In the aftermath of the landmark nuclear agreement signed between Iran and the major world powers, the key question uppermost on policymakers’ minds as well as the average citizen is how to navigate the economy in a post-sanctions era. The economy has heaved a sigh of relief at the prospect of sanctions relief and with billions of unfrozen dollars making their way back into the country, prudent and robust policies are needed to prevent past mistakes and steer the economy clear of its current woes.
Mohammad Hashem Pesaran, economics professor at Cambridge University and the author of over 200 publications in the areas of empirical finance, macroeconomics and the Iranian economy, sounds like the right expert to seek his views about dilemmas facing Iran’s economy. Professor Pesaran was considered by many to be one of the likeliest recipients of 2013 Nobel Prize in Economics but the prize was eventually awarded to Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller.
Financial Tribune’s sister weekly publication, Tejarate-Farda has caught up with him in an exclusive interview, excerpts of which follow:
Sanctions Relief
Professor Pesaran maintains that sanctions—although detrimental—have not been Iran’s main problem. But rather, he says, most of the issues plaguing the economy are “structural” and would not go away with the termination of sanctions.
He said at the worst estimate, only 25% of the economy’s woes could be attributed to sanctions while the rest are embedded into the fabric of the economy.
In seemingly counterintuitive remarks, Pesaran noted that sanctions relief can even worsen the country’s economic situation since it could raise citizen’s expectations about a sudden improvement in their lot, prompting the government to adopt palliative policies and address short-term ills to satisfy the public.
“If such policies are perused again, they will create deep and serious problems in the future,” he said.
The only way out of this trap, he suggests, would be to tilt the economy toward privatization and strengthening non-oil industries to end reliance on oil exports.
Stabilization Fund
For Professor Pesaran, buffering the economy against oil price volatilities is front and center. He strongly advocates that the government reestablish the Oil Stabilization Fund—created in 1996 but dismantled by former president Mahmoud Ahmadinejad—to cushion the economy against the effects of oil price shocks.
If there has been one silver lining to the sanctions, it’s that the government grew accustomed to less oil revenues and that is a good thing. So, Pesaran proposes, “Now would be the best opportunity to set aside the oil windfalls for foreign investment purposes.”
“This fund would be different from the National Development Fund, which is spent in domestic projects,” he emphasizes. This stabilization fund will be used for overseas investment and “only its profits” can be used for domestic expenditure.
Debt Market
When asked about the best way the government could pay its debts and fund the banks without recourse to the unfrozen assets, Pesaran pointed to the huge potential that the bond market presented.
“Now that gold prices have plunged and the real-estate market has also lost its appeal to investors ditto the foreign exchange market, the government can use its credibility and start issuing bonds,” Pesaran recommended.
This is exactly the course Japan has taken, he said.
Japan’s ratio of debt to GDP is higher than any other country but that debt is in the form of bonds to its own people which makes it less alarming.
Pesaran’s advice, however, comes with a caveat: The government should not have a monopoly on the bond market and banks and private corporations should also be allowed to issue bonds to finance their projects.
“It’s the simple fact that you can’t have the cake and eat it too, which means that it is not possible to use the released assets both to pay government debts to banks and boost manufacturing,” he warned.
About the unification of exchange rates, Pesaran said he did not see that as a priority since it would happen automatically as the economy improves.
Manufacturing Boom
Pesaran sees the conditions fit for an economic comeback in Iran, provided that the right steps are taken. He says foreign investment in the petroleum sector is necessary, a requirement eased by the prospect of sanctions relief.
He advises the government against encouraging consumerism and said it should instead focus on manufacturing.
“By allocating the revenues of the stabilization fund to foster manufacturing, more jobs will be created in the long run,” he says, adding that the process could take at least two years.
The economist hopes that the makeup of Iran’s population, which is mostly comprised of young people, makes it all the more conducive to sustainable growth.
In his final words, Pesaran indicates that the Iranian economy will ultimately benefit from sanctions relief since many businesspeople had delayed their projects to see the outcome of nuclear talks.
