Domestic Economy

Economic Reform Vital for Post-Sanctions Growth

Economic Reform Vital  for Post-Sanctions GrowthEconomic Reform Vital  for Post-Sanctions Growth

Economic reform should be the government’s top priority in the post-sanctions era, says Emeritus Professor of Economics at the University of Cambridge.

“Otherwise, either development will be impossible or economic growth, if achieved, will not sustain for a long time,” the Financial Tribune’s sister Persian daily Donya-e-Eqtesad quoted Prof. Mohammad Hashem Pesaran as saying in a videoconference with private sector business owners in Tehran Chamber of Commerce, Industries, Mines and Agriculture headquarters in Tehran on Tuesday.

Iran’s economy, according to the Noble Prize nominee, is at a “critical juncture”.

Pesaran said the upcoming removal of sanctions imposed by the West over Iran’s nuclear energy program as part of the July nuclear deal between Tehran and world powers has generated high expectations both at home and abroad.

“Nonetheless, Iran’s economy, at this point, is suffering from a multitude of issues that are either hard to tackle or need a long time to be resolved,” he said.

“The economy needs reform in line with the lifting of sanctions so that it can perform more efficiently.”

 Need for Investment

Underlining the indispensible need for investment, Pesaran said after sanctions were tightened in 2012, GDP growth declined by 3-6% and private and state investments also recorded a sharp decline of 12-15%, though consumption only fell 2.5% in the same period.

“These figures show that sanctions affected investments and manufacturing far more than consumption,” he said.

The economics professor said shortage of investments in Iran is not only blamed on sanctions, but also on domestic economic policies that until recently have allowed the country’s revenues to import consumer products instead of investment.

“Unless a huge amount of investment is made in the industrial and services sectors, the country will not have the manufacturing capacity it needs to benefit from trade opportunities after the sanctions are lifted,” he said.

 Non-Oil Exports

Pesaran also stressed the importance of promoting non-oil exports, saying to boost non-oil exports, Iran needs to consider tough competition with many rivals, referring to Central Asian countries like China, India, Europe, Latin America and Africa as prominent exporters.

“Increasing non-oil exports is pivotal to reducing reliance on oil revenues amid falling global oil prices that have tightened Iran’s budget in the past few years,” he said.

Crude oil prices have fallen by almost 60% since June last year, with production from the Middle East, Russia and North America consistently above global demand.

According to Governor of the Central Bank of Iran Valiollah Seif, Iran’s oil revenues have halved in the six months starting March 21 compared to the same period of a year earlier.

“Oil revenues dipped from $119 billion in the 2011-12 fiscal year to $55 billion in the 2014-15 fiscal year,” Seif said last week, as sanctions curbing petroleum exports augmented the general decline in oil price.

By non-oil export, he stresses, he was referring to export of goods by the private sector and those that are not derived from oil, as Iran often includes oil-related products, like petrochemicals and condensates, in the statistics it releases under non-oil exports.

Seif also underscored the importance of promoting tourism, given Iran’s abundance of cultural, historical and natural sites.

 Interest Rates Vs. Inflation

The economist referred to the sharp fall in Iran’s inflation rate in the past two years since President Hassan Rouhani took office as a “milestone” in the economy, “which built up trust between people and the government.”

Inflation is now hovering at around 15% after skyrocketing to 40% two years ago.

Nonetheless, Pesaran says, since the government had not envisioned such a rapid decline in the inflation rate, it has not yet adopted policies to cut the interest rates in pace with inflation.

The interest rate ceiling was last cut to 20% in May by the Money and Credit Council.

“Previously, interest rates used to be lower than the inflation rate, which prepared the ground for investment. But now that interest rates are way higher than inflation, private sector investment in businesses is undermined,” he said.

Pesaran also criticized the issuance of high-interest bonds by the government, saying this will encourage people to shift their bank savings to purchasing those bonds and as a result banks will be inclined to offer higher interest rates to attract more clients.

A landmark in the domestic debt capital markets took place on September 30 when Iran’s first-ever bond issue in rial, dubbed “Islamic Treasury Bills”, was launched.

Given the new measures to ease recession, which were unveiled last week by the government, and the prospects of lower interest rates on deposits, it seems there should be more demand for treasury bills that for today have 26.3% yield to maturity, which is considerably higher than the 20% cap set by the CBI on one-year deposits.

Pesaran also warned that the release of Iran’s overseas frozen assets, estimated at $29 billion by the Central Bank of Iran, could increase liquidity.