The Rohani Administration announced a new six-point economic plan Saturday, cutting interest rates and encouraging banks to lend, in an effort to boost a stagnant economy that may have slipped back into recession.
Earlier this month, the International Monetary Fund (IMF) said Iran had negative economic growth in the first half of the Persian year (March 21-September 22) and forecast GDP growth for the full year somewhere between +0.5 percent and -0.5 percent.
President Rohani inherited inflation above 40 percent when he came to power in 2013 and immediately set about tightening fiscal and monetary policy to bring inflation under control. Inflation has since fallen to below 15 percent, giving the government some leeway to loosen policy to help the economy. The new six-point plan indicates a shift in emphasis from inflation-fighting to job-growth.
Officials said the new program is meant to apply for the next six months in the transition period until the end of sanctions will begin to boost the economy.
In something of an oddity, many people are saying the economy is in the doldrums in part because so many consumers are postponing major purchases until the end of sanctions in the expectation that imported goods will flood the market and be much cheaper once sanctions end. Many merchants are saying business is very slack.
Some economists said the new proposals might not be sufficient to revive an economy hurt not just by years of sanctions but also by reckless state spending under the previous government of President Mahmud Ahmadi-nejad.
“The government is trying to use the banking sector to release some sort of credit into the economy, and through that encourage private sector borrowing for projects,” Mehrdad Emadi, an economist at the Betamatrix consultancy in London, told the Reuters news agency.
“[It] doesn’t address the fundamental factors that have depressed the economy…. It is contingent on the private sector reacting positively to a fall in the cost of borrowing.”
Another economist, Masud Nili, was also unimpressed by the new plan, saying consumer incentives were insufficient and the government needed to push down the price of the rial against foreign currencies in order to boost exports.
The six stimulus initiatives are 1) reducing interest rates on bank deposits and loans, 2) scaling down the banks’ required reserves from 13 percent of deposits to 10 percent, 3) increasing bank loans to help people buy goods and stimulate demand, 4) injecting 75 billion rials ($2.5 billion) into the country’s development budget in the next two weeks, 5) accelerating payment of the government’s debts to contractors, and 6) lowering the interbank interest rate from 29 percent to 26 percent.
This is the second economic package unveiled by the administration since Rohani took office two years ago. It is effectively an admission that the first package fared badly, apart from curbing inflation, and slowed economic growth.
Economy Minister Ali Tayeb-nia said the big problem now is the anemic demand for Iranian goods in the retail market.
But he said the good news was that despite the fall in oil revenues the government’s debt is still below 25 percent of gross domestic product, almost double what it was before sanctions bit down hard, but quite low compared to many wealthy countries. In contrast, the US debt is now at 101 percent of GDP and Japan’s has soared to 230 percent.
Tayeb-nia said the government would clear its debts to contractors by issuing bonds worth 160 trillion rials ($4.7 billion).
Djavad Salehi-Isfahani, a professor of economics at Virginia Tech University, wrote, “Rohani is finding it more difficult to ask the public’s patience for continued austerity. As a result, he has decided to change course.”
Salehi-Isfahani said, “Rohani’s cabinet, like his economic team, has been from the beginning an uneasy combination of right-leaning moderates identified with former President Hashemi-Rafsanjani and left-leaning reformists loyal to former President Mohammad Khatami.
“For now, Rohani seems to have responded to the pressure from the left….
“Given the economy’s highly anemic response to [the nuclear agreement with the Big Six], replacing austerity with expansionary policies and identifying unemployment rather than inflation as the enemy number one are good moves from an economic point of view.
“Meanwhile, from a political point of view, keeping together Rohani’s uneasy coalition between moderates and reformists as the parliamentary elections in February approach is a must,” Salehi-Isfahani said.
