Studies show that the factors behind economic growth during the past Iranian year (ended March 20) have either diminished or their mechanisms have reversed in the opposite direction this year. Given the current economic climate, the prevailing trend seems to be here to stay up until the removal of sanctions in winter (December 22, 2015-March 19, 2016).
The Institute for Management and Planning Studies has recently released a report titled “Analysis of the Real Economy and the Outlook of Economic Growth Before Sanctions Relief”. Surveying contributing factors to economic growth such as economic stability, development budget and imports, the report indicates that a fall in the rate of economic growth by yearend is highly probable, the Financial Tribune's sister newspaper Donya-e Eghtesad reported.
Failure in Production Sustainability
The analysis viewed decrease in economic instability, increase of intermediately goods imports as well as increase in government’s development budget as the main factors which led to economic growth from -1.9% two years ago (March 2013-2014) to +3% last year (March 2014-2015).
These factors mostly affected two sectors of oil and industry (automotive industry in particular), whose growth was mostly achieved in the period between December 22, 2013 and June 21, 2014, but failed to sustain for the remainder of the year. Despite the increase of production to higher levels, the total yearly growth on quarterly scale decreased gradually. The GDP fell from 3.8% in spring (March 21-June 21, 2014) to 0.6% in winter (December 22, 2014-March 20, 2015). The study has labeled it as “Failure in Production Sustainability”.
Propellers of Growth Come Stop
According to the report, one of the key factors in last year's growth was a boost in oil exports following the interim nuclear agreement reached in Geneva in November 24, 2013, which led to a jump in the added value of oil sector in the spring (March 21-June 21, 2014). However oil exports volume remained unchanged in the remaining months of the year. Statistics show that growth in industry and mining sector (mostly on the back of auto production boost) was another contributing factor in last year's economic growth. As the foreign currency revenues increased and the supply of auto parts rebounded, auto giants put in motion higher capacity and raised production. Since the rate of value added growth in each sector is compared to the corresponding period of the preceding year and given the fact that exports and production of oil will remain intact up until sanctions relief, the study projects that the rate of growth in the oil sector will head toward zero. The same prediction has been made for the auto industry.
Demand Deficiency
The report portrays a gloomy picture for companies listed in Tehran Stock Exchange last year and shows that they were faced with sales woes mostly in the first half of the year (except for auto sales) and saw a 3.3% fall compared to the preceding year. This is while production of industries apart from auto was on the rise last year. The gulf between production and sales of listed companies (except for auto) shows that a significant part of domestic industries were striving to sell their products which is a sign of “demand deficiency", which would in turn contribute to the increasing trend of “the ratio between inventories to production” index for the listed companies. The index hit a 5-year high last year. The oil revenue boom of 2001-11 ended in the increase in government development costs, and at the same time worsened the Dutch disease and directed investments toward the construction sector. Demand in the construction-related industries particularly steel and cement saw a remarkable growth, after sanctions took effect in 2012, the government’s development costs decreased and the housing sector entered recession. Related industries followed suit accordingly.
Considering the fact that real income of households and oil prices went into downward spiral after 2007, it is highly unlikely to see impressive growth in the consumption of public or private sectors and as a result the demand problem of listed companies will remain unsolved.
Outlook of Factors Contributing to Growth
Regarding minor fluctuation in exchange rates last year, a remarkable improvement of this market in the current year is unlikely, the study reads. The outlook of inflation rate does not promise an extension of its falling trend either. These factors will not contribute to economic growth.
Moreover, the report does not predict economic growth through increase of development costs before the sanctions relief amid falling oil revenues.
On the effect of imports on economic growth, the report says the rate of intermediately goods imports began declining since September, 2014 and saw a 40% decrease as of February, 2015 compared to the similar period a year before. The analysis shows as imports of intermediately goods grew or shrank, the GDP also rose or fell within a couple of seasons accordingly. Therefore the study maintains that because of the fall in the imports of intermediately goods in the second half of last year, economic growth is expected to decrease in the current year.
Challenges Ahead
Finally the report takes a look over the challenges ahead of the economy. It regards “financial constraint” as the main problem the economy has to wrestle with in the current year. Economic sanctions, decrease in oil exports and revenues and the consequent decrease of government budget before a boost in international relations are all behind the financial constraints in the current year. Also the investment market does not enjoy the advancement needed for the financing of economic entities. The banking system will not be fit to play its role effectively before resolving the problems associated with resource supply. Employing policies which boost the investment market and attract resources would help clear hurdles in the way of finance supply in governmental budget and the banking system.
The study also weighs the exchange rate competitiveness and reads: Last year’s appreciation of exchange rates does not correlate with those of domestic and foreign inflation. One of the main consequences of this imbalance would be reduced competitiveness of domestic products. Under such circumstances domestic products would see price rise when compared to foreign goods and lose their competitiveness. Pursuit of the same foreign currency policy and failure to increase its rate in accordance with domestic inflation rate would result in the loss of competitiveness of domestic goods and reduced export capacity.
