Domestic Economy

No Great Leaps

No Great LeapsNo Great Leaps

Many in Iran’s economic circles are concerned about future growth. Many  point to last year’s slowdown in growth and fret the same may happen next year. They understandably presume the government’s lofty eight-percent growth target for the years to come is too ambitious and will be missed.

As pundits Hamid Azarmand and Pouya Jabal-Ameli highlight in recently published opinions in the local media, the wounds from the two terms of Mahmoud Ahmadinejad’s presidency (2005-2013) are far too deep to be healed quickly. It is said that public perception was misled to believe that recovery would be swift.

Iran emerged from two years of deep recession in the 1393 fiscal year (2014-15). Three percent growth experienced then was sold as recovery. Iran’s economy has recovered. It has grown ever since. But, there were alarming contractions in major economic sectors in the succeeding fiscal year that ended in March 2016.

According to the Statistical Center of Iran, a presidential body, the economy expanded by one percent in that year. However industrial output dropped 2.8% during the period and private investment in construction plummeted 13.9%, leading many seasoned economists to question the premise of the 1% expansion in gross domestic product.

The prospects of growth are better this year. Thanks to relief from the nuclear sanctions, oil exports have more than doubled since January. Also, as a former deputy of the Iranian Productivity Organization, Azarmand points out, though the4 residual US sanctions have kept major banks away from Iran, commercial costs have dropped. This can and will boost economic performance, though most of the growth is likely to come from the oil sector  and fiscal spending from crude export revenues.

 Fault Lines

Other sectors of the economy, though, will continue to languish as long as fault lines in the economy persist. While capital formation—additions of capital stock, such as equipment, tools, transportation assets and electricity—averaged 9% of GDP in the two decades to 2009, it contracted by over 4% in the succeeding four years.

Countries need capital goods to replace the current assets that are used to produce goods and services, and if a country cannot replace capital goods, production declines. Small wonder Azarmand believes Iran’s production capacity and productivity has eroded.

Iran went through extreme bouts of hyperinflation as well with rates hitting 45% at some point in 2013. Now, it has dropped to just above nine percent, highlighting an ongoing crisis in the money market, says Jabal Ameli, an analyst at the Central Bank of Iran. During the high inflation period, banks put most of their assets in the then lucrative property market.

They bought real estate with public money. High inflation meant asset prices were bubbling and their assets were considered liquid. Now with the market downturn, banks have been stuck holding illiquid properties and mountains of troubled credit plus  failed loans, says the central bank analyst.

Iranian bureaucracy implies they simply need not file for bankruptcy! However, the problem persists and will not go away anytime soon.

Considering that nearly 90% of the economy is financed by banks, it is no surprise businesses are struggling to keep their head above the water. Add to this the huge deficit in production technology and machinery of which Iran was deprived due to the international sanctions.

In sum, political pressure and government anxiety are halting some critical and decisive moves to turn things around. The moderate administration is playing safe, for obvious reasons, at least until next year’s presidential elections. Iran will grow, but expect no great leaps.