Iran's Rouhani faces challenge of recession, inflation (Exclusive)

Business Materials 17 August 2017 23:17 (UTC +04:00)

Baku, Azerbaijan, Aug. 17

By Farhad Daneshvar – Trend:

Iranian President Hassan Rouhani who is beginning his second term after an overwhelming victory at elections in May has promised to fix the economy, but one huge obstacle stands in his way, deep recession.

The moderate president apparently should struggle to maintain a delicate balance in his economic policies as the economy is teetering on a knife's edge between inflation and recession.

The country over the past years has plunged into deep recession amid efforts to beat the raging inflation rate.

Ahmad Mojtahed, former head of Monetary and Banking Institute of Iran, suggests that luring foreign investment and reforming the country’s isolated banking system would contribute to efforts aimed at creating a balance between inflation rate and recession.

Investment: A solution to battle recession

Mojtahed believes that encouraging investment in both levels, domestic and foreign, could offer an effective solution to the recession and unemployment problems.

“The Iranian administration nowadays suffers from the shortage of domestic resources and capital due to sharp drop in oil revenues,” Mojtahed told Trend.

Although the Islamic Republic witnessed a significant boom in its oil output following the implementation of the nuclear deal back in January 2016, the dramatic slump in oil’s global prices has left a negative impact on the Middle Eastern nation’s revenues as Iran heavily relies on oil incomes. Therefore, Iran’s domestic investment capability is quite limited nowadays.

“On the other hand, domestic investors currently show interest in low risk investments with high returns, such as high interest savings and government bonds.”

In the meantime, industrial activities such as establishing factories and plants pose higher investment risks, which eventually cause the domestic investors to refrain from investing in the industrial sector.

In this situation, many consider prompting foreign investment as an enormously helpful solution. Iran’s sixth development plan (for years 2017-2021) has envisaged luring about $50 billion in foreign direct investment which could play a key role in rebuilding the country’s economy through developing the industrial sector and creating new job opportunities.

“The foreign direct investment is very unlikely to leave a negative impact on the inflation rate but it is capable of boosting the industrial sector. The flow of foreign investment can contribute to creating new job opportunities and eventually it can lead the economy out of recession,” Ahmad Mojtahed believes so.

However, shortcomings within the Iranian banking system in adopting the required international standards remain a serious obstacle in the path of luring foreign direct investment.

Banking reforms

“To climb out of the recession Iran needs to lure foreign investment and to meet this goal the country’s banking system needs to fully adopt international standards, because in the lack of banking cooperation there is no chance of attracting foreign investment,” he mentioned.

Although the nuclear deal has removed most of nuclear related sanctions on Iran, the leading European banks still appear reluctant to do business with Tehran as they are worried about running afoul of the US regulations.

The failure of Iranian banking system to fully adopt the required international standards, including anti-money laundering and combating the financing of terrorism (AML/CFT) regulations, is another reason behind the reluctant behavior of large banks.

In June 2016, the Financial Action Task Force (FATF) welcomed Iran’s high-level political commitment to address its strategic AML/CFT deficiencies and the organization decided to continue the suspension of counter-measures.

Nevertheless, the FATF said that it will keep monitoring progress in the implementation of the Action Plan and Iran will remain on the FATF Public Statement until the full Action Plan has been completed.

The FATF Public Statement indicates the crying need of the Iranian banking system to fully address its AML/CFT deficiencies to benefit from foreign investment.

“In the meantime, Iran should comply with other international standards such as International Accounting Standards and the country also needs to improve its credit rating,” Mojtahed mentioned.

Government budget deficits

Another solution to the economic recession could be countering the government’s budget deficits through the issuance of securities, including treasury bills and bonds, Mojtahed suggested.

Iran’s short-term Islamic bonds, also known as Islamic Treasury Bills, have recently become the most desirable commodity for the country’s traders.

Over the past years, the government in a move to reduce its debts, in particular to contractors, has issued thousands of the Islamic bonds.

"The contractors, who have difficulties due to the lack of cash and cash flow, sell-off the bonds, offering generous discounts to entice the traders," Mehrdad Seyed Asgari, a Norway-based Iranian financial analyst, told Trend.

Inflation is still high

“Considering the global standards, Iran’s inflation rate is still high, though President Rouhani’s administration has made a breakthrough in tackling the galloping inflation,” Mojtahed suggested.

Iran’s inflation rate had climbed above 30 percent, before Iranian President Hassan Rouhani came to power in mid-2013. Nonetheless, for the first time over the past 26 years, that figure declined into a single-digit row, bottoming out at 8.6 percent in June 2016. Despite that fact, according to the country’s Central Bank report for the 12-month period ending on July 21, inflation rate peaked at 10.3 percent.

“Iran’s non-oil economic growth over the past year hit 4 percent, which indicates that the economy is improving but it is still slow in the lack of adequate foreign investment,” Mojtahed concluded.