Demise of Oil-Driven Growth Raises Specter of Economic Slowdown in Iran

Oil was the main driver of economic growth in the first half of the current Iranian year (started March 20), but economic researcher Hamid Azarmand believes its direct impact will wear off as we approach the final months of the year.

Excerpts of his interview with the Persian weekly Tejarat-e Farda are as follows:  

Iran’s economy had to undergo low rates of capital formation from 2009 to 2013. The fall in Gross Fixed Capital Formation, despite the unprecedented rise in oil revenues, left its negative impact on the country’s net capital accumulation.

Besides, the nuclear sanctions and the barriers built in the way of international transactions sent the country into a deep recession during March 2012-13 and March 2013-14 fiscal years.

We can all remember the negative GDP growth of 6.8% and 1.9% in those years. The economy posted a short-lived 3% growth in March 2014-15, but it fell back to a sluggish, if not negative growth in the following year. [The Central Bank of Iran has yet to release the statistics for last year’s economic growth while the Statistical Center of Iran has put it at 1%].

But this year, Iran managed to pull out of recession, thanks to the implementation of the Joint Comprehensive Plan of Action and the exponential growth in oil production as well as steel and petrochemicals. Government success in maintaining a stable macroeconomic environment, its capital infusion into business entities and the support it lent to small- and medium-sized enterprises also contributed to the growth.

Meanwhile, it seems that the direct effect of the increase in oil production would stay limited to this year. The 30% growth in liquidity rate, tight government budgets and the probability of employing expansionary fiscal policies, as we get closer to the presidential election, have raised the specters of double-digit inflation rate. [Headline inflation fell below 10% for the rolling year ending June 20 for the first time in a quarter century.] Therefore, factors that helped bring about this year’s economic growth cannot necessarily remain effective for the upcoming years.

Predictions show the economy is fairly unlikely to enter a double-dip recession or sink into periods of negative GDP growth in the coming years. [The IMF predicts real GDP is projected to grow by at least 4.5% in 2016-17. The World Bank forecasts 4.2% and 4.6% growth rates for Iran’s economy for 2016 and 2017 respectively.]

Yet, the unsustainable and slow nature of Iran’s economic growth compared to its envisioned long-term average rate in development plans (8%) is of great concern. Iran’s average economic growth between March 2012-13 and March 2016-17 stood at -0.1%, much lower than the ideal average long-term growth.

 Scourge of Low Productivity

Based on economic theories, productivity is a key contributor to a sustainable economic growth.

Many theorists believe increasing productivity is the only way to reach a stable GDP growth. The share of productivity in Iran’s economy is minimal. It was around 1% in a 45-year period, whereas in China, India and South Korea, the figure stood at 36%, 30% and 24% respectively in the same timespan.

Of course, a favorable business environment and stable macroeconomic environment as well as reducing monopoly and improving competitiveness are absolute requirements of obtaining better productivity rates.

On the other hand, it is necessary to make major investments in infrastructures, if we are willing to maintain economic growth. A huge gulf exists between the numbers and capacities of our ports and those of China, India, Qatar, Singapore and Malaysia.

Compare the length of their highways and railroads or the penetration rate of their information and communication technologies with ours.

Needless to say, the development of infrastructures has never been possible without the participation of the private sector and foreign investment.

 Achievements & Drawbacks

The government of President Hassan Rouhani had to wrestle with numerous economic problems when it took the helm in 2013.

Besides settlement of nuclear crisis, taming the runaway inflation, creating long periods of stable exchange rate and redressing structural flaws of the banking system, the government was practically unable to formulate a farsighted plan to retool the economy.

Still it managed to accomplish three main tasks: It braved to cut the nuclear deal with world powers, achieved a single-digit inflation rate and pulled out the GDP rate from negative territory to around 5%.

The main criticism, which can be leveled at the government, is its adherence to short-term policies. It administered painkillers for the ailing economy: It injected capital into SMEs, failed to deregulate energy prices, continued to hand out cash subsidies and held on the so-called Wheat Guaranteed Purchase scheme.  

If the administration is willing to obtain a sustainable economic growth, it needs to accept what it demands. There is no way but to institute a well-thought-out policy for the future and employ structural reforms.

Iran needs to reach a national consensus and lay the basis for attraction of investments by tapping into all domestic and foreign capacities.

It is essential to boost competitiveness by avoiding currency manipulation, increasing the health and transparency of the economy and undertaking the real privatization of public entities.