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June 2018, No. 87


Economy

Two Challenging Triangles in Iranian Economy

Without a reasonable engagement with the world, development will not be realized, and at present, the dominant discourse of China should determine where the country is supposed to stand in the global value chain.


Masoud Khansari, Chairman of Tehran Chamber of Commerce, Industries, Mines and Agriculture

Tehran Chamber of Commerce Board members in their last formal meeting in the Persian calendar year 1396 (ended March 20, 2018) analyzed the economic drawbacks in Iran. In their opinion, the year 1396 ended under conditions that unemployment and lack of production boost in certain industrial fields are still among the most pressing challenges.

They noted that despite the relative stability provided by the one-digit inflation, these two above-mentioned factors continue to exist due to “declining investment growth,” “difficult and expensive access to loans,” and “reduced competitiveness of domestic goods versus foreign goods”.

But what is the root cause of these three factors? Economic activists blame the economic dilemma on three financially motivated main factors. “Government’s erroneous foreign exchange policy,” “Disorder in banking system and monetary policies,” and “Growing budget deficit and government debts to all sectors of the economy,” constitute the triangles of financial challenges.

Meanwhile, the government’s wrong decisions on the question of foreign exchange which continue to be enforced, is a source of great concern of economic activists these days. Commenting on this issue, Masoud Khansari, Chairman of Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIMA), said: “One of the main reasons for the economic turmoil in the country is the wrong decisions taken about the foreign exchange.” At the same time, in the eyes of some economic activists, the government’s wrong foreign currency policies have contributed to inflammation in the currency market. That’s why the TCCIMA is preparing a letter to President Hassan Rouhani, offering an analysis of the developments over the past two to three months and outlining the country’s economic problems.

At the meeting, Khansari, relying on statistics regarding macroeconomic variables, pointed to the inflation rates announced by Iran Statistics Center (ISC) and the Central Bank, saying that the inflation rate announced by the ISC and the Central Bank were still single digit (8.2% and 9.9% respectively). “On this basis, we hope that the inflation will remain single digit next year (new Persian calendar year 1397 started March 21, 2018).”

Khansari, referring to economic growth of 4.5% in the first half of 1396 (2017-2018), said: “The International Monetary Fund forecast for Iran’s economic growth in 1396 is 3.5 percent; we should wait to see how much will be announced. The IMF forecast for the next year is also 3.7 percent.”

Central Bank statistics show that the country’s economic growth during the first half of 1396 was 4.5 percent, with the highest growth going to the oil sector. The two groups, “commerce, restaurants & hotel accommodation” and “transportation, warehousing and communications” also recorded high growth during the first half of 1396. Accordingly, considering the importance of these activities in job creation and dynamism in other affiliated industries, it seems necessary to pay more attention to these activities, especially in the big cities of the country, in order to realize the high potential of economic growth.

Khansari described the growth of gross fixed capital formation in the country in the following words: Capital formation has been negative in the country since 1390 (2011–2012), and this trend continued until the first half of 1396, which has now reached zero with slight improvement. This course is an indication to growth, although investment growth in the country is not desirable at all. The TCCIMA estimates that eliminating barriers in the way of the private sector investment, updating production lines and developing new products, with emphasis on exploiting new technologies, especially the path to attracting foreign investment, are among measures that can improve the investment growth.

He also talked about the positive trend in the value added in the construction sector from the second quarter of 1396. He said: “We noticed negative economic growth in the construction industry for several years, but in the second quarter of 1396, the added value of the construction sector was positive.”

Khansari referred to liquidity as another economic indicator and said: “Liquidity in December was 14,450 thousand billion rials, which has grown by 22% compared to the previous year. Of course, the growth rate of 1396 has been negative compared to the same period the year before. The decline in the liquidity rate is increasing, but the problem, however, is that liquidity is still rising.

Currently, the public sector debt to the Central Bank, as one of the factors influencing the growth of the monetary base and, consequently, inflation, has reached more than 630 trillion rials in 1396 and the banks’ debt to the Central Bank is equal to 1,130 trillion rials with the growth rate being less than the previous year.

Commenting on the 9-month performance of the budget, he stated: “We have recorded 91% increase in development budget compared to last year but unfortunately the government’s current spending has grown as well, which is a disadvantage in the budget. The government was supposed to be downsized but we notice growth in government’s current expenditures.”

According to Khansari, the production index of large industrial workshops in the first half of the year grew by 4.9 percent. Although some industries recorded growth but 11 industrial sectors are still in recession and their growth is negative. Evaluations show that for two consecutive seasons or more, the activities of the textile, apparel, leather, pharmaceutical, machinery and equipment manufacturing, non-motor vehicle manufacturing, and the repair and installation of machinery and equipment industries all faced recession or reduced output.

The TCCIMA chief, referring to the trend of Iran’s trade with Europe, said trade in goods had grown 52 percent hitting 21 billion euros. The TCCIMA estimates that the 2 billion euro rise in Iran’s trade balance with Europe was a major success over the past year. With the presence of more countries such as Turkey and Saudi Arabia in the European market and the multiplicity of their trade volume with the European Union, it is hoped that in the coming year, while enhancing our diplomatic activities, the trade volume with Europe will double with more emphasis on increasing non-oil exports.

Commenting on IMF estimates on Iran’s current account balance, Khansari said the fund has estimated Iran’s current account balance for 2017 at $21.6 billion, up over $5 billion from $16.4 billion in 2016. The figure is expected to reach $23.4 billion in 2018, which is a positive development. It is noteworthy that in 2017, Iran ranked fifteenth in the list of 188 countries in terms of having a positive current account.

Lessons Iran Should Learn from China

The second part of the TCCIMA meeting focused on development of the Chinese model and its lessons for Iran.

Mohsen Shariatinya, a faculty member at Shahid Beheshti University, presented the results of his research project on the lessons the Chinese model of development had for Iran. Noting that China was able to achieve significant growth within a short period of time, he added: “The foreign trade of the country was estimated at around $20 billion in 1978 but today it stands at $3 trillion. China today is a trading partner of 120 countries.”

On the question of how China’s political economy changed and what lessons Iran could learn from the Chinese development model, Shariatinya said reforming of social contracts, prioritizing gradualism to shock therapy, reform of the foreign policy, prioritizing liberalization to privatization, movement from self-sufficiency to the context of  global value chain, as well as reform in and privatization of state-owned enterprises, accession to the World Trade Organization and the sharing of power with the private sector were among the measures taken by China. He also said that an important part of China’s success in development is due to rethinking of its interaction with the world. Without a reasonable engagement with the world, development will not be realized, and at present, the dominant discourse of China should determine where the country is supposed to stand in the global value chain.

 

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