Economy, Business And Markets

Economy Minister: Crisis Averted

Economy Minister: Crisis AvertedEconomy Minister: Crisis Averted

Government policies enacted after four ministers wrote a letter to President Hassan Rouhani in October averted an economic turmoil, the economy minister said.

"We made decisions about all the points in the letter and today all those measures have been enacted," Ali Tayyebnia was quoted as saying by Bourse Press.

The letter to President Rouhani, signed by the ministers of economy, industries, labor and defense, openly censured “the discord within the policymaking government bodies” and called for a prompt action to help falling equity markets.  

“The prevailing recession in the capital market could snowball into a crisis, if we fail to address it soon,” the letter read.

Many political groups and even top figures in the government criticized the letter. Some accused the ministers of fueling he fire, others accused them of having stakes in the stock market and some more criticized them for asking the president to do his duty.

> Somber Warning

But the warning was real. Equities had been on the retreat since Jan. 2014 due to the plunge in oil and commodity prices, as well as sanctions the previous government's mismanagement.

The ministers warned that if the poor performance of listed companies was not addressed, the economy would fall back into recession.

The Iranian economy expanded by 3% in 2014 on the heels of annual economic contractions of 6.6% and 1.9% in 2012 and 2013, respectively, according to the World Bank.

There was credible fear that the economy would contract in 2015, if industry was left to fend for itself.

“Based on budgetary forecasts of companies listed on the stock market and the sober realities of the market’s functioning  industries, there is the fear that the current recession would degenerate into a crisis, which would be a recipe for the people’s distrust in the government,” the letter warned.

> Short-Term Response

Regardless of the fire heaped on the ministers for writing the letter, Rouhani ordered swift action and the Cabinet came up with a plan to boost faltering demand for consumer goods, especially those produced inside Iran, in mid-October.

The rescue package had a six-month expiration date and was aimed at increasing money supply to stimulate demand and pull the economy out of recession. The plan included lowering interest rates, financing auto sales with loans from the Central Bank of Iran among others, along with some regulatory changes, including cheaper fuel for petrochemical producers.

The main focus was on industries producing durable goods—incidentally the biggest listed companies at Tehran Stock Exchange.

The plan's short-term outlook was criticized, but it was a conscious decision by policymakers. It was meant to give a jolt to the economy before the lifting of sanctions brought in foreign capital and eased business relations.  

"The government is trying to inject the economy with short-term anti-recession stimulus and hopes real stimulants from the international community, in the form of foreign investments will come into play and stabilize the economy, once the plan is exhausted," Behrouz Khodarahmi, the head of Iranian Investment Institutes Association, told our sister publication Tejarat-e Farda in October.

> Prayers Answered

Now the crisis has been prevented.

"We lowered interest rates and other steps were also taken. Though we have to analyze market conditions at the beginning of the New Year [in March] and decide about interest rates, the rate will fall further," Tayyebnia said this week.

Tayyebnia also said the game was not at an end. The government has a lot to do to make Iran a foreign investment magnet.

"Exiting recession and creating economic prosperity are the government's main permanent plan and we will not lose sight of it. We have made plans for increasing production and reforming infrastructure in the post-sanctions era," he said.

The government is targeting a stable 8% growth in the next five years, though many economists doubt the validity of those plans.

According to the World Bank, with the removal of sanctions at the beginning of 2016, real GDP should rise to 5.8% and 6.7% in 2016 and 2017, respectively, as oil production reaches 3.6 and 4.2 million barrels per day.

However, "reforms to the business environment to promote competition, rationalize licensing and authorization requirements, reduce the imprint of state-owned enterprises in the economy, and improve the health of financial and banking sectors are needed to accelerate growth and private-sector led job creation," wrote the world body in Iran's country profile.