Export Only Savior of Iranian Industries

Extroversion is the only magic word for the survival of Iran’s economy and industries, top presidential advisor, Masoud Nili, said.

“We cannot force banks into giving loans to failing manufacturing units, rather we have to expand our export markets,” he said in an address to a ceremony to mark the 50th founding anniversary of Industrial Development and Renovation Organization of Iran on Monday.

“What went on between March 2007-8 and March 2013-14 [under the administration of former president, Mahmoud Ahmadinejad] can’t go unnoticed. For example, urban and rural households’ income in 2013-14 reduced by 22% and 38%, respectively, compared with 2007-8. That undermined demand for products of domestic industries. The fiscal 2012-13 and 2016-17 saw the industrial sector shrink by 17%. The economic growth in the past two years managed to partly compensate for those losses; yet it takes seven to 10 years for the country to get back to where it was 10 years ago,” IRNA quoted Nili as saying.

According to the Central Bank of Iran's latest report, Iran's economy grew 12.5% in the fiscal 2016-17 compared to the preceding year. The strong growth, however, is mainly attributed to increased oil production following the removal of international sanctions against Iran over its nuclear program as of January 2016. GDP growth, without taking oil production into account, stood at 3.3%, as the oil sector registered a dramatic 61.6% growth last year.

The CBI report also indicates that the “industry sector” expanded 6.9% last year—a remarkable improvement compared to the 4.6% contraction registered a year before. Production in the agriculture sector expanded by 4.2%. Construction was the only sector that contracted last year and registered a -13.1% growth.

Iran’s economy emerged from recession in 2014-15 with a 3% growth after two years of recession when the economy contracted 5.8% and 1.9% back to back, the Central Bank of Iran reported. Growth in 2015-16 has been put at -1.6% by CBI.

“We bore witness to negative growth of the industrial sector in 2012-13 and 2013-14, which was unheard of even during the Iran-Iraq war (1980-88). Industries are almost double the size they were in 2007-8 but demand for their products is much lower now. A good number of troubled industrial units blame not having adequate funds as their major problem, whereas the lingering sluggishness in consumer demands is a more severe challenge,” Nili said.

The presidential advisor noted that Iran's industrial overcapacity problems are serious and the only way to solve them is by focusing on overseas markets where demand still has the potential to grow. And this is no easy task since an industry lacking a secure local market often fails to pull off in foreign markets.

Echoing similar remarks, senior Iranian economist, Saeed Laylaz, recently said overcapacity is a main challenge facing Iran’s economic development.

Erroneous economic policies in the 2000s, including foreign currency manipulation despite the annual rise in inflation rate, were to blame for overcapacity, which were wrongly called recession, Laylaz said.

“The manufacturing capacity of some sectors in our country equals that of half of the Middle East,” he said.

According to the Islamic Republic of Iran Customs Administration, Iran exported 129.648 million tons of non-oil commodities worth $43.93 billion during the last fiscal year (ended March 20), registering a 3.58% growth in value of exports year-on-year. However, a great deal of the export consisted of oil-driven products.

Gas condensate was the main exported commodity, making up for $7.32 billion of the export value. It was followed by light oil, excluding gasoline ($2.49 billion), liquefied natural gases ($2.79 billion), liquefied propane ($1.222 billion) and petroleum gases and liquefied hydrocarbons ($1.204 billion).

Referring to the change in the structure of demand in Iran’s economy, Nili said housing, which was the main sector attracting investments in the past, is now gripped by recession.

"There is no need for further investments in the housing sector anymore," he said, adding that the absence of a model for Iran's industrial development is very conspicuous.

"We are yet to ratify an all-inclusive document for this sector," he concluded.

On the housing sector bubble, Laylaz said, “Housing sector that used to be the propeller of Iran’s economic growth grew so big that now we consider its failure to be synonymous with the collapse of the whole Iranian economy. Economists believe that this sector is suffering from recession whereas the share of new homes, and not the housing sector, in GDP stands at 7% compared to the 8th government’s 5%.”

According to Roads and Urban Development Minister Abbas Akhoundi, there are vacant houses worth $200-250 billion, which are not likely to be occupied for the next 10 years.