News of the deal reached between Iran and the West on July 14 over the scope of Tehran’s nuclear energy program and economic sanctions against the country has grabbed headlines in the world media ever since. The enthusiasm of investors, foreign and Iranian, for the investment opportunities the deal unlocks has been unmatched. But we are getting ahead of ourselves, here.
“We mustn’t forget that thus far, there has only been talk of the deal and no actions have been taken regarding it. Iran’s overseas assets are still blocked,” economist Mousa Ghaninejad told Financial Tribune’s sister newspaper, Donya-e-Eqtesad.
With the prospect of stimulation from foreign investments and the release of Central Bank of Iran’s foreign assets still a few months away, the wheels of the economy are struggling to find traction. Tehran’s bearish stock market is hovering above levels seen in September 2013.
“Although there are signals of improvement in the economy, the recession is continuing in the production sector,” Mohammad Reza Bahraman, a member of Tehran’s Chamber of Commerce, Industries, Mines and Agriculture said.
The reason? Apart from the usual jab at sanctions as the cause of Iran’s misfortunes, the recession has both external and internal bases.
The Oil Factor
The Iranian government’s main source of revenue, crude oil, has had one of its worst years in recent memory, due to low demand from China and Europe, a supply glut from US shale production and Saudi Arabia’s bid to drive them out of business by keeping prices low.
In a heavily state-oriented economy like Iran, having your cash blocked and your revenue slashed means lower fiscal spending, accumulation of debt to contractors and banks, and too many unfinished projects.
Iran’s oil revenues have halved in the six months starting March 21 compared to the same period of a year earlier, according to CBI Governor Valiollah Seif.
Oil revenues dipped from $119 billion in the 2011-12 fiscal year to $55 billion in the 2014-15 fiscal year, Seif said last week, as sanctions curbing petroleum exports augmented the general decline in oil price.
“This [fall in oil prices] has led to a decrease in government spending, especially on capital projects, bringing down its demand for goods and services,” Bahraman said.
Let’s not forget the losses incurred by the petroleum industry and related investment companies, which make up 40% to 45% of Tehran Stock Exchange’s value.
Lower growth in China, the lingering shadow of Greek debt crisis on Europe and the shaky US recovery have also put pressure on other commodities and consumer staples. This has hit the capital-intensive heavy industries like steel and mining, but also helped the central bank considerably in bringing down inflation to just over 17% in the 2014-15 fiscal year from over 30% the year before.
Diminished Demand
With foreign markets closed to Iranian companies and the fiscal balance sheet in shambles, depressed consumer spending is hurting businesses.
“Today, manufacturers and companies from other sectors are seeing a rise in inventories, because of low domestic demand and their inability to export to competitive markets,” said Bahraman.
The previous administration is mainly to blame for the low domestic demand, which stems from economic turmoil, from 2010 onwards, caused by reckless spending and poor planning.
“The income of Iranian households has on average fallen 20% since 2012, in turn squeezing consumer spending,” Ghaninejad said.
“The economic crisis, which started due to sanctions, falling government revenue and excessive import of cheap goods flooding the domestic market, has been deepened and magnified by falling demand,” said Zahra Karimi, advisor to the labor minister.
Possible Solutions
In response, the government decided to channel cheap money from the central bank to industries. The CBI is also lowering reserve requirement –the money banks must keep with the central bank for rainy days –to 10-12% of deposits to boost bank lending.
Proponents say expansionary monetary policies are needed to stave off recession, although such policies may increase inflation.
The banking system is already struggling under the weight of at least $30 billion of non-performing loans. Toxic debt, along with the $30 billion owed to banks by the government, has locked up the financial system. Credit crunch is another reason behind the recession.
However, critics of the government’s push toward cheap lending argue that in its current state, with little possible oversight, the funds will be squandered.
“To create real reforms in the economy, the government should focus on long-term policies to help the supply side of the economy. Short-term expansionary policies cannot generate sustainable growth,” Ghaninejad said.
Easing barriers to business, streamlining regulations and improving corporate governance would lower financial and commercial costs of running a business and give way to a more favorable business climate, economists say.
Furthermore, giving the central bank more independence and transparency, coupled with less government intervention, would boost the government’s credibility, help restore investor confidence and promote joint business ventures.
