A recent survey conducted by the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture has shed light on the main problems facing local businesses.
The survey is part of the Purchasing Managers’ Index report for the current Iranian year’s 10h month (Dec. 22-Jan. 20).
The new PMI data for Iran’s overall economy show a persisting downtrend for the fourth consecutive month.
The PMI, known by its Farsi acronym Shamekh, for Iran’s overall economy settled at 46.94 in the current Iranian year’s 10th month (Dec. 22-Jan. 20) from 50.97 registered in the previous month, indicating a 4.03-point or 7.87% decline.
According to the Statistics and Economic Analysis Center of ICCIMA, the sponsor and coordinator of the report, the survey of businesses shows most businesses faced a severe shortage of demand.
The continuing trend of rising costs, coupled with concerns about tax increases, has put many businesses, especially in the services sector, on the verge of closure. On the one hand, under the current circumstances, many firms cannot withstand any more increase in costs and shortage of liquidity. On the other, uncertainty caused by the international ambience toward the country and its impact on foreign exchange rates has reduced demand.
The headline PMI is a number from 0 to 100, such that over 50 indicates an economic expansion compared with the previous month. A PMI reading under 50 indicates contraction and a reading of 50 implies no change.
PMI is an index of the prevailing direction of economic trends, aiming to provide information about business conditions to company directors, analysts and purchasing managers.
The list of problems identified by the survey are as follows:
Energy Price Hike
An upsurge in the prices of energy carriers, especially natural gas, in recent months has driven up production costs.
Together with concerns over an increase in tax, producers are facing a desperate situation. The curtailment of natural gas supply to industrial enterprises in some provinces, including Chaharmahal-Bakhtiari, has shut down production lines.
Iran’s steel output has declined in recent months due to frequent power outages and restrictions.
The Oil Ministry and National Iranian Gas Company are putting pressure on steelmakers and mining firms to drastically cut gas consumption, according to a report by Persian daily Jahan-e-Sanat.
Specifically, Chadormalu Mining and Industrial Company has been asked to keep its gas consumption below 30,000 cubic meters per day until further notice. Since the quota is less than 1% of the heavyweight mining firm’s gas consumption under normal conditions, the restriction practically means cessation of production in Chadormalu, inflicting huge losses in lost production.
The report also noted that certain companies have been restricted for longer periods, while others will be less affected.
It noted that producers of direct-reduced iron are the prime target of new restrictions due to their energy-intensive nature, adding that since DRI is considered a strategic product in the steel industry, the measure will impact the entire steel production chain and lead to a massive decline in output of steel products and rising prices.
With the decline in temperature across Iran, gas consumption in households has set a record high.
This is not the first time that industries, especially steelmakers, are facing power restrictions. In the summer of the current fiscal year (July 23-Sept. 22), steel production declined by 40% compared with the previous quarter (March 21-June 22) due to electricity cuts amid record high domestic consumption.
In a letter to the Supreme National Security Council, ISPA has put steel mills’ losses caused by power outages at $6 billion from the beginning of the current Iranian year (March 21) to Sept. 22.
According to ISPA, 82 days of production were lost during the period due to power outages and 300,000 direct and indirect jobs were lost or restricted, the news portal of the association reported.
Summer demand led to severe power and water shortages in summer in most regions, resulting in blackouts and dry taps.
The new record came as high temperatures nationwide drove general electricity consumption to new heights in summer, prompting authorities to prioritize domestic users over industries in supplying power.
As the manufacture of steel and cement is an energy-intensive process, their factories were subsequently restricted by the Iran Power Generation, Distribution and Transmission Company (locally known as Tavanir) and have been only allowed to work at a fraction of their capacity during specific hours.
According to Tavanir Spokesman Mostafa Rajabi-Mashhadi, the summer electricity restrictions for industries were removed as of Sept. 23.
All industrial units that consume more than 2 megawatts of electricity per month will be charged 2.5 cents per kilowatt-hour as of the next fiscal year (starting March 2022), the head of Thermal Power Plants Holding Company said in December.
“Industries are levied 0.5 cent per kilowatt hour currently and the 400% rise is expected to help the cash-strapped Energy Ministry meet its financial requirements,” Mohsen Tarztalab was also quoted as saying by Mehr News Agency.
As per the new bill passed by the Majlis, electricity tariffs for energy-intensive industries, namely cement factories, oil refineries and petrochemical and steel companies, will increase fivefold as of March 2022.
Industries account for 40% of Iran’s annual power consumption of 280 billion kilowatt-hours.
Industries Ministry’s Production Cost Initiative
The new legislation that has made it mandatory for manufacturers to print the costs of production on the package of some consumer goods has negatively affected demand, confusing the market.
Minister of Industries, Mining and Trade Reza Fatemi-Amin recently launched an initiative that requires the “total production costs” to be printed on the goods, according to which, “consumers understand how much more than the cost price they are paying; the measure will help increase transparency”.
Accordingly, the Chamber of Guilds has enumerated the list of goods included in the initiative and said, “On the order of Industries Ministry, producers of “mineral water”, “juices”, “fizzy beverages”, “malt beer and beverages” from the group of consumer goods and “food processor”, “beverage maker”, “meat grinder” and “microwave” from the group of capital goods will enter the first phase of this project for six months; other goods are likely be added later.
As such, manufacturers have been required to print the production price, i.e. invoice price, on the products and stores are required to display the selling price, i.e. the price that a consumer pays on the product or on the shelves.
“We have 80,000 items on the market, for which we have calculated their production cost. Sometimes, the gap between the production and selling prices of an item is as much as 100-120%,” according to the chamber.
Mismanagement in Subsidy Allocations
There is no supervision over government’s payment of subsidies to some goods such as food and pharmaceuticals. The subsidy is either exported via customs or smuggled out.
The Majlis Joint Commission recently rejected the government proposal in the budget bill of the upcoming fiscal year (March 2022-23) to abolish the allocation of subsidy to imports at the cheap rate of 42,000 rials per dollar.
“Considering that the government proposal is vague and unsubstantiated, the Joint Commission has decided that $9 billion will be allocated to supply [read import] medicines, medical equipment and essential goods at the preferential exchange rate [42,000 rials per dollar] in [the Iranian year] 1401 [March 2022-23],” spokesman of the commission, Rahim Zare’, was quoted as saying by ILNA on Saturday.
The $9 billion allocation is apart from subsidies to be paid out to import wheat, he added.
The joint commission is a parliamentary body responsible for reviewing the budget bill as well as five-year development plans proposed by the government before it is put to a legislative vote.
Also known as necessity or basic goods, essential goods are products consumers will buy, regardless of changes in income levels.
The abolishment would have put an end to the yearslong debate on whether or not to end the increasingly costly and corruption-tainted subsidy policy.
The government said it allocated 1,000 trillion rials ($3.5 billion) to help compensate the elimination of subsidized foreign currency in the 2022-23 budget.
As per the budget bill, the government will pay the $3.3 billion “to offset price rises of basic goods, pharmaceuticals, bread and guaranteed-purchase of wheat”, local media outlets reported.
Since mid-2018, the government has subsidized the currency for importing basic goods ($1=42,000 rials). The highly subsidized rate is about a seventh of the real prices in the open market and offers a fertile ground for rent-seeking by some big import companies, vested interests and state cronies.
Subsidized forex is gotten from oil export and used only for importing essential goods, pharmaceuticals and machinery to avoid price hikes in food and raw materials.
While successive Iranian governments have subsidized food imports, cheap currency in its current format was first given after the steep rise in foreign exchange rates in the spring of 2018 soon after the United States abandoned the Iran nuclear deal and imposed tough economic sanctions.
Flaws in the apparently ill-advised policy emerged in the first few months after inception and the government under pressure was compelled to slash the list of goods eligible for subsidized currency.
In the present fiscal budget, the government was not allowed to pay more than $8 billion in subsidized currency for importing food and medicine. The Central Bank of Iran says what has been paid so far is over and above the ceiling set in the budget.
The $3.4 billion will likely be channeled to the low-income strata in the form of cash subsidy.
Prominent economists, academia and socioeconomic experts hold the strong opinion that the forex subsidy policy never achieved its intended goal of supporting the downtrodden, while greedy middlemen and cronies in the distribution chain benefited the most.
On many occasions, consumers of imported essential goods must buy their needs at prices that equal open market forex rates, thanks to the gross mismanagement, inefficient distribution system and absence of viable government oversight.
In short, a significant portion of the cheap forex is pocketed by big importers and the distribution chain instead of end customers, which ostensibly means the millions of Iranians at the lower-end of the economic ladder.
It is often heard and said in Tehran’s politico-economic circles that in the past three years, billions in subsidized currency were given to selected companies to import food and medicine yet some of these companies simply did not bring anything into the country.
It later turned out that some of the firms who took the scarce forex resources were shell companies. Few, if any, have paid for the thefts or faced the full force of the law.
Automaker’s Debts and Shortage of Raw Materials
Auto part manufacturers have stopped production, thanks to automakers’ failure to pay their debts and lack of cash flow. As a result, many related companies such as tire manufacturing enterprises are facing a sharp decline in demand due to the incomplete auto production cycle.
Lack of transparency and delay in timely provision of raw materials by petrochemical firms in the domestic market, given their monopolistic status and the large number of downstream industries such as textile industry, rubber and plastic, has created challenges regarding the provision of raw materials.
The failure of petrochemical industries and Iran Mercantile Exchange to timely deliver raw materials and control fluctuations of foreign exchange rate have affected companies’ provision of raw material.
Labor Shortage
A number of manufacturing and industrial companies are struggling with labor shortage. In the wake of the increase in costs of living, workers now choose higher-paying jobs.
Shortage of manufacturing labor is one of the main concerns of production lines today, says Hervik Yarijanian, a member of Tehran Chamber of Commerce, Industries, Mines and Agriculture.
“The minimum wage set by the Ministry of Cooperatives, Labor and Social Welfare has discouraged workers from taking jobs at factories; they are more interested in working for online ride-hailing service providers, restaurants, or even as peddlers,” he was quoted as saying by ISNA.
Noting that even a 30% increase in next year’s wages won’t be enough to solve the shortage of labor force in factories, Yarijanian said working for the unofficial sector of the economy pays much better.
“The crisis in Afghanistan has forced part of the neighboring country’s labor force to come to Iran, but the current laws make it difficult or even impossible to employ them. It could be possible to tap into this potential and allay the concerns of manufacturing enterprises, if we could make some changes in the laws. These days, the shortage of workforce has put more pressure on producers than issues related to tax and insurance. Insufficient production and supply will eventually lead to higher prices of goods,” he added.
Tariffs Not Adjusted for Inflation
In many sub-sectors of services like telecommunications, where the client is usually the government, the Plan and Budget Organization has not adjusted tariffs for inflation and the rise in the value of foreign currency. As a result, businesses are now under immense financial pressure; they are trying to stay afloat with just enough workers to operate.
Therefore, a proportional tariff change in contracts signed in previous years in accordance with the rise in exchange rates is recommended.
