Domestic Economy

Reversal of Investment Trends Needed for Growth

Reversal of Investment Trends Needed for GrowthReversal of Investment Trends Needed for Growth

The economy requires a reversal in investment and productivity trends, says former presidential advisor, Saeed Laylaz.

Much of the growth in the past decade came from a boom in housing funded by windfall oil revenues. Productivity and investment suffered due to the crisis brought about by irresponsible government spending and foreign policy.

Two-thirds of the capital formed in 2005 were spent on machinery, according to Laylaz, who added that the ratio has now declined to a third, IRNA reported.

Capital formation refers to net additions of capital stock such as equipment, buildings and other intermediate goods. Nations use capital stock in combination with labor to provide services and produce goods. An increase in this capital stock is known as capital formation.

Not only investment in machinery has increased, but capital formation itself has slowed markedly. The Iranian economy is in such adverse conditions that few are risking their money to invest. For now, bank deposits and some debt securities are where money is flowing to. This has severely hampered investment.

Capital formation as a share of gross domestic product has fallen to a quarter of GDP from 40% a decade ago.

Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income. Increasing an economy’s capital stock also increases its capacity for production, which means an economy can produce more. Producing more goods and services can lead to an increase in national income levels.

The opposite happened in Iran from 2010 to 2015. Capital formation tanked. Oil prices fell while Iran’s foreign receipts were limited by sanctions. As money dried up, the currency, rial, devalued.

The aggregate effect has been shrinking GDP, capital formation and investment. Income and productivity also fell hand in hand.

Some officials are now pinning the hopes of recovery to the housing market.

Laylaz and presidential advisor Masoud Nili say it will not happen.

The housing boom that inflated Iran’s economy during the prior decade was fueled by money printing and windfall oil revenues. The current moderate administration is too prudent to print its way out of recession.

Oil revenues are unlikely to reach past levels either. Though sanctions have been lifted and Iran has ramped up its production and sales by over a third, low oil prices mean total revenues will fall short of prior records.

Nili believes recovery in the housing market will be slow and will lag behind industries and finance.

Laylaz says even when the housing market recovers, it will be less vibrant.

“Demand for housing in Iran will remain below 80 million square meters a year, given declining marriage and population growth rates, along with over 100 million square meters of vacant property,” Laylaz said.