Economy, Business And Markets

Economy After Nuclear Deal: Psychological Factor

Economy After Nuclear Deal: Psychological FactorEconomy After Nuclear Deal: Psychological Factor

As the impact of psychological behavior on macroeconomic models has been proven by economists, many have voiced concerns that consumers’ excessive optimism and irrational expectations about the state of economy after the July 14 nuclear deal reached between Tehran and the world powers would have negative social, political and economic impacts.

One major concern, both during nuclear talks and after the deal, was whether the government could handle public expectations and prevent overexcitement about the lifting of sanctions, the government’s access to assets frozen overseas, increasing international cooperation and foreign investments.

The economy has, in fact, struggled with many challenges that have partly been driven by public expectations over the July nuclear accord, including a decline in foreign trade over the past few months and diminished demand facing industrial and manufacturing sectors, which is manifested in the poor performance of companies listed in Tehran Stock Exchange, Financial Tribune’s sister newspaper Donya-e-Eqtesad reported.

Sliding imports and exports in the first three months of the current Iranian year (started March 21) has been attributed, to some extent, to traders’ supposition that foreign exchange rates would drop.

Following the nuclear deal that stipulates the reconnection of Iran to international banking transactions system SWIFT, many traders have deliberately reduced, if not stopped, commercial activities. They are waiting for the rial to get stronger against major currencies such as the euro and the US dollar.

The traders’ argument is that the rial nosedived after the United Nations Security Council ratified the disconnection of Iranian banks from the SWIFT system. Therefore, as the sanctions unwind, they expect the national currency to return to the pre-sanctions state.

Consumers have adopted nearly the same logic about falling commodity prices. They have not been spending much in the past few months, as they expect the prices to fall. This has sparked a decline in demand, caused a glut in inventories of factories and, consequently, led to a slowdown in industries that are already in a bad shape due to the prevailing recession.

Although part of the dwindling demand results from the relatively low inflation rate, which has been on a slide over the past two years, another reason is to do with the nuclear deal which, in public opinion, should have led to lower commodity prices.

The unrealistic public assumptions, according to many experts, germinated mostly before the nuclear deal was reached and during the talks between Iran and P5+1 (five permanent members of the UN Security Council plus Germany).

As the government was trying to convince the nation of the benefits of a diplomatic solution by painting a positive picture of the future of the economy after the nuclear deal, public expectations deviated from the fact that the deal’s positive effects might not surface in the short run, economic expert Forouhar Ferdowsi said.

Nevertheless, after the deal was sealed, many believe, the government tried on several fronts to guide public expectations to a more realistic direction. An instance was when it declared that the value of frozen assets was not as high as many speculated.

Soon after the Joint Comprehensive Plan of Action was reached between Iran and the six world powers, many Iranian and international media sources started speculating about how much the overseas funds was worth. Some even estimated them to be $150 billion.

Nonetheless, the Central Bank of Iran officially stated that the assets will amount to $29 billion.

According to Alireza Soltani, university lecturer and journalist, the move was made at the right time and played a crucial role in preventing overexcitement in the runup to the return of these assets on the one hand and in controlling foreign exchange rate fluctuations on the other.

Soltani believes stabilizing the exchange rates after the July deal was another post-deal policy that helped moderate public expectations from JCPOA.

“While the public expected the price of dollar to significantly drop against the national currency, the government managed to keep the exchange rates stable and limit fluctuations to prevent turmoil in the market,” he said.

Ferdowsi, however, noted that such administrative policies, although necessary and effective, are not adequate.

“Straight-out clarification of the current economic status could be substantially effective in moderating public expectations,” he says.

He stressed that the government needs to explain to the public that the process of economic recovery after the removal of sanctions could be time-consuming.

What the public should be aware of in the first place, according to Ferdowsi, is that “it would require from six months to a few years for different economic sectors to reach sustainable growth”.