Oligarchies pose obstacles to Iran’s economic growth

Business Materials 20 December 2016 21:26 (UTC +04:00)

Baku, Azerbaijan, Dec. 21

By Mehrdad Emadi for Trend:

While the recent reports by Central Bank of Iran suggest impressive achievements, many believe that the economy still suffers from deep shortcomings.

The economy is still facing deep rooted problems most of which are caused by internal factors driven by the behavior of “economic oligarchies”.

However, the latest report on growth released by the Central Bank of Iran confirms a rise in the growth rate for the economy. The figure of 7.4 percent is an impressive achievement given than three years ago the economy was shrinking at a rate of around 4.6 percent.

This is certainly not a small feat for Iran especially noting the depressed oil market and the current oil prices which have greatly reduced the foreign revenues of the government from the sale of the crude oil.

Gradual Improvement

The emerging data suggest that the economic conditions have been gradually improving in Iran in the last two years.

However, this does not mean that all sectors in the economy have been experiencing growth. There appears to be a clear dichotomy appearing in the economy. On one hand, we have large strategically significant projects which have been identified as driving leaders for industrialization and strategic poles for technology transfer.

These projects have received capital injection through partnership with outside firms, often global leaders in their field.

I identify these activities as technology-driven export-oriented projects which are guided to become competitive at world prices in the near future.

There is, in fact, supporting data that confirms over 15 percent growth and expansion for this part of the economy.

The spin-off from such projects has been improvements in the demand for the smaller and medium size firms that can be considered as service provider for the core projects.

The growth in this area combined with structured support from the government have facilitated a re-orientation toward export markets and can be confirmed is that for the first time in 56 years, the trade performance of the country is improving showing a surplus in the trade balance while at the same time the share of oil in the economy shows a decline.

This is a historical change suggesting that the political leadership has succeeded in weaning off the economy from oil revenues and instead to guide the economy toward the manufacturing and the production of exportable goods.

This will have important ramifications for the strength of the economy and its ability to stand external shocks or any attempt in the future to impose new trade or investment sanctions upon Iran.

IRGC involvement

At the same time, there is a vector of activities where there seem to be persistent recessionary conditions arising from the falling investment and stagnated activities exacerbated by shrinking demand.

Most notable here are projects which used to receive preferential treatment in the allocation of foreign currency by the government as well as unimpeded imports exempted from the existing import duties and taxes.

The main revenue here has been rooted in “economic rent” from imports and “soft loans” to undertake new projects.

Most notable amongst these have been businesses owned or controlled by entities connected to the Islamic Revolution Guards Corps and their parallel organizations.

The emerging opening of the economy to competition from outside and the insistence of the government to reduce the monopoly power of the oligarchies have reduced the ability of this sector to enjoy access to easy money, i.e. soft loans and credit, and foreign currencies at preferential rates.

In this segment of the economy and all the businesses that used to benefit from serving it, data suggests a stagnated growth and even contraction in new investment.

Furthermore, completing the previously awarded contracts has suffered because suddenly this sector of the economy has had to face hard budget constraints and financial discipline similar to those faced by the privately owned business.

Given the size and reach of the owners of the businesses in the sector, it is understandable that there are concerted efforts to resist the plans of the government to make the economy more competitive and open large projects in key sectors such as oil, gas, petrochemicals, automotive and construction to foreign competition.

Translation of this resistance can be measured through daily and weekly media campaigns by some of the religious quarters who also have seen the emergence of a more competitive and transparent economy unfavorable to their current business interests.

Given the substantial share in the economy, it is my view that government should continue on its current path of pro-competition macro policies whilst at the same time enter a period of consultation with the main actors in this sector with a view of offering them a framework of transition during which those firms that can increase their productivity and reduce wasteful practices can continues doing business competitively.

I think there may be merits in helping this sector since there are many resources at the disposal of firms in this sector that can be employed productively resulting in stable employment at competitive salaries and product prices. We should be reminded of the success of Vietnam and China here.

Wait-and-see” segment of the economy

Finally, there are firms and activities which do not fall into either of the aforementioned categories which have been trapped in what I call the wait-and-see segment of the economy.

These are by large, privately owned businesses with no mentionable political connections whom in my view are the most important long-term actors in economy.

This segment has the potential to become the core of the economy.

However, the managers in this segment are wary of the durability of economic reforms and indicated transparency.

The deeply rooted concerns about the return of oligarchs to take back the control of foreign trade and barter-based trade of the last administration make the managers jittery because of the uncertain future.

Should we see good economic practices started in the last two and half years to continue taking roots and become common practice, I view this segment as the true engine of growth for the Iranian economy.

Through re-orienting their investment and expanding their output capacity, the sustainable employment will come from this part of the economy.

And I also suggest the most impressive performance in increasing exports at competitive prices will be reported by firms that are truly independent of government and other political entities.

Still optimistic

I stay cautiously optimistic on the future of the Iranian economy for the following reasons.

The flow of outside firms interesting in investing in the economy of Iran shows a positive rise whilst at the same time the pressure on business entities owned by the quasi-state entities to adopt more transparent measures has been rising. Just recently the largest telecommunication contract awarded to a firm owned by the Revolutionary Guards was reversed because of a non-payment problem.

I view this as a sign that the political leadership at the most senior level has agreed that the economy in the country needs to become more robust by improving its competitiveness and budgetary discipline.

There seem to be more signs of such a dynamics though we also have signs that certain religious organizations have received special dispensation with regards to tax and duties.

Whilst the figure of 7.4 percent growth may not be supported by the looking at the data from an array of economies activities, there are sectors in the economy that have seen 10-16 percent growth in their activities.

Typical of a state-centered economy like Iran at this stage, for the politically unconnected firms, read the true private sector to experience a 5-plus growth rate, we need to see the continuation of the growth in the super-macro projects and the ripple effects of the growth to the small and medium firms.

I expect in another twelve months, barring a negative shock, we hear a widespread rising activity in the economy.

Mehrdad Emadi is an economic expert and consultant at the UK-based Betamatrix International Consultancy.