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June 2021, No. 97


Millennium 21st Century

Century of Economics!


One important challenge and chronic disease the Iranian economy has been facing for decades is the issue of paying energy subsidies and the unrealistic prices of water, electricity, gas, etc.


Masoud Khansari, Chairman of Tehran Chamber of Commerce


At the end of the 1390s (2010s) and on the eve of the new century Iran has not yet answered a fundamental question: Why has an economy with so much domestic potentials and short-term and long-term planning over the past half a century, still not managed to achieve sustainable development? Most importantly, how should we look at the economy and the future of development in Iran on the eve of the new century?

Examining the performance and analyzing the trend of macroeconomic indicators of the last decade shows that, unfortunately, the input and output of this fertile land does not comply with what is outlined in the 1404 Vision Document as Irans long-term economic goals. The Vision Document outlined the position of Irans economy on the eve of the new century, in the region earlier than Turkey and the Persian Gulf states, but what have really happened are their continuous progress and our regression. Paying attention to some macroeconomic indicators can give an accurate picture of the situation we are in. Iran is the sixth country with highest inflation in the world. Out of 186 countries in the world, only 9 countries have double-digit inflation. Unfortunately, Iran is one of them.

The result of this unbridled inflation is evident in peoples livelihoods. The inflation situation is not hidden from any observer, and one of the effective factors is the annual budget deficit, which is not hidden from any policymaker. The next indicator is liquidity, which was equal to 3,540,000 billion rials in 1390 (2011/12) and has now exceeded 31,300,000 billion rials, which means that liquidity has increased more than 9 times during the 1390s. Increasing liquidity that is not commensurate with production and trade is detrimental to any economy.

Also, the per capita national income, which was equal to 57,600,000 rials in 1383 (2004/5), has reached 47,400,000 rials today. Thus, according to a report released by the Majlis Research Center, during the last decade, 35% of the countrys population, that is close to four deciles of the population is below the poverty line. One of the most important indicators of how far behind programs we are is economic growth. The index was minus 5.4 and minus 6.5 percent, respectively in 1397 (2018/19) and 1398 (2019/20). Irans economy has shrunk by about 12 percent in two years.

In addition, the weakening of social capital and the reduction of the level of global interactions has caused a negative growth of investment in the country from 1390 (2011/12) to 1398 (2019/20). This downward trend is very worrying because today depreciation and lack of investment have overtaken the accumulation of capital. On the other hand, in the same period of time, we have witnessed the outflow of 90 billion dollars of capital from the country.

Another important challenge and chronic disease the Iranian economy has been facing for decades is the issue of paying energy subsidies and the unrealistic prices of water, electricity, gas, etc. During all these years in the Iranian economy, all kinds of subsidies, including energy subsidies in the form of electricity, gas, etc. are paid. Notably, according to the International Energy Agency, Iran spent $86 billion in energy subsidies in 2019, while China, with a population of 1.4 billion, was in second place with $32 billion in energy subsidies.

Meantime, lack of economic stability, the dual rate of the hard currency, inflation and recession, as well as the lack of a clear picture of the current state of the economy and the uncertain future, and uncertainty in doing business, unfavorable business environment and unrealistic three key variables, namely exchange rates, interest rates and energy carriers prices are the most serious current challenges in the economy.

The requirements for reforming the course ahead include public and transparent dialogue of the government and the establishment with the people, accountability to the public, accountability of the private sector and civil society in decision-making, handing over affairs to the people and reducing government interference, and finally political determination to change and reform. To escape the dusty economic horizon ahead, courageous action must be taken:

- Targeting single-digit inflation

- Realization of three key prices in the economy: exchange rate, bank interest rate and energy carrier prices

- Minimizing the budget deficit

- Targeting subsidies

- Strengthening interaction with the global economy

- Removing barriers to the business environment for domestic and foreign investment, accepting the influence of the private sector in the development of the country and, of course, facilitating and helping the formation of economic activities based on new technologies. 

The experience of developed countries shows that economic progress is achieved when the private sector enters the field of action in a stable and predictable economy. In Iran, too, sustainable growth requires such an effective presence.

 

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  June 2021
No. 97