0309 GMT July 22, 2019
Iran's economy demonstrated the extent of its vulnerability to external factors following the intensification of Western sanctions which deepened recession and reversed economic growth in 2012 and 2013.
The past government's inefficient and poor management of revenues during its peak period (2006-11) played an important role in the severity of the damages inflicted on the country due to those extraneous factors.
On July 14, Iran and P5+1 reached a nuclear deal which will lead to the lifting of the embargoes and resolution of the so-called extrinsic problems. This is while, the domestic economy is still suffering from an unorganized structure and the same drawbacks in management.
Past governments' flawed fiscal policies had made the country highly vulnerable to international restrictions. This is while, currently, there are doubts about the incumbent government's ability to accelerate economic growth and achieve a better outcome in post-sanctions era. A higher economic growth will help significantly increase per capita income.
Another question faced by the Rouhani administration is how it is going to further absorb foreign funds for domestic oil and gas projects to increase output and exports to earn the same amount of revenues it used to get before the tightening of the sanctions.
Now that a large number of leading international oil and gas companies have lined up to cooperate with their Iranian counterparts, the government is required to skillfully direct the flow of foreign funds to other economic sectors to promote the use of modern technologies, improve their management and consequently boost national productivity.
All these [to be adopted] strategies and measures, will definitely play a pivotal role in pulling the country out of recession. However, they are inadequate to develop a healthy and sustainable economic system which does not collapse under the pressure of external tensions.
In case the government manages to meet all the abovementioned prerequisites, at most, it will be able to achieve an average economic growth of four percent per annum which will not be sustainable (as was experienced during 1995-2005).
Following the removal of the embargoes, the ground will be prepared for the government to enact the necessary structural reforms. Given the growing enthusiasm of foreign firms to enter the Iranian market, all eyes are on the performance of the Rouhani administration in attracting foreign investments.
However, apart from the major oil and gas companies that have sought to expand cooperation with state companies and will receive full guarantee in this respect, there are other foreign agencies seeking direct investments in Iran and collaboration with the private sector. The question mark hanging over this is whether the Iranian government will guarantee capital security and facilitate their business as well.
While domestic agencies are always subject to and threatened by unstable regulations and cumbersome bureaucracies, how it can be expected that foreign firms adapt to Iran's market regulations and comply with the country's business conditions.
Two decades have elapsed since the establishment of a number of free zones in Iran, while they have not been successful in attracting foreign funds to stimulate production. They simply have turned into gateways for imports. If the present condition persists, foreign companies will certainly opt to just sell their products in this relatively huge consumer market.
When oil revenues were at their peak, the government's inability to fund domestic economic agencies and tackle its own budget deficit was quite conspicuous. However, following the tightening of the embargoes and the decline in oil prices, the drawback struck a severe blow to the domestic economy which triggered an unprecedented inflationary recession.
The government's anomalous move to lower bank interest rates in an economy highly dependent on banking system, led to a high wastage and misuse of domestic banks' reserves. Iran's banking system is still grappling with the adverse consequences of that decision. The entire issue further underlined the absence of a debt market in the domestic economy. Such a market helps determine real interest rates in a financial system preventing economic officials from imposing their own wills on banks and economic agencies. In addition, a strong debt market could significantly help relieve the burden on domestic banking system to solve the fiscal problems of the government and domestic agencies.
Apparently, the government's top priority in post-sanctions era would be to overcome such structural inconsistencies. Nevertheless, it is highly up to the Rouhani administration whether to get rid of the flawed and inefficient policies of the past and thus, bring hope back to crisis-hit economy through prudent and firm will, or to pursue with the same ineffective policies.
Mousa Ghani-Nejad is an economist and a faculty member of Petroleum University of Technology.