3%, 0.8% and 2.5% respectively. The services sector contracted by 3.3% and the construction subsector expanded by 3.9%.
According to the Statistical Center of Iran, the Iranian economy experienced a 7% contraction in the fiscal 2019-20.
The center, the GDP shrank by -0.6% without taking oil production into account.
The sectors of industries and mines, and services saw respective contractions of 14.7% and 0.3%.
This is while CBI put last fiscal year's growth at -6.5%. Excluding the oil sector, he put growth at 1.1%.
According to the bank, the oil sector shrank by a whopping 38.7% amid sanctions on Iran's oil sales.
The sectors of agriculture and industries and mines saw respective growths of 8.8% and 2.3%, as services contracted by 0.2%.
Iran's gross domestic product shrank by 4.9% in the fiscal 2018-19 compared to the year before, according to SCI, with the production of the two groups of industry and agriculture at -9.6% and -1.5% respectively and services at 0.02% growth.
SCI put that year's growth without taking oil production into account at -2.4%.
CBI did not release any report on the fiscal 2018-19 economic growth.
Iran’s economy emerged from recession in the fiscal 2014-15 with a 3% growth after two years of recession when the economy contracted by 5.8% and 1.9% back to back, according to the Central Bank of Iran.
Growth in 2015-16 has been put at -1.6% by CBI and 0.9% by SCI.
CBI has put 2016-17 growth at 12.5% while SCI says it was much lower and near 8.3%.
Subsidies
The fourth challenge facing Iran’s economy, according to Khansari, is the issue of subsidies.
“The government is paying over $100 billion of energy subsidies and other non-targeted subsidies on a yearly basis, which does not play a role in economic growth and development,” he said.
Iran was the largest fossil fuel subsidizer for the third year in a row in 2019, according to the International Energy Agency.
Having spent $86.09 billion on fossil energy consumption subsidies in 2019, Iran ranked first globally, leaving behind China with $30.48 billion and Saudi Arabia with $28.72 billion.
The volume of Iranian fuel subsidies extended to its citizens in 2019, which increased by 10.9% year-on-year, equals 18.8% of Iran’s GDP.
Iran’s average subsidization rate of fossil fuels (as a proportion of the full cost of supply) was 79%. The country paid $1,038 as fossil fuel subsidies per person in 2019.
In 2019, Iran’s subsidies for natural gas consumption were at $16.32 billion, fossil-fueled electricity at $51.74 billion and oil at $18.03 billion. The transportation sector’s oil subsidies stood at $13.08 billion.
Iran spent $77.62 billion on fossil fuel consumption in 2018, including $26.52 billion on natural gas, $19.33 billion on electricity and $31.76 billion on oil. The transportation sector’s oil subsidies reached $23.96 billion.
In 2017, the country spent $57.76 billion on fossil fuel consumption, including $20.04 billion on natural gas, $17.08 billion on electricity and $20.63 billion on oil. Transport oil subsidies stood at $14.82 billion.
After two years where the global aggregate rose, 2019 saw a decline in fuel consumption subsidies of $120 billion, related in large part to lower average fuel prices over the course of the year.
Almost all countries had lower estimated subsidies year-on-year, the only exceptions being Iran (which remained the single largest provider of these subsidies, despite a hike of at least 50% in gasoline prices in November), Bahrain and Sri Lanka.
The weighted-average subsidy rate was some 15% - meaning consumers receiving these subsidies paid on average around 85% of the competitive market reference prices for the energy products concerned.
Among the fuels, subsidies to oil products remained the largest single component of the total ($150 billion out of the total $320 billion). Electricity is the next-largest element of the overall subsidy estimate ($115 billion in 2019), followed by natural gas ($50 billion) and coal ($2.5 billion).
Corruption
The most complex issue in Iran's economy is corruption. At least a decade has passed since the beginning of the serious fight against corruption in the country, but corruption has not decreased.
It is noteworthy that Iran's ranking in the Corruption Perception Index has reached 149, meaning Iran is one of the weakest countries in terms of this indicator.
Since its inception in 1995, the Corruption Perceptions Index, Transparency International’s flagship research product, has become the leading global indicator of public sector corruption.
Founded in 1993, Transparency International is an international non-governmental organization based in Berlin, Germany. Its nonprofit purpose is to take action to combat global corruption with civil societal anti-corruption measures and to prevent criminal activities arising from corruption.
“Big government is the root cause of corruption and other fundamental problems. The economy’s problems will compound when the government deems itself responsible about everything from setting foreign currency exchange rate to prices of gasoline, potato, onions and tomatoes,” Khansari said earlier.
Noting that quasi-state companies that have monopolistic positions in the market also contribute to the growth of corruption, he said, “The annual budget of public companies is almost twice the government’s general budget. This is while the tax paid by such companies is very insignificant.”
Khansari stressed that the consequences of wrong measures, such as persistent budget deficits and the resulting inflation, have manifested in people's lives.
“The economy has some 3-5 million long-term unemployed people and its social ramifications have become critical. The next government has a duty to rectify this disappointing situation, given the real challenges of the economy,” he said.
