Iran’s industrial sector contracted more than 1% in the first half of the current fiscal year (started March 21).
The sector generates over 40% of Iran’s gross domestic product and its slump, along with hits to the services sector, have led Iran’s capital markets down for the past two years.
Known as one of the main supporters of Iranian industries, Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh has mustered all the support he could for Iran’s beleaguered companies.
The minister has been one of the strongest advocates of monetary expansion, favoring economic growth over restraining inflation as a solution to Iran’s stagflation—high inflation amid GDP contraction.
Nematzadeh believes companies should forgo paying dividends for a while and increase their capital with their profits or invest.
As the government and state-owned companies have controlling stakes in most of the stock market’s companies, the government can help set this trend in companies. In fact, the government’s fiscal deficit is partly to blame for the dividend payments and short-term outlooks most companies have adopted.
This should change, according to the industries minister.
But he does not shy away from government action. Corporate bonds are a main avenue for raising money for corporations. This market needs expansion. However, the debt market in Iran is shallow and companies have a hard time selling bonds.
The government can bear part of the risk burden of bonds by offering guarantees. Certainly this would be a measure for helping the market take its baby steps.
Iranian companies have seen their cash flows halted. Low demand has seen their inventories rise and emptied their pockets. Iran’s entire industrial sector needs to boost productivity.
However, Nematzadeh believes the pressing issue is the cash crisis that has frozen up industries.
A main culprit is the banking system. Structural troubles have frozen up bank assets; the government owes them nearly $42 billion and companies have fallen behind on repaying $100 billion of their debt, driving interest rates higher and forcing more banks into default.
The central bank has lowered the deposit interest rate cap to 20% per year, but banks have not complied. It is economics. Money costs them around 27%.
Further worsening the issue is competition from illegal credit institutions that offer higher interest rates on deposits because they do not keep reserves with the central bank. So money costs less for them. These institutions are tied to other state entities and control a quarter of the country’s money supply and no one oversees their activities. The central bank has made little headway curbing them.
However, a recent decision to cut reserve requirements for healthy banks by three percentage points will release 250 to 300 trillion rials to banks, Nematzadeh reckons.
This will increase lending and change the economics behind interest rates, letting them fall in line.
To boost private investment and business activity, the government should make business more viable by lowering the cost of money.
As a target, “we must bring deposit rates below inflation and interest rates to just above inflation”, Nematzadeh said.
All these steps can help alleviate the financial woes of industries and jumpstart business activity. The stock market itself can help find financing for heavy industries, but that will not be enough, the minister says.
