Masoud Nili

Iran’s Biggest Economic Challenges

Iranian President’s senior economic advisor spoke of employment, economic growth and inflation as the three main challenges in Iran’s economy in his recent speech on employment and warned that the remaining years of 2010s are absolutely decisive in the future of the country.
Masoud Nili believes that due to the stagflation ruling over the country, our GDP will reach as much as that of 2011 by the first half of 2016 in the best case scenario. In an interview with Tejarat-e-Farda, Nili gave his prediction on employment over the next few years and suggested that by learning from our mistakes in the past and by reaching out to the world, we can effectively take advantage of oil revenues for the country’s development and curb its destructive impacts.

You spoke of the remaining years of 2010s as “decisive for the country” and “a new leaf on the history of economy” in your recent speech. While we have only seven years before entering 15th century in Iranian Calendar, what are the biggest challenges for Iran’s economy over the next few years?

As you’re aware, my studies are focused on Iran’s macro economy. As a result of conducting numerous economic analyses in this regard over the past couple of years, I’ve come to the conclusion that inflation, economic growth and employment are three biggest economic challenges of the country in the next seven years to come and employment is even a more pivotal issue among the three. We need to act quickly and decisively on these economic indicators, or we will face irreparable social consequences. Among the three indicators, employment is a matter of great importance and plays a decisive role in our economy in the present decade. We need effective measures and accurate policies to be able to pass this difficult economic test.

Why do you find the issue of employment critical in 2010s?

When we analyze the five major activities that contribute the most to employment (agriculture, industry, wholesales, construction and transportation), we realize that employment has seen steady decline in agriculture and industry sectors. According to statistics, employment in the said areas has declined between 2005 and 2011 while the rate of employment in construction and transportation business has increased. This is an important finding, because as you know, the workforce in the industry sector possesses higher education and consequently, their unemployment would leave more negative impact on the labor market.

You’re well aware of the country’s baby boom in early 1980s. Should we fail to create new employment opportunities for that certain age group in the remaining years of the present decade, it will be too late, because they will have reached 40 by the end of 2010s. The government has invested a lot for this age group in the past, but now it’s time for their employment and the stagflation ruling over the country has made it too difficult a task. The 15-34 age group is estimated at around 30 million individuals, Some of whom are employed, some unemployed, some studying and some remaining to be consumers without looking for a job. What happens next is that the bottleneck of employment will increasingly narrow down for those still busy with their educations. A big percentage of the educated will be unemployed; a critical situation that may possibly include PhD holders as well.

There has been substantial investment in the country’s higher education and educational institutes such as universities worked as a buffer for the labor market. As a consequence, educational development lost balance with the level of development and the country’s needs. In other words, we encountered “over-investment” in higher education without having the economic capacity for such a workforce. On the other side of the coin, the rate of employment among women has steadily increased. These two economic phenomena indicate that we need to create new employment opportunities that cover the demands of both women and the unemployed population of the country.

What were the repercussions of injecting oil dollars in Iran’s economy?

The number of small industrial units fell from 13000 to 10500 units and the number of medium-sized enterprises dropped from 4100 to 3900, but the number of large companies soared from 430 to 490 units. The overall condition of the economy indicates that around 2750 production units came to a halt in the past few years and consequently, many lost their jobs. It’s not to mention that large companies are mostly state-owned and small to medium enterprises belong to the private sector. Thus we can confidently conclude that the number of private small and medium enterprises has seen a sharp decrease, while the number of state-owned companies has increased. The aftermath is that employment rate has dwindled in the private sector and that we can clearly see its reflection in employment numbers and statistics. An overview of the country’s workforce points to the increasing rate of unemployment among youth and women, especially in the private sector.

Unemployment is one of the main indicators when analyzing any country’s employment situation and what is specifically important for us is the employment situation of the youth. According to the 2011 census, unemployment rate of males between 15 to 24 years of age was 26 percent and for males between 15 to 29 years of age at around 20 percent. Furthermore, the structure of employment in Iran doesn’t normally allow women in and as a consequence, unemployment rate among young women has hit 40 percent. These alarming numbers indicate that we are faced with a critical problem, that is, we have failed to meet the demands of the young generation of the country for employment, and as a result, they choose to bide their time and continue their educations in hopes of finding more convincing opportunities in the labor market in future.

Besides employment, you spoke of economic growth as another serious challenge for the economy. Do you believe that we have what it takes to overcome stagnation?

Our economy is under stagnation and economic firms are the real reasons behind the current situation. In every economy, some firms do not perform and their activities come to a halt. On the contrary, a number of firms come to fruition and generate profit. But if the number of inactive or sluggish firms increase, there’s obviously something wrong in the economy in general. When we speak of stagnation, we speak of a critical condition in economy as a whole.

Our problem is both difficult and complicated. It arises from the fact that our economy is under stagflation, meaning that we’re faced with stagnation and inflation at the same time and it makes everything more convoluted. Statistically speaking, we haven’t had negative growth since the Imposed War up until 2012, when we were hit by a shocking -5.8 percent growth rate. According to Central Bank, economic growth over the first half of 2013 was around -3.1 percent. If we apply the same number to 2014, our GDP will have been decreased at about 10 percent by the end of the present Iranian year, as a result of which, level of revenues decrease and per capita income will have fallen nearly 12 percent. Our economy entered a period of turmoil as of the winter of 2011. When the GDP is negative for two consecutive seasons, economy is considered to be hit by stagnation. This situation has lasted for 9 consecutive seasons in our country; a situation in which stagnation is both long-lasting and deep.

Why did this happen?

As a result of decreasing growth rates of added value in oil and industry sectors, our country’s economic growth nearly reached -6 percent in 2012 and we experienced an unprecedented stagnation. The imposed sanctions were the main reasons behind the reduction of production and revenues in the oil sector. As a consequence, the added value of oil revenues has hit -34 percent. In the industry sector, the rise of production costs and implementing wrong policies alongside the sanctions severely affected economic firms and at the same time gave a shock to the prices of energy carriers in 2010, curbed the prices in 2011, and led to lower investments and negative economic growth in 2012 as well as turmoil in the exchange market over the years of 2011 and 2012.

Considering the current situation, when do you think the country will overcome negative economic growth and its consequences? Would it be possible to get back to the situation in 1390?

Pessimistically, Economic growth in 2014 will be 1 percent. In that case, we need an 8.7 percent economic growth in 2015 to be able to equal GDP of 2011. In a more positive view, economic growth of the present year will reach 3 percent, thus in order to match our GDP in 2011, we would still need a 6.4 percent economic growth in the next year. It’s highly unlikely to reach the same economic level as that of 2011 over the course of the next year, but we may be able to level the GDP at about zero percent in the middle or late 2016 and only then will we match the economic situation of 2011. In case these anticipations come true, the employment situation of the country will become comparable to that of 2011. It’s worth mentioning that between 2005 to 2011, no more than 21 million individuals had a job, and therefore the employment situation of Iran in the second half of 2016 will closely match that of 1384. We may conclude that economic stagnation in 2012 and 2013 will leave irrecoverable consequences and the results of poor decisions over the past few years will become visible in the near future.

Inflation is another hurdle in Iran’s economy. How can we win over this challenge?

It’s important to curb the inflation, but more importantly, we must be able to decrease the inflation at a steady rate. Some argue that in order to overcome stagnation, we need to act less strictly when it comes to financial and monetary policies, but I’m all against it. I believe that a 32 percent inflation is massive in any economy and it must be tailed off and letting loose of monetary and financial policies is a wrong notion.
I assume that “positive employment rate without inflation” must be the roadmap for Iran’s economy over the next few years, because the remaining years of the present decade will be extremely important to the future of the country in long-term.

How do you assess the future of Iran’s economy in the next few years?

We need to implement our experiences from the past in the right direction. Yet the critical question is whether we will follow the same policies and protocols between 2006 to 2011 in case the sanctions are lifted. Will we impose another wave of crises against the economy only for increasing the volume of exports or we will learn from the tried and true experiences in the world? Will we establish national funds for saving oil revenues with the aim of developing national infrastructures?

Economic growth of the country is bound to learning from the mistakes in the past. Our economic experiences give us a few invaluable lessons. First, we need to reach out to the world and extend national ties. It is by no means acceptable to put the economy in danger of cheap imports in an attempt to fight the inflation and providing the people with their needs. Iran’s economy cannot withstand another wave of mass imports. Our industry has become so weak over the past few years that another unfair competition with foreign imports will bring it down to the knees. We need to consider establishing funds for saving oil revenues with the aim of maintaining economic stability and development. The matter of National Development Fund should be taken more seriously. We need to stop lavish spending, or we will have to confront the consequences of our poor decisions. The second lesson is curbing the prices. Fortunately, the new administration doesn’t see inflation as equal to costliness and doesn’t consider curbing the prices as a means of controlling the inflation. Controlling the inflation has nothing to do with curbing the prices, but it should rather be pursued through controlling the monetary base.

Another important lesson to learn is that Central Bank’s resources do not lead to stable growth. Putting the banking system under pressure through control measures for interest rates and giving out loans is of no use. Finally, employment, similar to inflation, is not a matter of micro-economics, but must be explored as a macro-economic issue. We cannot possibly think of boosting employment by implementing short-term projects, but we need to possess long-term vision and prospect in this regard.

Source: Tejarate Farda – Donyaye Eqtesad

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