The Forum for Partners in Iran's Marketplace

June 2019, No. 91


Iranian Economy in 1398

When we examine the business cycles of the Iranian economy, we see that the periods of recession and boom are entirely dependent on oil revenues.

By: Dr. Pooya Jabal Ameli

In order to realize a boom in production in the new calendar year, we need to first look at the current state of the Iranian economy. Understanding these conditions will provide the main ways to prevent a sharp drop in national production, while protecting the policy makers from falling into the abyss of extending aid to production through credits, which results in no more than monetary base growth and higher inflation rates.

First, we know that crude oil in the Iranian economy accounts for more than half of the countryís exports. The same income on paper supplies more than 30% of the state budget. To be more precise, these figures are more than that. In other words, the proceeds from the sale of oil make the import of capital and raw materials easy, and in the next cycle, this import causes economic boom and exports of other goods.

Hence, lack of this income would lead to a sharp drop in the import of capital goods and would face the economy that is in dire need of capital with a negative shock. In the case of the government budget, this process is more severe, meaning that the dependence of government revenues on oil is much higher than 30%, because its tax revenues rely on businesses that are indirectly dependent on foreign exchange earnings.

When we examine the business cycles of the Iranian economy, we see that the periods of recession and boom are entirely dependent on oil revenues. As oil revenue rises, the boom cycle begins, and as the sales decline, the economy faces stagnation. Hence, without a doubt, the recession that started last year will continue this year, and if oil sanctions intensify, this cycle will get even deeper.

Second, the problem that the sanctions create is far beyond the fall in currency revenues, budget imbalances, reduced imports, reduced consumption and economic downturn. Sanctions have affected the long-term trend of the economy. In fact, the trend tells you the cycles move upwards or downwards. When the trend is bullish, it means that the per capita income of the country in the long run is incremental, irrespective of cross sectional developments, and when it goes down, it means a decline in the welfare of the citizens.

The main determinant of this trend is the rate of investment, or the ratio of capital formation to gross domestic product (GDP), which has always been more than 30%, but this figure has fallen below 20% in recent years. It means we may face a situation where the amount of investment could not cover the depreciation of capital stock and as a result the net inventory of capital in the country would decline. This means that from now on, the concern of the Iranian economy would neither be development nor progress but preventing its citizens from becoming poorer.

Third: Although the Iranian economy has always faced structural problems, the consequences of the sanctions have created a completely different image in recent years, which did not exist before. Ignoring this image and remitting it to structural issues would basically keep the policymaker away from solving the problems. However, structural reforms can partly ease the burden of the sanctions. Doing this too would require courage and risk more than it needs knowledge.

These are reforms that include a wide range of reduction of government bureaucracy, increased tax bases, dramatic drop in tariffs and trade barriers, banking reforms, energy subsidy reforms, and so forth. Of course, if it is asked again whether development would be possible by fully carrying out these reforms, and despite the volume of the current sanctions that have turned the economy and the country to anarchy, the answer is undoubtedly negative.

Fourth: In this big picture, the problem of lack of working capital in firms is not the cause but the effect itself. Eliminating the effect by using options whose origins go back to the monetary base would be provisional with inflationary consequences which would only deteriorate the situation because it does not respond to the effect. Therefore, contrary to the impression that exists, excessive pressure on the banking system and the CBI (Central Bank of Iran) is not the way to achieve the production goal.

The calendar year 1398 (2019/20), even if reasonable policies are implemented, will be one of the hardest years in recent decades. Letís not make it more challenging by taking customary decisions.


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  June 2019
No. 91