Structural Economic Reforms Key to Sustainable Growth

In order to maintain the 7.4% economic growth experienced in the first half of the current Iranian year (started March 20, 2016), there is a need to bring about structural economic reforms, motivate the private sector and forge constructive ties with countries that have resources and buoyant markets.

This was declared by Masoud Nili, economic advisor to Iran's president, in an interview with the Persian daily Shargh.

In its latest report on Iran's economic growth, the Central Bank of Iran said gross domestic product during the first half of the current fiscal year (started March 20) grew 7.4% compared with last year's corresponding period.

> Factors Contributing to H1 Growth

After the nuclear agreement was reached, Iran had the opportunity to increase its oil production as well as exports, which increased from 1 million barrels a day before January 2016 to 2 million barrels per day.

"Economic growth in the summer stood at 9.2% while growth in spring was 5.4%. Only part of this almost twofold increase owes to the surge in oil production and exports, the role of which in generating economic growth will gradually fade away by next year," Nili said.

"What helped bring about this increased rate in summer as compared with spring is the services, industrial and agricultural sectors that are also experiencing growth."

The significance of the services sector, he added, lies in its capacity to create jobs, which the oil sector cannot provide. The services sector accounts for about 50% of Iran's gross domestic product and is considered Iran's largest economic sector.

According to the Statistical Center of Iran’s latest report on Iran’s job market, during the second quarter of the current Iranian year, the services sector employed 49.1% of the country’s population, whereas industrial and agricultural sectors provided 31.5% and 19.4% of Iranians with jobs respectively in summer.

The services sector comprises wholesale and retail trade; restaurants and hotels; transport, storage and communications; financing, insurance, real estate and business services; as well as community, social, education, health and personal services.

Nili explained that increased gas production led to the feedstock's higher supply to industries such as steel and petrochemicals, giving a boost to their production and exports, which was previously undermined in cold seasons.

The economist noted that the activity of large industries has increased and though it is not satisfactory yet, Iran is in a much better place compared with last year.

"After March 2007-8, the struggle with low economic growth rates began, and in March 2012-14, we experienced negative growth rates. Now, if we want to get back on track, we need [large] industries that can pull other sectors like a locomotive toward better performance," he said.

"So, the first step must always be taken by large industries. For small- and medium-sized enterprises to be able to participate in bringing about economic growth, they need to link up with large local or foreign industries."

> Need to Be Realistic

According to Nili, some tend to underestimate the government's achievement of a 7.4% economic growth, while others are of the opinion that the country can maintain such a growth without any structural reforms.

"Both groups are flawed, in my opinion. We need to be realistic. Our economy will grow this year. What we have to do is to identify the factors that helped create this growth and try to maintain them," he said.

"We are currently using up the available capacities, but these are limited. We need to add to these capacities to be able to arrive at sustainable growth. Iran's oil export volume is nearing its maximum limit and the same is going to happen with gas next year."

Nili said exports have had a big role in spurring economic growth, though these are mainly in the form of raw material.

Turning raw material into processed and value-added products that can compete in international markets requires investments and the technology that the country lacks at present.

Iran is moving to ban the export of raw minerals as of next year. According to the head of Iranian Mines and Mining Industries Development and Renovation Organization, Mehdi Karbasian, the export of three strategic minerals, namely iron ore, copper and gold, in their raw form will be banned by the end of the first half of the next Iranian year (Sept. 20, 2017).

> What To Do

The economist believes without structural economic reforms, growth will not be sustainable.

"If we want to export our products, transfer technology to our country and attract investment, we need to set up constructive ties with other countries. No country can sustain its economic growth without having international interactions," he said.

"A prerequisite to thriving exports is a competent private sector. As things stand, we cannot hope for an active and powerful private sector in the near future. Governments around the world are not direct generators, but facilitators of economic growth. They provide an environment in which the private sector can thrive."

According to Nili, another factor that can guarantee sustainable growth is investment.

"First we need to do our best to direct local resources to invest and then we should try to attract foreign resources," he said.

Nili concluded that Iran needs to be concerned about its economic growth and there is a need to reach a domestic consensus politically and economically to overcome the barriers facing sustainable growth.

"We must focus on rectifying the internal handicaps of our economy and set this as our priority," he said.