Economy, Domestic Economy

Facing Facts

Facing FactsFacing Facts

The president’s senior economic advisor published a note last week that highlighted “11 super challenges” in Iran’s path to sustainable economic growth and stable single-digit inflation—a target that has eluded all governments since the Iran-Iraq war of 1980-88.

The note shocked many businessmen for its comprehensive account of the harsh conditions Iran is going through.

Not that Masoud Nili revealed anything new under the sun. The obstacles highlighted are known to other economists as well. Yet, no one had put all of them in context.

Titled “Iran’s Dire Circumstances and the Need for Forming Post-Sanctions National Dialogue”, the note ran for 24 pages, a short summary of which was published by Financial Tribune on December 14.

However, the most important part of the note is its predictions and warnings. Iran’s economic fortunes are very much tied to how the government manages the transition into the post-sanctions era and what it does to make the best of the normalization of relations with the world. The siege against the Iranian economy is soon to be lifted as part of a historic deal between Iran and six world powers—Britain, China, France, Russia and the United States, plus Germany. The prospects are the release of blocked assets, reconnection with international finance and the opening of Iran’s doors to foreign business.

Nili warns policymakers to avoid a repeat of the past by spending the inflowing cash, fattening the government further, weakening private companies and giving foreigners free rein over business sectors.

Iran needs structural changes to its economy more than anything and that should not be forgotten with the lifting of sanctions. It is not the time to throw caution to the wind.

Another must in the transition is to manage public expectations. There is a lot of hype surrounding the lifting of sanctions. Iran has been lauded as the last frontier market and the largest to open up since the fall of the Berlin Wall. But the economic realities of Iran and weak global growth tell a different tale.

If public expectations are not managed properly and Iran’s condition is left unexplained, “political and social challenges” will follow.

Here lies the crux of Nili’s assessment, for the note is as much a political statement as it is an economic one. The conservatives prefer to put a high bar for economic performance in the post-sanctions era. That way, the expected weak economic growth in the coming years can be used to bash the government.

Nili is making it clear that growth will not come easily and the endgame is carrying out structural changes, first and foremost in the battered banking system. He said that overselling the effect of the removal of sanctions and misleading economic expectations to attain political agendas will damage growth and veer Iran away from pragmatic decision making.

Of course, Nili could meet the same pitfall. A lower bar for the government will make outpacing expectations easier.

So what’s in store for the economy? Growth will come, slowly. Foreign investment will rise and help the private sector boom, gradually. Fiscal spending will remain tight as crude oil prices will stay lower for longer considerably. And low taxation efficiency and weakness in the economy will also linger.

Structural changes will be hard and, as the veteran economist puts it, will need consensus in politics as the required metamorphosis in the economy will carry great political cost.

But as Nili puts it, Iran’s cheap but educated workforce, investment in energy saving solutions and increase in natural gas output, along with its wide array of industries that are fit for competition, will be the drivers of growth in the years to come.