December 2009, No. 54

Domestic Economy

Domestic and International Crises in

Iranian Economy

As long as the government is not taking scientific decisions, no solution would be effective.

Bankruptcy of Lehman Brothers Bank in September 2008 unveiled a great economic crisis in the world. The crisis had been on the horizon for many months before running deep into the global economy. Bankruptcy of Lehman Brothers, which has been working for 150 years, shocked the Wall Street. It was an omen for the imminent economic crisis in European and East Asian markets causing bankruptcy of many banks and general unemployment. During the early months of the crisis, which had been characterized by economists as being a long-term phenomenon, developed and developing nations moved rapidly to support their production and economy by offering support packages in order to weather a crisis which nobody could tell how long would be nagging the world economy. Introduction of those packages was accompanied by injection of liquidity into the world economy and developed countries adopted support policies. On the first anniversary of the global crisis, they announced that economic conditions were about to improve and that the crisis would be soon over. At the same time, our country’s approach to the crisis was different from other countries. During the early months, that is, when all policymakers and economists were concerned about future outlooks of their national economies as well as international economy, Iranian cabinet members maintained that the global crisis would spare Iran. They argued that since the crisis had begun in the United States and that Iran had no economic relations with that country, then the crisis would not touch Iran. They continued with such assertions despite warnings from economists until signs of crisis began to show in production sector. Of course, that sector was already nagged with problem, but they became more pronounced. It was then that they admitted to the fact that the crisis was already in Iran. At the same time, the private sector was discontent with measures taken to support domestic production and maintained that increasing imports at a time that all countries were looking for import markets was an erroneous policy to open Iranian markets to foreign imports. However, this was not the end of the global economic crisis in Iran. On the first anniversary of the crisis and when international economists were optimistic about its approaching end, Iranian economists were talking about critical conditions in the Iranian economy which was different from the global crisis and a result of incorrect and hasty decisions made by the government. It was threatening the whole economic system of Iran, especially production in the private sector. To analyze the situation, we have conducted the following interview with Dr. Behrouz Hadi Zonouzi, faculty member of Allameh Tabatabaei University.

About one year has passed since the beginning of the global economic crisis, which echoed in the world with bankruptcy of Lehman Brothers and influenced all economic activities in the world. What is your opinion about the current situation of the global economic crisis? Does it seem to be near an end?

The world economy is recuperating. According to an assessment by international experts, the economic situation is improving, especially in countries with emerging economies like China and Bahrain. Although there are doubts about the end of the crisis in Europe and the United States, but most experts maintain that the worst phase of the crisis is already over. Some economists, however, maintain that a more severe crisis will follow this one. They maintain that improvement in the economic situation is transient and it may be followed by a more serious one. Of course, most economists do not believe in that prediction and maintain that the economic conditions are improving.

How do you see the situation of the Iranian economy one year after the beginning of the global crisis? At the beginning of the crisis, government officials maintained that the crisis would not touch the Iranian economy and if it did, it would be a late effect. However, a few months later, the Iranian production sector was facing problems which were attributed to world crisis.

Only government officials claimed that the Iranian economy would not be touched by the global crisis and their remarks were not authentic. At that time, they ignored the fact that the global crisis was sure to affect oil prices by reducing them and, thus, it would leave its mark on the Iranian crisis. The global crisis decreased demand for industrial goods and, subsequently, demand for energy fell causing a downswing in oil prices. The economic crisis also touched non-oil exports and export of traditional commodities of Iran because it had already shocked target markets and reduced demand.

Then, although they had already claimed that the global crisis would have no effect on Iran, they said that problems in production could be blamed on that crisis. Of course, those remarks were not scientific either. Our economy was plagued with a greater crisis than global economic crisis. We have oil revenues which allow for the government to cover the crisis, but there is unseen crisis underneath. One of its consequences is indebtedness of industrial companies with hefty figures. Those debts constitute a domestic crisis which has already made the private sector stagnant and this is another part of the crisis. Iranian economic entities are in critical conditions and have been forced to end or reduce their activities. This has exacerbated unemployment and is a sign of a major domestic crisis.

Last year, the global crisis started with collapse of financial markets and its early signs loomed in the housing sector. The housing crisis inside the country was more severe than the world. Housing prices had already begun to rise at a speed more than the American markets. At present, we are facing stagnation in the housing sector, which is a sign of crisis. If the stock exchange has been able to keep going in the past year, it has been for the purchase of stocks by state-run and semi-state-run entities, which feign privatization.

In reality, however, the private sector has been hit hard and has played no major part in transfer of governmental bodies. In other words, our economy has come under more control from the government and only its outer shell is nongovernmental.

Please explain about the reasons behind the crisis?

The crisis in our country is different from the global crisis in industrial states. Although there may be overlaps, but it is different in nature. Inside the country, the government heavily controls all markets and that control has been increased in recent years. The private sector is under heavy pressures and is not ready to embark on any new activity. Under the present circumstances, there is no investment and this is due to security problems felt by investors. The insecurity is a result of sudden interventions by the government which have made the economic situation quite unpredictable.

The government role in setting foreign exchange rate, customs regulations and tariffs has depicted a vague future outlook before the eyes of investors because variables suddenly change by the government. In these conditions, investment is damaged more by domestic situation than international crisis. We have no established markets and an already unstable market we had has become even more unstable. The government has been more present in this market and has destabilized the private sector.

What solution can be found to these circumstances?

As long as the government is not taking scientific decisions, no solution would be effective. When the private sector activists are asked about the situation of the economy and production, they talk about economic problems in the country and will say what sectors are giving rise to economic problems. When we talk about government officials about this, they provide us with another picture as if we are living in another country.

If realities are not considered, solutions will not be logical. Under these circumstances, they are talking about the newly established competition council and they say the council will save the private sector. However, plans considered for the council will bring the economy under more state control. At present, the situation is alarming because the country’s economic realities are considered upside-down.

Under these conditions, what is the role of monetary and financial policies in this crisis?

Private sector activists maintain that incorrect monetary and financial policies are a major problem causing crisis of liquidity in production units. Government’s interference is limiting opportunities and one part of that limitation is related to monetary and financial policies. Government’s monetary policies have not been correct and it is not clear what the Central Bank wants to do.

The real independence of the Central Bank which all economists believe it should have is now lost and the government is dictating its policies to the Central Bank. At the same time, the Money and Credit Council has been closed down and even if its sessions convene, it cannot be effective due to existing pressures. The main problem with monetary policies is that the money market is managed by government orders. They have ordered the interest rate to be decreased and the rate of deposits at private banks has also been lowered through government order to make them even with state-run banks. Such interferences have weakened the private banks.

By reducing the interest rate on deposits in private banks, the government is reducing competition in the sector. If they previously paid the highest interest rate in order to attract more deposits, now the government is ordering them to pay interest rates equal to those of the state-run banks. These are examples of incorrect monetary policies which have been imposed on the economy. This market is under stress, like other markets, and is not functioning properly. A glance at Article 44 of the Constitution and the Fourth Economic Development Plan will prove that such monetary and financial interferences are against strategic goals set at the highest levels. The government, however, is unfortunately ignoring them.