Iran’s economy is facing unprecedented predicaments related to growing poverty and declining purchasing power.
To fulfill the promise of improving the economy, the new government has put forward policies, the newest of which is the so-called “Package of incentive policies and removal of production barriers to achieve the motto of the year: production, support and removal of obstacles.” Economist Mousa Ghaninejad believes that a look at the approach of this “package” and its analysis can help find the answer to the fundamental question of “where does the problem of Iran’s economy lie”.
A translation of his editorial for the Persian economic daily Donya-e-Eqtesad follows:
The authors of this “package” have presumed that problems with the Iranian economy, or more specifically, the problems of economic players, can be solved by taking a series of administrative decisions by the executive and governmental apparatuses. In other words, the prevailing perception is that the problem lay with former government officials who did not have the insight or will to right the wrongs. So, with new officials in power, all the problems can be solved in the blink of an eye.
This approach is not unique to the current government, all previous governments, more or less, held the same view. That’s why the country’s economic problems, including the double-digit inflation, fluctuations in foreign exchange rate and recession, have become chronic.
The draft of “the package of incentive policies and removal of production barriers to achieve the goal of the year: production, support and removal of obstacles” contains 38 articles categorized in five groups: “financing (foreign currency and the rial)”, “tax”, “social security”, “production infrastructures” and “business”.
The first group, “financing”, mainly includes a series of tasks designed for the Central Bank of Iran, the country’s banks, the stock exchange organization and the National Development Fund of Iran. The authors of this section believe that the main challenge facing manufacturers is the lack of liquidity and the onus is on the banking system to finance them.
Article 1 of the package is really astonishing, as it states, “The CBI is obliged to increase the remaining ceiling of working capital loans granted to manufacturing companies to 120% of their last year’s sales [without considering the claims and debt purchases of manufacturers]. Demands higher than the ceiling or inactive or less productive manufacturing enterprises [compared with previous years] should be taken care of within the CBI’s framework.”
The designers of this “package” do not seem to have a clear understanding of the central bank’s nature and its duties; otherwise, they would not have pit CBI against manufacturers, forcing it to increase the ceiling of loans.
The central bank, by definition, is the banker of the government and all the country’s banks; it is not the banker of any manufacturer, public or private, whatsoever. Hopefully, this article was nothing but a misprint and the content of this article was not a reflection of the writers’ insight.
Compounding Existing Problems
Article 2 states, “The board of directors of banks and credit institutions are obliged to double the ceiling of loans that designated banks are allowed to accept, review, approve and pay to manufacturers and investors compared with that of fiscal 2019-20.”
The article does not imply anything new; it reflects the dominant view among our government officials and policymakers over the past four decades. They believe the government is in charge of people’s bank deposits and therefore banks, both public and private, do not have the independence in decision making. Other articles in this section are written in the same way; as they suggest that by putting pressure on the banking system and other financial institutions, the credit crunch of active manufacturers will be solved and closed enterprises will reopen, production barriers will be removed and economic prosperity will return.
Based on the findings of economics and the experience of the past half a century, we can say with conviction that such a belief is misguided; it will not only fail to produce positive results, but will also compound the existing problems. The fact is that the deposits in banks are the property of the people; they do not belong to the government and so it cannot decide where they should be spent.
Banks, either public or private, are trustees of the people and according to the agreement they’ve signed within the law, they must safeguard public assets and be accountable in this regard. The entry of a third party [government] into this bilateral relationship disrupts the basic principle of banks’ accountability and harms public interests.
Government directives to the banking system on providing incentives, which are often with concessions to borrowers, are intended to “encourage” production and “assist” beleaguered producers, but they all end up hurting banks and depositors. As the experience of the past decades shows, the winners of these command policies are die-hard rent-seekers and those with political power; the national economy has never been a beneficiary here.
Unscientific Approach
Command policies are mainly taken in the absence of a scientific perspective on banking and economic issues. They give golden opportunities to professional recipients of special allowances; behind the scenes, these people are the staunch defenders of these policies.
The “incentive package” proposals on tax and social security suffer from the same command-economy and unscientific approach.
Tax and social security laws in our country are flawed, no question about that. But if these laws are problematic or are not enforced properly, the solution is not to resort to government to empower local political officials to circumvent them. Instead, rational, scientific amendments must be introduced.
Government orders in such cases, like the one mentioned above regarding the banking system, often help special beneficiaries close to the political power and, as usual, real producers will not only be left empty-handed but will also be the hardest hit.
At present, transparent manufacturing enterprises with no political affiliation to the establishment have to bear a disproportionate share of the tax burden.
When it comes to “production infrastructures” and “business”, the approach used by the writers of “incentive package” is entirely administrative and overbearing; they have ignored the real economic issues. Here, too, the proposals are nothing more than recommendations to government agencies to “approve and communicate executive bylaws”. Policymakers do not seem to have noticed that the problem with Iran’s economy is the multitude of rules and regulations, and not the dearth of them. Article 34 is related to “business” and states that, “All executive agencies serving the manufacturing sector [especially the central bank and designated banks] are required to interact with the Ministry of Industries, Mining and Trade to set up a platform and ‘single production window’ in this ministry within a month. The platform will be tasked with creating an efficient system to address complaints at the provincial level; complaints filed by economic players should be taken care of within a week.”
After setting those deadlines, the writers of this article have apparently realized how unrealistic they were. Therefore, they’ve added a paragraph declaring that, “To prevent the flood of complaints by economic players, executive agencies are obliged to clarify, reform and review their procedures in order to reduce the number of complaints.”
A look at this article and its paragraph shows how disoriented the writers were feeling at the time; logically the content of the article and its paragraph should be the other way around.
Interestingly, the content devoted to “business” has nothing to do with the business environment. The writers have not even realized that the pricing policy in all markets, enforced by the likes of Consumers and Producers Protection Organization and ‘Tazirat’ organization [a judiciary-affiliated body dealing with trading offenses] has made the country’s business environment toxic. These organizations are acting as hurdles for newcomers. They have also discouraged real private sector businesspersons who don’t have political affiliations.
Such negligence toward real economic issues is to blame on the lack of a scientific view and the dominance of the ideological perspective and the administrative, imperative approach.
Enterprises are short of cash, thanks to the runaway inflation resulting from misguided monetary policies similar to this “incentive package” and also mandatory pricing under the pretext of preventing “price gouging”. Pricing policy has helped the growth of black markets and corruption, troubling real producers and satisfying rent-seekers and the corrupt elites.
The problem with Iran’s economy is not the market, which has practically lost its function due to government interferences, or “profiteers” who simply want to keep their heads above water. In truth, the problem lies in the flawed judgment of government officials and policymakers who presume they will be able to settle economic challenges by using force and issuing orders. Therein lies the problem.
