Four major challenges in Iran and many other countries have the potential of turning into a Gordian knot in the coming months if left unsolved, so much so that even the World Bank has warned about a possible return to the 1970s stagflation, said president of Tehran Chamber of Commerce, Industries, Mines and Agriculture.
In an article for the Persian economic daily Donya-e-Eqtesad, Masoud Khansari added that the world has been buffeted by a series of crises over the past few months.
“The Covid-19 pandemic, the war in Ukraine, inflation and shortage of food [particularly essential commodities such as wheat, corn and edible oil], fuel price hike and the acceleration of climate change impacts and global drought are among dramatic challenges facing the world. Our country is hit with a double-whammy of sanctions and economic mismanagement to boot,” he added.
A translation of the article’s full text follows:
Inflation
Inflation is now the main challenge of economies. The outbreak of Covid-19, Russia-Ukraine War and the growth in fuel price are the main causes of inflation worldwide.
One-third of European countries, which used to have 2% inflation for years, saw double-digit inflation this year; US inflation hit 40-year highs, reaching 8.6% [in May].
The World Bank has predicted that the uptrend in prices and shortages of essential goods will continue in many countries and even lead to instability in poor countries.
The bank has also warned about the emergence of a new recession, as central banks keep on increasing interest rates. It has proposed that the economies employ other regulatory tools to control inflation instead of increasing interest rates; for example, they can channel more money into the supply chain to curtail inflation.
Iran has been plagued by consecutive waves of inflation over the years. The country registered 38.7% inflation in the last two months of the fiscal 2021-22 and the first two months of the current fiscal year [2022-23]. The Consumer Price Index increased by 13.2% in the month starting May 22 compared with the same period of last year, providing fodder to those against the elimination of import subsidies to blame economic reforms as the main culprit of inflation.
Although the removal of subsidies did contribute to inflation, it was not the only cause. The growth in monetary base and money supply in the fiscal 2021-22, the rise in the global prices of essential goods and the decline in optimism about the revival of the Joint Comprehensive Plan of Action (Iran nuclear deal) were other drivers of inflation.
The government needs to control the growth of monetary base and money supply to curtail inflation and conclude nuclear talks in the best way possible and continue the implementation of a floating exchange rate system. Hopefully, positive changes will occur in the economy.
Water and Food Crises
The Food and Agriculture Organization of the United Nations issued in its latest report a stark warning of multiple, looming food crises, driven by conflict, climate shocks, fallout from the Covid-19 pandemic and massive public debt burdens - exacerbated by the ripple effects of the war in Ukraine, which has accelerated food and fuel price hikes in many countries.
FAO has also warned about the shortage of water resources in Iran, saying that Iranian farmers consume two to three times more than the global average of water consumption to cultivate corn, rice and wheat per hectare.
Iran is likely to lose 70% of its agricultural lands in future. Experts have sounded the alarm about this grave danger, but so far little attention has been paid to this challenge.
Experts recommend the government to employ 10-year water austerity measures instead of taking a political stance to resolve this issue.
Financial Indiscipline in Banking System
The latest report by the Ministry of Economic Affairs and Finance on the financial statements of governmental banks in the fiscal 2019-20 and 2020-21 speaks of their huge accumulated loss of 816 trillion rials (about $2.5 billion).
Some of these banks are subject to Article 141 of Iran’s Trade Law; they have to hold general meetings [of their shareholders]. The report also lays bare the causes behind losses incurred by the banks in the past, including their lending to the government, the unproductive nature of their assets, their many properties, low productivity of affiliated companies, mismanagement or political and regional management of companies, unresolved claims and corruption.
A large part of new investments in the country is made by banks, therefore it is vital for the government to improve and streamline banking business. It is more than a decade that the idea of overhauling the banking system has been put forward but left untested.
Exports Overlooked
Despite financial crises and inflation, many countries have managed to tap into the potential of exports as a tool to improve their economies. In Iran, however, we have fared badly in this area.
One of the drivers of economic growth is export of goods and services. Up to 30% of Turkey’s economic growth over 2015-21 are attributable to exports.
Official reports show that Iran’s exports (adjusted to constant prices of 2016-17) decreased from 2,530 trillion rials (about $7.9 billion at the current exchange rate) in the fiscal 2011-12 to 2,220 trillion rials ($6.9 billion) in 2021-22.
The annual average growth of goods and services exports was -1.29 during the period under review. Exports are central to the development of countries; we need to pay extra attention to improving exports.
