Economic challenges await upcoming Gov’t

Financial Tribune- Achieving sustainable growth is the biggest challenge facing the Iranian economy, an economist said.

“There is a serious concern about preserving the economic growth achieved in 1395 (the last Iranian year ending March 20, 2017),” Davoud Souri also told Financial Tribune’s sister publication Tejarat-e Farda weekly.

Economy is the main topic discussed by the six candidates competing for Iran’s presidency in the May 19 elections, which reflects the main concern on the part of their supporters.

The Iranian economy has been in trouble for a good few years, because of international sanctions, deep-seated structural issues and flawed policies. President Hassan Rouhani’s administration made every effort to do away with the sanctions and streamline the monetary sector.

As a result of the nuclear deal Tehran clinched in July 2015 with world powers—which took effect on January 16—oil exports are now almost back to normal and world businesses are weighing reengagement with Iran after years of isolation.

The inflation rate has dipped below 10%, as economic growth hit double digits, but an array of issues still remains to be solved before ordinary people can feel improvement in their daily lives.

Experts believe running the country will be a big challenge for the next administration, as economic challenges persist.

Sustaining Growth

Economy Minister Ali Tayyebnia has estimated that last year’s GDP growth stood at 8%. This is while official statistics on the year’s growth rate have yet to be published.

The latest statistics released by the Central Bank of Iran show the Iranian economy grew 11.9% during the three quarters of last year. According to CBI, without taking the oil sector into account, growth rate stood at 1.9%. The oil sector expanded by a staggering 65.4%, thanks to higher crude production and exports following the lifting of sanctions. The sectors of agriculture, industries, mining and services grew by 4.2%, 5.8%, 0.2% and 2.4% respectively while construction saw a negative growth of 17.1% during the nine months.

“Sustaining an economic growth of more than 5% depends on a rise in demand, lower unemployment and betterment of public welfare,” Souri said.

The International Monetary Fund has projected in its latest report that Iran’s economic growth will stabilize at 4.5% over the medium-term, as the country’s recovery broadens.

Real GDP growth is expected to reach 6.6% in 2016-17 and to ease to 3.3% in 2017-18, as oil production remains close to the OPEC target.

Although last year’s impressive growth rate was mainly driven by oil, it is no longer expected to contribute to boost Iran’s GDP growth in the coming years now that the sector is running at full capacity.

“One of the biggest obstacles to growth is lack of investment … Government resources are not adequate for investments needed to achieve a growth of more than 5%,” the economist said.

“Removal of sanctions has created a good opportunity to attract foreign direct investment. Nonetheless, FDI requires a series of structural reforms in Iran’s economy as well as adherence to international rules of doing business.”

Banking Reforms

Souri noted that fixing Iran’s banking sector is another challenge facing the Iranian economy, which policymakers should address sooner or later.

“The massive volume of non-performing loans, coupled with low amount of capital, is weakening the banks’ role in moving small-scale capital to investment projects,” he said.

Despite a reduction in NPLs under the Rouhani administration, there are concerns that a banking crisis may be looming, if the government does not take serious measures to carry out structural reform.

“The Iranian banking sector’s ratio of non-performing loans stood at 11% by Sept. 20, 2016, down from 13.6% in September 20, 2014,” CBI Governor Valiollah Seif announced back in January.

Furthermore, Iranian banks have recovered 203 trillion rials ($6.3 billion) of non-performing loans in the past three years.

“Although supervision over banking activities have recently improved, we still lack a proper oversight system and a robust banking regime,” Farshad Fatemi, an economy professor at Tehran University, said.

He believes that Iran’s banking system is “rapidly” moving toward a crisis.

Energy Prices, Subsidies, Dual Exchange Rates

Fatemi refers to energy and foreign currency markets as sectors posing short-term challenges to the upcoming Iranian government.

Under lavish government subsidies, energy prices have traditionally been remarkably cheap in Iran, even after the implementation of reforms initiated under the previous administration, under which part of energy subsidies were removed and almost all Iranians received cash subsidies instead.

This, in turn, imposed another burden on the government, as shrinking revenues in the face of falling oil prices dealt a heavy blow on government finances.

Iran’s dual foreign exchange rates regime is yet another obstacle to the country’s reintegration into the global banking system and payment networks, while the system has been blamed for rent-seeking and corruption.

Exchange rates have seen little fluctuations since Rouhani took office in 2013.