The elimination of troubled business entities and emergence of efficient companies are normal mechanisms of a market-based economy, Iranian economist Farrokh Qobadi said.
In an editorial published on Sunday in our sister publication Donya-e-Eqtesad daily, Qobadi urged the government to adopt a practical approach toward beleaguered businesses that have no option but to declare bankruptcy. Below is the translation of the article.
Picture yourself as the owner of a manufacturing business, one with low productivity level caused by reasons ranging from old or even obsolete technology, to unfavorable business environment or underproduction due to shortage of working capital. All these have led to high end costs of production.
Cheap imports and rampant smuggling have also taken their toll on your business; you are defaulting on your loans; your debts to banks, treasury and social security are mounting (doubling every three years or so). By all accounts, you can’t settle your loans. What options are available to you?
The first choice would be to remain hopeful about a miracle, which would turn the government’s verbal support for production to a real one. You know that the government is tight on money and that, according to statesmen, no [Iranian] government has had to struggle with a recession of this enormity since the Iraq-imposed war (1980-88). In fact, a fraction of producers are living off this hope.
The second alternative is to avoid falling further and further into this quagmire. This would require you to shut down your factory and file for bankruptcy.
Here you have reached a point where you have to face humiliation and disgrace and kiss your business goodbye in order to, at least, fend further crises off your personal life.
Hard Pill to Swallow
Withdrawal of troubled business entities and the arrival of efficient companies with strong financial backing are normal mechanisms of market-based systems, which are aimed at increasing productivity.
In fact, ease of resolving insolvency is one of the 10 indices used by international institutions to rank countries’ ease of doing business.
Despite this, in our country, acceptance of bankruptcy, as one of the components of a market-based economy, is a hard pill to swallow.
First Vice President Es’haq Jahangiri recently said, “There was a time when declaring bankruptcy constituted a shame and disgrace, but today, unfortunately, it has been de-stigmatized and become an escape route for those who don’t intend to pay off their debts.”
Jahangiri referred to what big-time debtors do to avoid settlement of their debts and said, “We need to be sensitive in this regard and the judiciary system is also expected to make efforts on this issue.
“Of course, some economic entities are grappling with problems and can’t stay afloat. We need to dissociate them from racketeers and help them re-launch their businesses; then they would be able to pay up their debts.”
Everyone knows that people are fed up with the pervasive corruption and we also know that big-time debtors have landed massive loans by pulling strings and taking advantage of administrative corruption.
These debtors are only a handful and based on what we have read and heard, a large percentage of overdue claims should be paid by a small number of debtors. In this situation, blaming the wave of bankruptcies on the ill deeds of a few corrupt elements might send a wrong message to the society.
In fact, a large number of manufacturing businesses are so entangled that they would rather endure “humiliation and disgrace” and pull the plug. The number of businesses, which should opt for filing bankruptcy, would increase exponentially if we define insolvency as the state in which the value of a firm’s assets is less than the value of its liabilities. According to the Institute for Trade Studies and Research, excluding the shutdown units, 40% of the entities located in the industrial towns are on the verge of bankruptcy.
Fundamental Solution
The government of President Hassan Rouhani managed to register great achievements in foreign policy and curb inflation despite crippling problems and will definitely work out a solution to salvage production. The 160,000-billion-rial ($4.65 billion) credit allocated to production is one of them. But years of imprudent policies hit the production real hard; painkillers such as this would do little to ease these excruciating pain.
The fundamental solution would be to turn production into a profit-making endeavor. Boosting productivity, setting the stage for a favorable business environment and reducing the extra costs of production are steps toward reaching that. But all these measures require time, besides motivation and perseverance. The longer it takes, the tougher it gets to resolve the problems of beleaguered manufacturing entities.
Under the present circumstances, the inefficient (or unlucky) entities should be allowed to halt their work with the minimum marginal loss possible.
Unified stances of officials would send a significant signal to potential domestic or foreign investors. If we are really willing to throw a lifeline to troubled businesses that might get back on to their feet, we need to not only reduce the production costs but also freeze their debts for a couple of years. This would help them raise their revenues and pay off their debts.
With the current high interest rates and penalties on late payments, the accumulation of debts will outpace their money making.
Ultimately, the prerequisite for all these reforms is to initially grasp the true depth of the crisis in the manufacturing sector.
