The National Business Environment Index, measured by Iran Chamber of Commerce, Industries, Mines and Agriculture, stood at 6.05 in the third quarter of the current Iranian year (Sept. 23-Dec. 21, 2022) to register a 0.17 percentage point or 2.89% increase compared with the preceding quarter, and a 0.11 percentage point or 1.78% increase compared with the corresponding quarter of last year.
The index measures business friendliness of Iran’s economy, with 10 indicating the worst grade and a decline showing an improvement in the business environment.
The ICCIMA index is fashioned after World Bank’s discontinued “Ease of Doing Business” index, a tool formerly used to measure the cost of doing business in countries.
Iran’s National Business Environment index stood at 5.88 in Q2 (June 22-Sept. 22) and 6.07 in Q1 (March 21-June 21), according to the findings of the 25th edition of this report.
“Unpredictability and fluctuations in the prices of raw materials and products”, “instability of policies, regulations and executive procedures related to businesses” and “difficulties associated with funding from banks” affected Iran’s business environment during the period under review (fall).
The chamber of commerce measures the index for each of the 31 Iranian provinces. Sistan-Baluchestan, Kurdestan and Hormozgan had the worst business environment and Qazvin, West Azarbaijan and South Khorasan had the best.
The average real production capacity of economic enterprises participating in this survey stood at 43.51% in Q3, indicating an increase of 2.36 percentage points compared with the preceding quarter.
The services sector had the worst business environment in Q3 with 6.07 points followed by industry (5.96) and agriculture (5.83).
Among 21 categories of business activities, the worst three business environments were registered for “construction”, “real-estate services” and “professional, scientific and technical activities” and the top tier included “real-estate services”, “mining” and “human health and social work”.
Enterprises with 6 to 10 employees had the best business environment with a score of 5.86 while those with more than 50 to 100 and less than 5 employees had the worst business environment, each with a score of 6.09.
Businesses operating for less than two years and more than 16 years had the best business environment (5.97 each) while those operating for 6-10 years had the worst business environment (6.09).
Purchasing Managers' Index
Latest data released by ICCIMA’s Statistics and Economic Analysis Center show the Purchasing Managers' Index for Iran’s overall economy saw a “massive crash” in the 10th month of the current Iranian year (Dec. 22, 2022-Jan. 20).
The report attributes the downturn in economic performance to longstanding factors plaguing the Iranian economy, such as runaway inflation, plummeting value of the national currency and the ever-dwindling demand in the domestic market, in addition to a new challenge, namely “shortage of energy”.
PMI for Iran’s overall economy settled at 41.89 in the 10th month of the year from 49.14 registered in the previous month, indicating a 7.25-point or 14.75% decrease.
Describing the huge fall in the index as an indication of a “rare” slump in Iran’s economy, the report said, “Except for the first month of every Iranian year [which coincides with the Iranian New Year holidays and registers a marked decline in economic activities], and the last month of the Iranian year 1398 [February-March 2020] which saw the outbreak of Covid-19, this is the lowest level ever recorded by PMI since the project [i.e., PMI reports] began.”
PMI indicates the prevailing direction of economic trends in the manufacturing and services sectors. 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.
The index is indicative of the prevailing direction of a country’s economic trends, aiming to provide information about business conditions to company directors, analysts and purchasing managers.
According to the new report, rise in production costs as a result of the hike in foreign currency rates against the rial, and closure of industrial units due to energy shortage have severely impacted companies’ ability to meet their customers’ demands.
“Internet disruptions have also added to the decline in business activity, particularly in the services sector,” the report read, adding that the decline in customers’ demand and the pressure of rising costs on the operations of companies have led to a drop in the recruitment of new human resources.
Local Industries Hard Hit by Gas Cuts
The sharp drop in temperatures in recent weeks, including in the capital Tehran, has led to an unprecedented increase in energy consumption.
Iran also lost gas import from Turkmenistan due to problems in the Central Asian country’s domestic supply network. In addition, the cheap price of gas in the country has led to excessive consumption and shortage, despite having the world’s second largest reserves.
Amid the shortage, the state-run National Iranian Oil Products Distribution Company has cut supply to local industries to meet the growing needs of households.
Between 30% and 70% the gas supplied to local industries have reportedly been cut this winter. Normally, 65% of the gas produced in Iran are allocated to the domestic sector.
The priority of the National Iranian Gas Company is providing gas for the household and commercial sectors. Before the start of the cold season, the Oil Ministry took measures to allocate alternative fuel to industries so that when the consumption of households increases and less gas is delivered to the industrial sector and power plants, they can use other fuels such as diesel and mazut.
Cement factories were among the first producers whose gas supply was cut, after gas consumption soared late in fall.
Most manufacturers have started to tap into liquid fuel to continue their operations.
The Oil Ministry has said it compensates the cement producers’ financial loss through discounts in liquid fuel bills.
Iran offers natural gas to households and businesses at highly subsidized rates, which experts blame for the illogically high level of gas consumption in the country.
In fact, gas shortage has become a major headache for many industries in recent years. One hard-hit sector is steelmaking. Restrictions on gas supplies to steel mills have intensified since last year; such that direct-reduced iron production units have had to close down or face severe curbs, which have adversely affected the steel industry, according to Vahid Yaqoubi, executive manager of the Iranian Steel Producers Association.
“Due to gas and electricity supply restrictions, we fell behind by about 6 million tons from out steel production plans last year [March 2021-22],” he was quoted as saying by the news portal of Iran Chamber of Commerce, Industries, Mines and Agriculture recently.
“Despite the better management of electricity in the summer [June 22-Sept. 22, 2022] compared with the corresponding period of last year, gas restrictions started sooner this year. While our plan was for the restrictions to start from the beginning of the 10th month of the year [Dec. 22, 2022-Jan. 20], they started from the beginning of the ninth month [Nov. 22-Dec. 21, 2022]. At first, we saw a 30% cut in gas supply, then 50% and 70%, and currently the supply to northern steel manufacturing companies [mostly DRI plants] has been completely cut off and the plants are closed. Some arc furnaces and rolling mills have also closed since they do not have raw materials,” Yaqoubi said.
Noting that gas plays a pivotal role in the steel industry, the ISPA official said the Iranian steel production is based on DRI.
“If there is no gas, no DRI will be produced, and in the absence of DRI, other parts of the steel manufacturing chain will be closed and steel production will halt. Therefore, the role of gas in the steel industry is vital.”
He explained that there is no replacement for gas in the Iranian steel industry.
“For example, gas can be replaced with mazut in other industries, while this is not possible in the steel industry. Therefore, with gas outage or restrictions, inevitably all steel industry operations will be disrupted,” he added.
According to Yaqoubi, the steel industry’s gas usage stands at about 550 cubic meters per ton, of which 70% are used alone by DRI plants.
“In the ninth month of the current year [Nov. 22-Dec. 21, 2022], out of 40 million cubic meters of needed gas, they only supplied 15 million cubic meters. During the last 7-10 days, the weather has become colder and they’ve reduced the allocated gas volume and even the 15 million cubic meters have not been supplied.”
The ISPA chief noted that due to restrictions on gas supply to power plants, industries have also had to grapple with electricity shortage.
“For instance, for more than 40 days, the gas supply of Khorasan Steel Company has been cut off and since last week, there are electricity restrictions imposed on this plant. Mobarakeh Steel Company, the biggest steel manufacturer in Iran, has been facing a 50-70% gas usage restriction since last week besides a 30% electricity usage restriction. We fear that as the weather gets colder, this restriction will also increase to 50% or more,” he said.
According to the official, a total of 800 million cubic meters of gas are used in Iran, of which 650-700 million cubic meters are used by households and commercial units, so practically no gas is left for industries.
“There is a pressing need for investment in Iran’s gas industry to increase production while household and commercial consumption needs to be optimized,” he said.
World Bank’s Ease of Doing Business Index
In September 2021, the World Bank announced it was “discontinuing” its “Ease of Doing Business” report, which ranks countries on the ease of opening and operating a company.
It cited the outcome of an investigation that found the World Bank had changed the rankings under pressure of funding. This wasn’t the first time the rankings had come in for criticism.
A 2008 internal evaluation report highlighted their lack of transparency, while in 2018 the bank’s chief economist, Paul Romer, resigned decrying data manipulation.
According to Ian Richards, an UNCTAD economist, the Doing Business had become too politicized. It was originally intended as a way to measure improvements in countries’ business environments. It used an index score based on the number of procedures and time to, for example, start a business or get a construction permit; there were 10 indicators.
However, the bank also used it to rank countries, feting top scorers and reformers. Governments soon saw a good ranking as an end in itself, regardless of how it impacted their development. A slip in rank could be politically damaging.
According to Doing Business 2020 published in October 2019, Iran’s Ease of Doing Business ranking improved by one place to stand at 127th among 190 economies.
The report shows the country’s distance to frontier score saw a decline of 0.1 percentage point, from last year’s 58.6 to 58.5 in the new report.
New Zealand topped the list of 190 countries in the Ease of Doing Business with a score of 86.8, followed by Singapore with 86.2 and Hong Kong with 85.3, while Somalia was in last place with a score of 20.
