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Rouhani’s Risk Management

Masoud NiliMasoud Nili

The administration of President Hassan Rouhani successfully controlled the damage of the prior government’s populist policies, says Presidential Advisor Masoud Nili.

The incumbent administration inherited a country in deep recession and under sanctions. But it managed to return Iran to growth, put an end to its isolation, all while weathering a sharp decline in crude oil prices.

Nili, a 61-year-old academic and economist, has been a vocal figure and an unofficial spokesperson on the government’s economic policies. He has become more vocal in recent months, as Rouhani’s opponents started attacking the administration’s economic policy, Fars News Agency reported.

With less than nine months to the next presidential elections, the stakes are high. And Nili believes the public has been misinformed about the legacy of the previous administration.

There is a divide among the left and right about the role international sanctions played in the 2012-13 economic crisis when the Iranian economy shrank by 6.6% and 1.9%.

When sanctions against Tehran’s nuclear program intensified from 2010, the former government’s initial reaction was denial of their effect. However, when the rial devalued and the economy got out of hand, almost everything was blamed on sanctions. Others argued that the government’s profligate policies heightened the effects of sanctions.

 Contraction Regardless of Sanctions

Nili discounted the effects of sanctions and presented a fresh view based on a study conducted under his supervision.

“Iran’s GDP would have started shrinking in 2012 regardless of sanctions, our analysis shows,” he said.

The find is unsurprising if one is familiar with what went on in Iran before the crisis and how the crisis panned out.

Unlike the UAE or Saudi Arabia who filled their sovereign wealth funds during the oil price boom of the late 2000s, the former Iranian government used its petrodollars to keep the rial strong, increase imports and print money to waste in populist projects.

In this regard, Nili sees Iran’s governance more akin to that of Russia and Venezuela. Both countries have faced currency devaluations, recession and inflation since oil prices began to fall.

Of course, Russia and Iran could be considered paradise, compared to Venezuela. The Latin American country is facing constant crisis, as its inflation surged as high as 700%.

 High Default Rate

Banks failed to manage their risk and assess borrowers properly during this influx of cash, leading to a high default rate on loans.

“During the peak of government spending in 2007-8, non-performing loans were 21% of total outstanding loans in the banking system. In the global finance arena, if this ratio hits 5%, the bank is in distress … The ratio has currently dropped to 7.1%,” said Nili.

There came a second shock to the banking system in late 2012 when the rial lost 70% of its value, as the government was forced to abandon rial’s peg to the dollar.

According to the professor, the rial’s devaluation forced many borrowers who had based their calculations on a 10,000-rial per dollar exchange rate into default. This was especially true about borrowers in foreign exchange. The dollar was suddenly worth 35,000 rials.

As a result, banks have been in dire conditions and the Rouhani administration is carefully diffusing the situation. Because most of their cash got locked in illiquid assets and bad loans, they stopped lending and created a credit crunch that is exhausting all efforts to revive industries.

To counter the drop in crude oil prices, credit crunch that had suffocated businesses and to curb runaway inflation, the government executed two short-term plans. Plans included lowering reserve requirements, loans to consumers and manufacturers, and a lot of fiscal discipline on the state’s part.

 Stability Despite Shortcomings

While the plans had many shortcomings and some of the decisions were questionable—like the choice to subsidize the sale of 110,000 cars via central bank funds last winter—they managed to stabilize the Iranian economy. Even though the economy was in shambles, 1.4 million jobs were added from late 2013 to late 2015.

“The second plan we executed was a response to counter the oil shock that could have created the same problems that other oil producing states faced,” he said.

The economist also defended the nuclear deal between Iran and the West, which put an end to sanctions in exchange for limiting Tehran’s nuclear works. He said though initial expectation about the effects of the deal were unmet, Iran would have had a 270-trillion-rial ($9 billion at the official exchange rate) deficit if it had not ramped up its crude output from 1.3 million barrels a day a year ago to nearly 3 million today.

Opponents of Rouhani are constantly bombarding the deal’s outcome, saying it was fruitless. A multitude of problems have kept foreign companies at bay, disappointing initial expectations of an investment boom from the sanctions.

Iranian banks fall short of the standards their foreign counterparts demand for doing business. The lenders are especially lagging in meeting capital requirements and keeping pace with technological updates. These exacerbate fears of inadvertently crossing remaining US sanctions that were not part of the negotiations for foreign companies. The influence of quasi-state companies in the economy does not help.

Given all the complications surrounding the Iranian economy, the Rouhani administration has successfully averted further crisis and brought stability and growth to the economy. Still, there is a long way to go. Nili reiterates that it will take until 2018 for per capita income to reach the desirable level in 2010.

 

 

Financialtribune.com