Studies show that the factors which contributed to Iran's economic growth in the year to mid-March 2015 are either no longer at play in the current year or have activated reverse mechanisms.
In an OPINION on its Tuesday edition, the Tehran-based English newspaper Iran Daily wrote, apparently, given the country's current economic outlook, the factors will not begin to have a positive bearing on the domestic financial system until the removal of Western sanctions. This will lead to a decline in the economic growth by this winter.
These are greater economic stability, sufficient development budget and increased imports of intermediate and capital goods.
Following the Geneva accord of November 2013, greater stability in Iran's oil exports and auto production, which had reached a new level, slowed growth in these sectors. This is while, the recent downward trend in oil prices further hindered Iran's economic progress.
The Institute for Management and Planning Studies has recently published an analysis of the real section of the domestic economy and the economic outlook in the year to mid-March 2016.
The article raises the question whether economic growth will continue in the year to mid-March 2016. It also hypothesizes that the three aforementioned factors were greatly effective in increasing the growth rate from -1.9 percent in the year to March 2014 to 3 percent in the following 12 months.
These factors were effective in boosting production and exports in auto and oil industries, respectively. This growth, however, did not endure.
Although production in these key sectors attained a new level, due to a disruption in the progressive trend, the economic growth declined gradually. This is while, the annual growth in gross production which stood at 3.8 percent in the spring of 2014, dropped by 3.2 percent in the winter of 2015 to reach 0.6 percent.
Following the Geneva deal, Iran's revenues grew [due to increased oil exports] and domestic auto manufacturers could purchase spare parts with greater ease [owing to improved international relations]. These enabled the car companies to employ a greater portion of their capacities and raise production.
Since the annual growth of value-added in the industrial sector is calculated on the basis of figures of a year ago, the oil and auto industries are not to experience considerable growth.
The report reveals that the earnings of agencies listed in the stock exchange, excluding those from auto sales, encountered a number of problems due to a reduction in domestic market demand. This disrupted the balance between the ratio of inventory index to domestic production in those agencies (industries which were not involved in auto production) and raised the index to a five-year high. In the year to March 20, 2015, the shares of industries sold in the stock exchange plummeted 3.3 percent compared to the figure of last year.
According to the report, the growth in oil revenues in the first decade of the present century led the government to boost development expenses. This, exacerbated by the outbreak of the Dutch disease in the domestic economy, funneled investments entirely towards construction industries — particularly steel and cement.
Following the intensification of the sanctions in 2012, the government's development budget shrank, domestic housing sector fell into recession and consequently, the supply and demand in related industries were upset.
The rift between the agencies' output and sales in the year to mid-March 2015 will certainly bring their production down.
The article maintains that forex and inflation rates are not to undergo any major changes in the current year and therefore, play no role in fostering economic growth. It also holds that the government's development budget is also not going to stimulate growth due to the decrease in oil prices.
Since September 2014, the imports of intermediate goods witnessed a decreasing trend, registering a 40-percent decline during February 20-March 20, 2015 against the amount for the same period last year.
Statistics show that there is a direct relationship between imports of intermediate goods and the rate of domestic production growth. Thus, given the decline in the import of intermediate goods during September 2014-March 2015, the economic growth will drop in the current year compared with that of last year.
The most important challenge faced by the Rouhani administration is removing the country's fiscal bottleneck. Given the present economic condition, apparently, the problem will keep hurting the domestic economy until the embargoes are lifted.
This is while, the country's capital market is not capable of allocating sufficient funds to the economic agencies. In addition, only after domestic banks manage to overcome a shortage of monetary reserves, the banking system can play a significant role in this respect.
In the meantime, to further spur growth, the government can shore up the capital market, absorb more foreign investments and eliminate the obstacles to injecting funds into the state budget and banking system.
The study hypothesizes that fueling domestic demands and raising forex rates in proportion with the inflation are among the other strategies which will stimulate growth. In case the government fails to increase hard currency rates, domestic products will lose their competitiveness in international markets.