Iran’s economy witnessed the depreciation of its national currency, high inflation and recession following the US withdrawal from the Joint Comprehensive Plan of Action and imposition of sanctions in the fiscal 2018-19.
The country’s politicians introduced policies that had an adverse effect on the production sector. On the one hand, severe import restrictions were enforced to preserve the local currency’s value. Imported goods were divided into four groups of essential, semi-essential, non-essential and prohibited goods; and the import of 1,339 items were banned. On the other hand, the rise in exchange rate from 40,000 rials per US dollar in the early 2018-19 to more than 100,000 rials at the end of that year led to an increase in the prices of imported goods and rise in the price advantage of domestic production.
Barzin Jafartash, an economic expert, prefaced his write-up for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
The rial’s depreciation has continued over the past few years, reaching more than 400,000 per dollar. Thanks to this, in addition to import restrictions, the share of domestically-produced goods in this protected market has grown significantly. As a result, Iranian home appliances, clothes, electronic accessories, cosmetics, stationery, faucets and toys have found their place in the basket of consumers.
The taste of Iranian people has changed decisively. The market share of Iranian brands has increased from 20% in the fiscal 2018-19 to more than 80% in some industries, including home appliances. These changes in the structure of the domestic market have been conductive to higher quality and quantity. For example, all major home appliance brands currently offer their products with a 2-3-year warranty and 10-year after-sales service.
Uncalled Protection
This “uncalled protection” was mandatory and anti-production in nature. In more precise terms, Iran’s political establishment, which depends on mass policies, placed a wide range of pro-consumer and anti-production policies on its agenda. Price control was made an integral component of Iran’s economic structure since the depreciation of local currency and the surge in inflation. The government’s lower-than-inflation pricing deprived Iranian producers of earning a profit, despite the significant increase in production and sales.
Price control policies were not limited to mandatory pricing; surveillance patrols were dispatched to shops and manufacturing enterprises. Such an approach toward business owners under the pretext of fighting inflation has imposed huge costs on manufacturing enterprises.
However, import restrictions created hurdles in the way of supply. For example, the supply chain of the domestic garment industry faced countless problems following the ban on textile imports.
In fact, limits on foreign income and import restrictions in upstream industries disrupt downstream industries. In addition to the anti-production policies of the government, the outbreak of Covid-19 and the continuous shutdowns following quarantine orders also inflicted irreparable damage on the manufacturing sector.
As such, in-person shopping in some industries like clothing decreased significantly. The decline in public purchasing power led to a decline in total domestic demand. For example, the share of clothing in the budget of urban households fell from 4.2% in 2011-12 to 3.3% in 2021-22. However, it seems that the cost of import substitution has been heavier than the decrease in total demand, i.e., the share of domestic production gained from the substitution of foreign goods has been bigger than the decrease in total demand.
Potential Turning Point
In general, one can say that restrictions on imports and the depreciation of local currency have led to a quantitative and qualitative increase in domestic production.
Price control policies, sanctions, instability of the economy and the pandemic have slowed down the progress of these industries. As we speak, the country’s manufacturing industries are at a potential turning point. The government can now opt to improve the quality of domestic manufacturing, gain customer satisfaction and direct industries to export markets by supporting the progress that has been made at the expense of the consumer (by being deprived of having the option to choose foreign goods and consequently being forced to buy local products).
The move from import substitution stage to the development of exports requires considerable investment and energy, including technical assistance to manufacturing enterprises, financing investment and working capital, employment of foreign technicians, facilitating the import of raw materials, allocation of export subsidies, training the workforce and also terminating anti-production policies such as price control, prioritizing of industries when it comes to electricity and gas cuts and suppression of exchange rate as well as having an expansionary budget that leads to high inflation.
The continuation of anti-production policies will create more consumer dissatisfaction with domestic products and as soon as the country’s foreign revenues increase and import gates to foreign products open, all the current positive developments in the production sector will disappear.
