Economy, Business And Markets

What’s Holding Back Businesses

Business & Markets Desk
What’s Holding Back Businesses
What’s Holding Back Businesses

B usinesses are suffering from a “credit crunch” in the Iranian economy. For the right and wrong reasons businessmen are asking for cheaper money. They contend that with adequate financing, business and manufacturing would pickup. But the central bank technocrats argue that although there is a credit crunch, lending would only raise inflationary pressures and hurt businesses in the long run. They also argue that those calling for cheap money want to use it to line their pockets.

In fact low productivity and the government itself could be the main issues.

Business lending has fallen since Iran’s banking crisis following the intensification of sanctions in recent years against Iran’s nuclear energy program and the backfiring of former president Mahmoud Ahmadinejad’s policies. But lending is now picking up, statistics show. Regardless, lending practices are not clear cut and corruption runs rampant, though recently on the decline. So, an increase in lending may not have the desired effect on economic growth.

Furthermore, cutting rates may prove imprudent. Although inflation has come down from its hyperinflationary levels – it averaged 35.7 percent in 2013 – expected to fall under 20 percent for 2014. So an increase in money supply could become fuel for an already blazing fire.

Some  officials say banks can lend to businesses that will use the funds for productive activities, and that discerning between rent-seekers and honest businessmen will be easy. We contend otherwise, simply because the infrastructure is not ready. There are too many legal and bureaucratic loopholes, and until enough supervisory measures are placed and banks are held accountable for their risky practices, an increase in the money supply can prove disastrous.

Other factors are at play here. Lagging business performance is not just because of a credit crunch, nor can monetary easing solve everything.

Iran’s foreign exchange rate regime must be unified, to reduce rent opportunities. Furthermore, as many manufacturers rely on imports – from raw material to machinery – for production, they are vulnerable to exchange rate volatility. The central bank should allow for currency futures, so that companies can hedge against market volatility.

 Hidden Problem

One of the main obstacles businesses face in Iran is the state itself, a hidden problem. The government is the main producer and consumer, and its privatization scheme has turned hundreds of state-run companies into quaisi companies. There are countless businesses that go bust because state companies don’t buy from them or offer them unfavorable contracts.

Also, most government officials still have a command economy view of things. A look at newspaper headlines and news leads quickly reveals officials’ and media’s propensity to look down on businesses and view the government as the supreme bighead. That has to change if conditions are to favor entrepreneurship.

Instability of foreign exchange rates and higher inflation make business planning nearly impossible, both byproducts of government actions. It is nearly impossible to have long-term plans when inflation is fluctuating between 15 and 40 percent in about a year or so, and there is a possibility of 60 percent devaluation just round the corner. Moreover, bureaucratic laws stop businessmen in their tracks and leave the field open for rent-seekers and conmen. Iran is nearly at the bottom of ease of doing business list – 130th out of 189 countries.

 Workforce Productivity

Another main issue weighing on business performance is workforce productivity. Iran has a relatively skilled and educated population. But labor laws and management techniques predate dinosaurs.

The society is still suffering from patriarchy, so gender pay gap is considerable, but it’s not even seen as a threat. Labor laws don’t allow for easy labor movement, thus forcing unfavorable conditions on both sides of the table.

Iran’s workforce is educated but largely mismanaged. University graduates are used for secretarial jobs and engineers as managers.

As a businessman once told me, “Management in Iran breeds inefficiency”. Managers rarely invest in their people.

Without the hope of development, ambitions hit walls. Decision-making is top-down and teamwork and ideas are discouraged.

Iran is yet to move from nepotism and cronyism to a meritocracy and as Forbes magazine stated, “There is no ladder to climb when the top rung is reserved for people with a certain name.” So while cheap money can certainly help businesses, Iran’s economic problems run far deeper than mere economic sanctions.