Iran’s Economy Continue to Experience Growth
By Mahdi Goodarzi & Mojde Rezaee
Since the lifting of sanctions, Iran’s Economy has embarked on a new growth path, opening a new chapter in its economic prosperity and paving the way to move quickly towards development.
According to the governor of the Central Bank of Iran (CBI), the economy expanded 7.4% in H1 ended 21 September 2016 and it is estimated to grow up to 6.7% in 2017 as well; all forecast growth rates will be the highest in the Middle East and North Africa and among the highest in the world.
Considering the country’s economic situation and predicting the current year to become a significant year with significant performance, Masoud Nili, as the Economic Advisor to President Rouhani, has investigated the causes bringing about this growth rate as well as those necessary for its continuance, firstly published in Tejarat-e Farda magazine, although he believes that the recent years’ recession shrinking per capita income might make the current year’s economic improvement intangible to some extent.
He has also issued warnings on the government imbalanced budget and lack of unanimity over types of economic reforms, stressing specifically on fighting the “low growth rate” disease in the upcoming years.
Factors Contributing to the Growth Rate in 2016/17
The first factor in the current year’s economic growth was the lifting of sanctions pertaining to the oil export; Iran resumed its activities in this area almost as soon as the JCPOA was hit. The 50% growth in the value added of the oil sector contributed greatly to the 4.4% GDP in spring 2016.
Other factors were the establishment of stability at the macroeconomic level since 2013 on one hand and the significant drop in point-to-point inflation rate and management of the interbank market on the other, which resulted in the reasoning decline in interest rates on deposits.
According to Dr. Nili, the data collected from the housing sector seems to signal some movements in this industry. Besides, the total payments to individuals within the 7 months ended 21 July 2016 have posted a 19% rise compared to the same period last year.
In addition, statistics on non-oil export also shows that the nominal value of the non-oil export (without gas condensates) has registered a 15.3% growth in the first 5 months of the current year; this is interpreted significant due to the decline in global commodity prices.
How to Maintain Such Growth Rates
Stressing on the importance of avoiding getting trapped in low growth rates, Dr. Nili assumes that Iran’s economy is no longer dealing with recession; rather, the problem is now the low growth rates, whose cure falls within reaching policies for assuring the continuance of such growth and development.
Oil does not appear to be expected to drive the economic growth engine and the budget will impose some limitations to this rate as well; furthermore, an internal agreement must be reached to overcome difficulties in resuming banking relations with foreign banks, which will lower financial expenses for manufacturing units and help the continuance of such growth rates in the next years.
Calling the “low growth rate”, as a long term issue, and not the “recession”, as a short term issue, the major challenge ahead Iran’s economy, Dr. Nili assumes that requirements for long term economic growth must be met for which lowering the inflation is a pre-requisite, followed by
- facilitating trade;
- improving gas productions from Pars- Jonoubi Field, which will hit its high in 2017/18; besides, during 2017/18, the expected increase in oil and gas prices plus the increased non-oil export can be added, which will contribute to experiencing such high economic growth rates;
- lowering financial costs; and
- mobilizing the housing sector, which has recently emitted signs of growth; if continued, they will have the power to move the economy
In addition to economic growth, one main strength point of the economy is the sustainable trade surplus. In fact, the Iranian economy has managed to sustain its trade surplus over the past few years and all indications are that the trade surplus will increase now that most external sanctions have been lifted. Continued trade surplus will offer the Iranian economy an important backbone to face other economic challenges.
However, it is worth mentioning that structural reforms are a must in order for the 7% economic growth to be materialized. Recently, the Economic Commission of the Majlis has released a report on how the budget was used in 2015/16, which definitely calls for such reforms. According to this report, 94% of the government revenue has been realized; in fact, the most important part, i.e. tax revenues has been obtained by 92%. On the other hand, 134 state companies have made loss during this year; the first 10 have made loss worth beyond IRR 13,000 bn. Regarding the privatization process, there are still left a large number of state companies to be divested; only 5 enterprises out of 113 have been offered. Besides, high amounts of subsidy have been paid in cash to people, mostly from revenues obtained from adjusting energy carriers’ prices, in a way that only 3% of such resources were left to be allocated to production and health sectors.
The role of export should not be underestimated either, whose achievement will be in need of a powerful private sector. Experts have the idea that a country cannot experience sustainable growth without a powerful private sector and constructive relations with the world; these call for particular mechanisms and strategies to guarantee such changes and growth in an environment created by the government to ease and facilitate investment.
Last but not least, it is to remind that absorbing investment, both domestic and foreign, has the power to turn our economy into a sustainable growth engine; unfortunately, investment figures have gone through a 20% drop in 2012-2013. In this regard, we are in need of deep reforms and upgrading our banking system plus infrastructure and legal frameworks to firstly become able to use local funds in manufacturing units, and then gain access to foreign banks and foreign funds to enhance finance and trade finance and help attracting foreign direct investment as well as foreign portfolio investment.
All in all, the outlook for Iran’s Economy remains positive; however, the improvement might be very gradual and also influenced by a number of domestic, regional and international developments, including the future price of oil. Iran could also be transformed into an exporter of diverse products and commodities. Among the said factors, under the current circumstances, attracting foreign investment needs to be paid extra attention since the country is obviously suffering from credit crunch; this itself, calls for taking practical measures to remove the impediments against money transferring, provide the necessary assurances as well as trying to improve our place in the international arena.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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