Recurrence in Iran’s economy emanates from the cognitive mindset of policymakers and the cyclical priorities of the establishment in its interactions with the world. In order to see what risks investors will face in the new Iranian year (started March 21), the best way is to see the repetition of these patterns and its impact on the economy.
Morteza Imanirad, an economist, discussed the patterns and cognitive mindsets behind these policies in a write-up for the Persian daily Donya-e-Eqtesad. A translation of the text follows:
Speculators invest mostly in the gold, currency, land and housing markets, as well as the stock market.
Too much emphasis on ideological patterns in the economy and the changeability of these patterns are the main source of cognitive patterns in Iran’s economy.
After the Islamic Revolution, the economy has been continuously used as a tool by politics. Therefore, the Iranian economy is not an independent phenomenon that can be analyzed on its own. It is significantly formed by exogenous variables, that’s why without a degree of political involvement, it is difficult to depict the structure and outlook of the economy.
Post-revolution, it became gradually clear that when the stock market index rises, then it is healthy; if it decreases significantly, it is unhealthy. Everyone seeks to raise the index through political interference. Therefore, low prices, low exchange rates and low interest rates are considered a value, making Iran’s economy predictable through the formulation of policies despite high fluctuations. These worthless values have made the government’s economic policies recurring and ineffective.
In economy, the more you underline information and data, the more effective such policies become. Even the common economic theories in Iran have no value unless they can be defended and analyzed based on data and research. Unfortunately, after the revolution, we are seeing the spread of baseless “economic theories”, which not only fail to solve problems, but are also against facts, and as a result, the theory itself becomes an obstacle to economic achievements.
Theories that have been tested and fail are being repeated. That’s why instead of relying on information, indicators, analysis and research, we have theories and theorists.
There has been a general understanding among policymakers and political officials after the revolution that there is a threat in the global markets unless it is proven otherwise. This has separated Iran’s economy from the world economy. Perhaps continuing to defend nuclear development can be regarded as a tool for special interaction with the world because it has been more challenging for the development of industry, or the energy industry than useful.
Risks for the Economy and Investors
These factors, apart from the repetition of policies and trends, have brought about risks for the economy and investors, which are listed below. On this list, I’ve tried to specify the relationship of the above five factors to economic trends.
The continuation of inefficiency in governments has been offset by the expansion of liquidity; this has given way to more destructions. Continuous inflation is the inevitable result of this process. Post-revolutionary governments, have at times denied the relationship between inflation and liquidity, and paved the way for further growth of liquidity.
This trend has created chronic inflation and will continue in the fiscal 2023-24. But the difference between this year and the previous years is that the threshold of inflation has reached a point where any shock to the economy leads to severe price fluctuations. Therefore, this year, inflation along with price fluctuations is one of the top risks for investors. If inflation increases gradually, it can be seen as an opportunity for investors but significant fluctuations increase the investment risk.
The fluctuation of exchange rates and the growth of liquidity have stabilized the repetition of political patterns. High tension in international relations has also stabilized sanctions and worsened Iran’s position in the Financial Action Task Force. Sharp increase in capital outflow also aggravates this process. Therefore, high fluctuations in market rates are among the risks of investment in Iran.
These two key factors reduce stability in economy and always combine any investment with high risk. Risk of investment is usually reduced by economic stability and predictability of economic variables. This year, we will probably face more severe fluctuations; speculative investments are bound to increase cautiously.
Apart from international tensions, internal tensions can also raise price fluctuations. As long as the dialogue between the government and the protesters is missing, investment risk will go up.
I expect that along with higher fluctuations in variables, we will see changes in procedures and regulations, as well as policymakers in the current year. These changes cannot increase stability; on the contrary, they can accelerate instability.
Given the above factors, speculative practices for more profit or capital preservation will increase. Therefore, investment in production will decrease in favor of speculative markets. These changes continue the price fluctuations. A part of the speculative capitals will not be able to yield as much as inflation. Therefore, the real value of their capital can decrease.
