Majlis in Declining Days Bars Rouhani’s Financial Reforms

In the fifth of a series of meetings on Iran’s economic strategies, Iranian officials and experts offered their critical analysis of the country’s economy, past and future.

During the meeting, Farshad Fatemi, assistant professor of economics at Sharif University of Technology's Graduate School of Management and Economics, called the instability of the country’s economic growth one of the major problems of the economy in recent years.

Reviewing an IMF report, Fatemi said a glance at the country’s GDP indicated that the oil sector had been the most severely hit, in part by the CBI and oil sanctions and partly by the reduced global oil prices. As other sectors such as industrial production and services depend heavily on the oil sector, they have not only failed to compensate but also started to fall, he noted.

The Chairman of Tehran Chamber of Commerce Massoud Khansari also said Iran’s toughest year in economy is already behind. Optimistic about the post-JCPOA era, he called visits made by some 180 foreign delegations in the four months since the nuclear deal significant for the country that has just come out of a ten-year international isolation. In a direct response to those who criticize the visits for not leading to tangible results, he said it is still too early to judge. “When Iranians still hesitate to withdraw their capital from the banks to utilize it in the country’s economy, we cannot expect foreigners to rush before us and trust the economy,” he said.

Speaking on the economy’s structural problems to be dealt with, if an expected five-percent growth is to be realized, Khansari named the multiple exchange rate system, the banking system, the heavy governmental bureaucracy, the unsuitable business atmosphere and the existing corruption as the main obstacles in predicting the country’s growth. Nonetheless, he still believes the current year could be a good one, given the existing relative stability.

Drawing on Fatemi’s argument, the President’s advisor on economic affairs, Massoud Nili, elaborated on the reasons of the economic crisis and stagnation in Iran, stressing the necessity to keep the country’s pace in economic growth. Later in his remarks, he categorized oil-exporting countries into three groups. “The first group are those countries, like the UAE, that have transformed theirs into diverse economies, reducing their dependence on basic commodities but seen a decline in economic growth following the shock caused by reduced oil revenues,” he said. The second group, he said, includes those countries with economies depending on oil revenues that seized the opportunity during the period of abundant revenues to fill up their national funds. He called the Saudi Arabia and Kuwait two examples fitting into this category while stressing that they too experienced stagnation after the oil shock. “The third group, including Iran, Venezuela and Russia, are those countries that have spent all their revenues, inflating their budgets by expenditures coming from oil revenues and making their economies import-dependent,” he said, noting that the group have experienced economic crisis as well as the stagnation caused by the oil shock.

Elsewhere in his remarks, Nili said Iran’s economy has seen unprecedented fluctuations over the past ten years. He calls a financial impasse and lack of demand as the country’s fundamental problems emerging in recent years. Traditionally, Iranian economy has used oil revenues and the banking system for financing. The former has now plummeted sharply by nearly 50 percent, compared with 2013. In the meantime, increased production in 2014 and sale problems in 2015 indicate a decline in demand, Nili said. “The reason is a 21-percent decrease in national revenues over the past three years as well as extremely high interest rates that did not come down proportionately with the inflation,” he added. This has led to controlled consumer and perplexed investment demand.  Naturally, with the large gap between the interest and inflation rates, people are less and less interested in withdrawing their deposits from the banks. The administration’s failure to spur a significant rise in demand has caused an imbalanced growth with oil and agricultural sectors on the positive and the industrial and services sectors on the negative side.

Nili says Iran expects a 25-percent hike in oil revenues in the current year while foreign trade could increase 15 to 20 percent. There is a consensus within the administration that the main priority for the economy in the current year should be to reform the banking system, to facilitate joining the global banking system and resolve the stagnation.

The Rouhani administration boasted about its control over inflation, but has appeared to be disarmed against its critics as more recently it has turned up to spark stagflation. Efforts made to counter the situation are sometimes barred in what seems to originate from domestic political competition. Nili spoke out about a recent instance, in a year that is quite sensitive not only because of the presidential race to follow but also because it might be the last chance for the economy to be resurrected. The President’s advisor said two major clauses, included in the administration’s proposed budget bill, that could pave the way for the banking system reforms, have not been approved in the parliament.

Last year on July 4, President Rouhani ordered a series of reforms in the country’s financial and banking systems in a directive addressed to his First Vice President Es’haq Jahangiri, flashing a déjà vu ten days before the nuclear agreement was reached in Vienna. Rouhani called on Jahangiri to devise a plan for comprehensive financial reforms to fix Iran’s banking system, help the development of the capital market and organize the government’s debts.

Clause 19, now eliminated by the parliament, called on banks to increase their capitals while Clause 20 sought permission to turn 40,000 billion tomans of the administration’s debts into securities. The elimination of the two clauses has rendered the executive package to reform the banking system void. Although the administration hopes to re-include the two controversial clauses, back into the budget bill, after the next parliament takes over, Nili says the incumbent Majlis has killed the first six months of the current year. He knows all too well that the clock is ticking against the administration.