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June 2017, No. 84


Economy

Injection of Liquidity Is Not the Answer to Economic Crisis!


There is no need to emphasize that the ambiguity in the conditions for choosing the units that are eligible to receive the facilities plus lack of expert view will boost the market for recommended selections upon “favoritism” and rent seeking.


Not long ago, the daily “Donyay-e Eqtesad” published an alarming article under the title of “Repeating the Experience of Quick-Impact Projects?” in which the plan for allocation of 16 thousand billion tomans in loans to boost production was evaluated. As we know, the plan was implemented with an aim of activating 7500 troubled corporations; though up to date, the number of applicants for this facility has increased to 15 thousand.

Perhaps such a dramatic difference arises from the imprecise estimation of the relevant authorities of the number of “qualified” corporations and perhaps after a short time everyone realized that a certain “condition” is not involved and thus more corporations applied for the facilities.

The truth is that the selected criteria of the qualified corporations to receive the facilities have not been specified and no expert study has been conducted in this regard. The truth will be unveiled in the selection of the units which had been practically paralyzed, for reasons separate from liquidity shortage, and will be paralyzed again in not too distant future with most certainty (and foreigners call them “zombies”).

There is no need to emphasize that the ambiguity in the conditions for choosing the units that are eligible to receive the facilities plus lack of expert view will boost the market for recommended selections upon “favoritism” and rent seeking. No wonder that in the article of “Donyay-e Eqtesad” and also in the discussions among producers, mention is made of repetition of the experience of “quick-impact projects”.  The similarity between the two plans is not perfectly accurate. In the “quick-impact” projects, of course, the selections were done without observing any regulations; but under the government pressure, the banks were forced to pay the loans to the selected ones. The damage which was inflicted on the economy was the result of the compulsory and irregular payment of facilities to the applicants which caused an unprecedented wastage of national resources.

In the new plan however, there is no trace of pressures and compulsions. In fact, those groups of justified companies (and qualified in all respects) which have received positive responses from the “loan committees” and have received “the letter to the bank”, in referring to the banks are encountered with conditions they are not ready to accept and finally receive no money. In some cases, parts or whole of the facilities allocated to the applicants are collected to make up for their previous debts (which is contrary to the instructions of the “plan for allocation of facilities”; but is fully in practice). Statistics on bank “payments” in line with the new plan also include such displacements.

Given that these same displacements are in need of offering stronger and more practicable securities by the applicant, some of the manufacturers evaluate this whole event as a trick by the banks “to stabilize” their demands. This cynical interpretation of the motivation under discussion might perhaps be untrue; but the fact that a large number of categorized companies as the “loan recipients” have not received part or the entire allocated sum is not a matter of question.

In the opinion of most of the big shots in the field of industry, implementation of this plan would neither lead to a significant increase in employment nor would solve the dilemma of the present stagnation. In fact, if the implementation of this plan is not considered politically motivated in the remaining months to the elections and if the mentioned plan is truly the outcome of analysis of the government’s economic team of the reasons for the widespread recession in the industry, and if the economic authorities really consider implementation of this plan a curing prescription for the salvation of the industry from the abyss it has been caught in, producers are then right to be concerned about their future. From their perspective, resort to such plans is an indication of unawareness of the economic authorities of the roots of the recession governing over the industry and their confusion in how to deal with such a dilemma.

The reality that confusion exists cannot be denied. The fact that we do not ask ourselves why the industry has been stuck, why domestic production has lost its competitiveness, why most corporations cannot make their ends meet and why owners of micro and macro capitals are reluctant to invest in their manufacturing areas and instead of trying to solve these key predicaments we see the remedy in merely injecting money among applicants, are not signs of confusion?

Undoubtedly, most of the manufacturing corporations are suffering from shortage of working capital and some of them become profitable through injection of liquidity. Of course, assisting them is an appropriate action but who have exactly identified these groups of corporations? We know the “loan” workgroup neither enjoyed expert tools for the exact survey of the current status of the applicant corporations and their future perspective nor had enough time to take such a measure.

Apparently, the main responsibility for identifying the justified applicants is delegated to the banks and they make the decision on the basis of their own interests which is of course understandable. But the fact that those interests are in conformity with the intension of the economic authorities (that is to say to turn the rusty wheels of the industry by injecting the resources in qualified and needy corporations), is a shot in the dark.

However, why the economic team of the government does not target the main issue? There is no expert who would not know that production in our country is not profitable. The return of investment in productive activities is low and the best sign of this reality is the declining trend of investment in the industry sector. According to statistics announced by the Ministry of Industry, from 1385 (2006/07) up to 1393 (2014/15) investment in the industry sector experienced a significant drop which can be interpreted as the declining attraction for investors to make investment in the industry sector. The drop in attractiveness was as such that between 1387 (2008/09) and 1393 (2014/15) investment in the industry sector (at current prices) reduced about 60%. It is not irrelevant that the head of the Institute for Commercial Studies and Research has described the situation as “free fall” of investment in the industry sector.

According to another official report, the share of the industry and mine from the total fixed gross capital in the country has taken a downward trend since 1383 (2004/05) which “shows that investments have relatively been withdrawn from the industry and mine sector and made in other economic sectors of Iran.”

It would have been better if the officials in charge of the economy looked for an answer to this question that why the potential investors who would naturally go everywhere for more profits, are keeping away from the industry sector? If they do they would inevitably come to the same conclusion that industry in our country is a challenging and loss making activity with low return and as a result has no attraction for investors. If they truly came to this conclusion, logic dictated that instead of resorting to immature and tested plans of this kind, they should place solution of the main dilemma, that is to say reduction of challenges and costs for production and making industry profitable, on their agenda.

Of course, we know that the government’s hand is empty, but if the government intended to inject the 16 thousand billion tomans into production, would it not be better if this money were spent on improvement of the business environment and reduction of the obvious and clandestine costs of production (insurance, tax, bank interest rate, the crippling penalties, the invisible but real costs) so that the paralyzing pressures on manufacturing corporations would slightly be eased? In that case, the real producers, those who have employees and pay for insurance, tax, interest rate and penalty, would take advantage of government’s assistance and their production costs would reduce. Then there would be no “favoritism” and the rent seekers would receive nothing. More importantly, wastage of resources would be prevented.

The reality is that many of the companies receiving these loans are corporations with obsolete technology and old and inefficient physical capital that would resort to more loans out of desperation in order to survive.  Liquidity injection would not relieve their pain but rather would add up to the load of their debts. Would it not be better if they were offered an honorable and less problematic way to halt operation without the fear of scandal and devastation and evaded more losses and debts? Do not the economic authorities know that “facilitating conditions for halting activities” is one of the necessities of the market-based economies and is considered one of the 10 criteria for making an assessment of the business environment? Injection of liquidity to the “zombies” would only postpone their inevitable fate and waste the unique and valuable resources.

The manufacturers are reluctant to criticize the 11th government. They know that this administration has inherited a crisis-hit economy and has an acceptable work report on diminishing the problems and creating social calm. We have not forgotten that only during the last two years of the previous government, the per capita gross domestic product in our country reduced by about 11%, national income dropped by 20% and inflation rate jumped to 40%. Even imagination of that condition, together with the sharp fall in oil revenues, is truly alarming. The stoppage of that trend has not been a small achievement. Aside from this, producers sustained severe losses as a result of the imprudence of the former government and paid a heavy price and for this reason they understand the difficult circumstances of the government.

However, as long as the “loan plan” proves to be a symbolic movement and a sign of the government’s goodwill for relieving the pains, the implications can be ignored and forgotten. The main concern of the manufacturers is that the economic team of the government would truly consider plans of this kind as a remedy for the industrial stagnation and in the future too, after overcoming “financial bottleneck”, resort to such solutions for the salvation of the industry. This is a matter of real concern!  


By: Dr. Farrokh Ghobadi

 

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