July 2009, Nos. 52&53

Economy

Recession, High Inflation and Incomplete Projects

While the ninth government is close to its end, it is handing down a host of economic woes to the next president. Some economic analysts maintain that the budget deficit, inflation, incomplete projects and a rent-based managerial structure will be the most important challenges to be faced by the next government.

Economists (Dr. Massoud Nili,    Dr. Akbar Komijani, Dr. Mohammad Sattarifar, and Dr. Saeed Shirakvand) reflect on Iran’s future outlook:

Nili: Recession is the main concern

Economics professor of Sharif University of Technology maintains that economic policies in recent years have led to chronic imbalances and it seems that the main feature of those policies is exacerbation of imbalances which have been chronically nagging the Iranian economy. Referring to signs of the Dutch diseases in the Iranian economy he maintains that high imports had increased inflation and perpetuated recession. The economist believes that overall budget deficit has led to shortage of developmental budget while energy shortage has harmed production and, thus, he maintains that the main economic concern for the coming years is not inflation, but recession. Addressing a conference on “economy and next government,” Masoud Nili stated that the world has been through a serious financial crisis in the past few years which has greatly reduced oil prices.

“The crisis caused a negative world economic growth after a period of 60 years. Advanced countries like Japan, the United States and the Eurozone countries have been hit worse…. Our country has earned more than 240 billion dollars since 2005 through oil sales, which has been unprecedented. Before the Fourth Economic Development Plan, our country earned 15 billion dollars through oil sales per year, but that figure later increased up to 80 billion dollars. After oil revenues improved, government earnings in rial also rose and since the government could use the resultant liquidity, its expenses increased against a falling demand, thus exacerbating inflation.”

Nili also stated that as foreign exchange rate remained constant, imports increased putting much pressure on domestic production which was already under tremendous pressures due to economic sanctions. “As a result, demand shifted to the housing sector and prices greatly increased in that sector. Government’s consumer expenses greatly increased and resources available to the Central Bank of Iran also rose, thus raising the monetary basis and liquidity. Therefore, inflation gained new momentum after 2006 and apart from the exceptional inflation rate of 1996; the inflation rate in 2006 has been unprecedented in Iran, which combined with constant foreign exchange rate, reduced the actual value of foreign exchange. During the past 10 years foreign goods have been less expensive while domestic goods have become more expensive. The reason behind presence of foreign goods from home appliances to fruits in the Iranian market, is the reduced actual rate of foreign exchange and due to low competitive advantages of domestically produced commodities, imports have greatly increased.”

Nili also pointed to unreal price of energy in Iran, saying, “This has greatly increased energy consumption in the country because low prices have barred energy producing companies to make enough investments in energy production a result of which was disproportionate growth in energy output and frequent cases of power outage followed by gasoline and diesel rationing.”

The economist then emphasized that Iran was still the third biggest consumer of natural gas and while investment in the country has been in decline since 2002, consumption growth has increased in the meantime despite the fact that consumption has not consistently increased.

“When promoting presidential candidates, the mass media should ask them about their economic plans in view of the current conditions and imbalances in payment and budget due to higher state expenses and lowered revenues. Candidates should accurately explain about changes which should be made to the business environment in order to employ young, educated manpower to cause economic prosperity. They should also explain about the next government’s approach to foreign exchange rate and should make clear what their government’s energy policy will be?

Komijani: Rationing bank facilities, a challenge for future government

Dr. Akbar Komijani

Banks were facing some problems because inflation was rapidly rising and they were forced by the government to reduce the profit rate on facilities. Therefore, deposits were transferred to private banks and state-run banks lost their potentials to give facilities.

“The most important challenges related to monetary policies and banking system include disturbed relationship between the government and the Central Bank of Iran and banking network as well as continuation of obligatory policies and rationing bank facilities, increased demands from banks by the Central Bank, dissolution of the Money and Credit Council and transferring its duties to the government’s Economic Commission as well as disruption in monetary policies.” Akbar Komijani, a professor of economics at the University of Tehran, who was addressing the same conference, explained about usury-free banking system, saying, “Reduced legal deposit in order to boost banks’ resources to pay facilities and empower banks to disburse more facilities was a major feature of the Third Economic Development Plan.”

He added that considering a single rate for foreign exchange in 2002, introducing a single foreign exchange management system and putting an end to different foreign exchange rates were major features of the Third Economic Development Plan.

“During the Third Economic Development Plan, the average annual inflation rate was reduced from 20.1 percent to 14.1 percent and 92 percent of economic growth goals were realized with an average of 5.5 percent while the investment rate averaged 9.6 percent above the predetermined figure, which raised hope in continuation of high economic growth rate in the years to come.

The economist noted that despite ups and downs monetary policies at that time reached their major goal, which was to curb inflation and although liquidity rose by 28.9 percent, most of the cash went to the capital market.

Explaining about the Fourth Economic Development Plan, he said that the plan had put inflation rate at 9.9 percent for its last year, but the rate increased to 16 percent in 2008 while liquidity rose to 28 percent.

He said during the Fourth Economic Development Plan up to the last year, banks’ liabilities with the Central Bank increased, adding, “Banks were facing some problems because inflation was rapidly rising and they were forced by the government to reduce the profit rate on facilities. Therefore, deposits were transferred to private banks and state-run banks lost their potentials to give facilities. Therefore, they moved toward partnership contracts in order to correct that situation and accepted usury-free banking in order to determine profit rate of partnership at will.”

Komijani also noted that rationing bank facilities was always an issue during the Third Economic Development Plan and the Fourth Economic Development Plan and their facilities were mostly given to the industrial sector rather than the commerce.

“The plan for establishing early productive small businesses increased banks’ debts to the Central Bank of Iran…. The most important monetary and banking challenges included disturbed relationship between the government and the Central Bank of Iran as well as other banks, elimination of the Money and Credit Council and transfer of its duties to the government’s Economic Commission, and disturbances in monetary policymaking.”

Komijani concluded by saying that coordination among the government, the parliament, and the Central Bank of Iran; observing financial discipline by the government and supporting the Central Bank of Iran’s policies to reduce inflation; improving financial relationship between the government and banks; making necessary grounds for privatization of state-run banks; strengthening the supervisory role of the Central Bank of Iran and promoting electronic banking were major solutions to the existing problems.

Sattarifar: Absence of MPO and increased budgetary violations

Dr. Mohammad Sattarifar

The Fourth Economic Development Plan has been compiled on the basis of the 20-Year Vision Plan and paid attention to many problems including climatic, economic, social and women’s problems, though its implementation has been unsatisfactory due to a variety of issues.

“Management and Planning Organization is a basic organization in every society which follows up budgetary violations and its absence will increase those violations.”

Mohammad Sattarifar told a conference on the economic performance of the ninth government that abstract policies and incomplete planning has increased class divide and reduced public welfare.

He added, “Economic achievements since the victory of the Islamic Revolution have been jus acceptable compared to many potentialities of the country.”

Former head of the Management and Planning Organization then referred to fluctuations in international oil price last year and said, “Reduced international oil price has increased public sensitivities about performance of the government…. The ninth government is facing serious problems for formulating the budget and there is currently no transparency in budgetary and other basic laws.”

Professor of Allameh Tabatabaei University also stated that the Fourth Economic Development Plan has been compiled on the basis of the 20-Year Vision Plan and paid attention to many problems including climatic, economic, social and women’s problems, though its implementation has been unsatisfactory due to a variety of issues.

Sattarifar noted that elimination of official reports on budgetary expenditure will weaken the government, adding, “At present, due to absence of the Management and Planning Organization, budgetary performance and situation of the Oil Stabilization Fund is in doubt and they say that performance of the budget and the Oil Stabilization Fund is confidential and cannot be made public.”

Referring to spending 62 billion dollars by the government, he added that Iran’s foreign exchange budget stood at 22 billion dollars at the end of Khatami’s tenure as president, which should have grown 10 percent per year according to the law to reach 29 billion dollars under the ninth government.

“However, the government has spent 62 billion dollars in the country and its expansionary financial policies have increased dependence on oil revenues…. The inflation rate was 26 percent in June 2008. Although the ninth government has earned 205 billion dollars in oil revenues in the past three years, inflation has been on the rise and instead of production, the government has just spent money,” he said.

Former head of the Management and Planning Organization further stated that recent years’ challenges have their roots in software problems and the main solution is to lay needed grounds according to the Fourth Economic Development Plan.

As for “justice stocks” he noted that it was a good idea, but the plan was compiled hastily and now, holders of such stocks have no role in management of respective companies.

Shirakvand: Management in oil-dependent governments is rent-based

Dr. Saeed Shirakvand

The government tries to cover its ineptitude through oil revenues. All positive measures taken under Khatami government like establishing the Oil Stabilization Fund are now backfiring.

Deputy minister of economic affairs and finance under former President Mohammad Khatami noted that political and managerial structures of oil-dependent governments are based on economic rents. Saeed Shirakvand told a conference on “state oil, oil states” at the University of Hormuzgan that two centuries have passed since Adam Smith used “rent” and caused a major wave in oil-based economy and the term holds true for governments which are heavily dependent on oil revenues. He noted that the difference between such governments and those not dependent on petrodollars was in the way they used oil revenues.

“Oil-dependent revenues spend their earning anyway they deem appropriate and do not consider themselves accountable to people because it is the government which gives money to people and seems to be their master.”

Member of the Islamic Iran Participation Front said that oil dependence took precedence over meritocracy under such governments and added that in such governments people try to use every means to take a managerial post and take advantage of its economic rent.

Shirakvand said oil dependence was the main reason behind economic ineptitude of the ninth government, adding, “The government tries to cover its ineptitude through oil revenues. All positive measures taken under Khatami government like establishing the Oil Stabilization Fund are now backfiring.”

He called the ninth government’s appetite for spending oil revenues as a cause for wasting assets and incomplete projects which have made the Central Bank of Iran to repurchase dollars and euros earned through oil sales, which is against the law.

“The sole organization which supervised government’s budgetary performance has been dissolved so that no entity would be able to prevent wastage.”

Shirakvand then focused on importing 55 billion dollars worth of commodities by the ninth government and said the high imports have not worked to curb inflation, but dealt serious blows to domestic producers and raised inflation to 25 percent.

He concluded by saying that the problem of subsidies is also rooted in oil revenues, adding, “All economists are against continuation of the current situation of subsidies, but the government plan to reallocate subsidies is riddled with flaws and even distribution of ‘justice stocks’ is against Article 44 of the Constitution, because it is being carried out by the government.”