Economy, Business And Markets

Huge Rift Between Realities, Expectations

Huge Rift Between Realities, ExpectationsHuge Rift Between Realities, Expectations

It’s a pretty pass for the Iranian economy. The recession of 2012-13 in the real economy that came about after currency devaluation is now squeezing demand, as the rift between .

Though worsened by economic sanctions against Iran’s nuclear program, the crisis, however, has far deeper roots in Iran’s banking structure and fiscal policy, as Masoud Nili, the president’s economic advisor, explained in a meeting with members of Iran’s Chamber of Commerce, Industries, Mines and Agriculture on Sunday.

“Economic policies may shift toward an uncontrolled monetary expansion, instead of economic reforms, in 1395 [the Iranian fiscal year starting March 2016] as Iran’s first year without sanctions,” he was quoted by Financial Tribune’s sister newspaper Donya-e-Eqtesad as saying.

The lifting of sanctions will release billions of dollars of the Iranian government’s frozen assets. As fiscal spending has contracted in the past two years due to tumbling oil prices and the banking system is plagued by illiquid assets and overdue loans, there is a clear danger of a political push toward a spending spree.

The government must act prudently, however, said the economist, as oil revenues are likely to stay low for a long time due to weak growth in emerging markets and Europe along with surplus supply. So, the released assets should be used as reserves.

“The drop in oil revenues is unprecedented in the past 60 years and Iran has never faced such an income shortage,” he said.

According to Central Bank of Iran’s Governor Valiollah Seif, oil revenues dipped from $119 billion in the 2011-12 fiscal year to $55 billion in 2014-15.

Nili said this year’s revenues are expected to fall to $40 billion.

  Deep Roots

Tightening fiscal spending created a widespread recession in all industries, which was exacerbated by a dry-up in the money markets.

Banks are owed over 1 quadrillion rials ($28.5 billion at market exchange rate) by the government. They also have another quadrillion stuck with their bad borrowers. Together the overdue debts make up 15.5% of GDP.

Taking into account that 75% of the 3.42 quadrillion rials ($97.7 billion) lent by banks last year were used to reschedule existing debt because debtors could not repay their loans, one can imagine the depth of the hole banks are in. However, the real depth is unknown even to the Economy Ministry and CBI.

Nili believes positive expectations about the future are deepening the recession.

Consumers are not buying durable goods in hopes of getting better deals in the post-sanctions era. With their spending already squeezed by a drop in purchasing power, Iranian companies are having a hard time selling anything they make.

The advisor reckons that if Iran manages to hit 4.5% economic growth every year, per capita income will return to its 2011 level by 2018.

Structural challenges curtailing economic performance will not go away with the lifting of sanctions. However, public expectations fall on the other side of the scale.

“There is a huge rift between the realities about the country’s economic future with regard to plummeting oil revenues and public expectations about the post-sanctions era,” said Nili.

Sounds like the government has its work cut out for it.