In this edition of the Economy section, the Iranian economy during the recently ended Iranian year of 1385 is analysed with emphasis on some particular challenges and problems.
One of the main characteristics of
the Iranian economy in 1385 has been the surge in liquidity levels which have
seen a 42% rise during the past year to reach 1,200 trillion Rials ($130
billion). The main engine behind
the rise in liquidity is the significant rise in
Imposing Interest Rate Cut:
During the first few weeks of 1385, the government announced a mandatory interest rate cut which forced the state-owned banks to drop their interest rates from 16% to 14% and the private banks from 22% to 17%. This decision was opposed by many experts who believed any government involvement in imposing interest rates would disrupt the balance of the money market and argued that a cut in interest rates would result in a surge in loan applications and a corresponding drop in bank deposit levels. These predictions largely came true as most state-owned banks faced liquidity shortages while a significant amount of money was shifted from bank deposits to other sectors such as the property sector in particular which saw a 20% overall price rise in the second half of the year.
Employment and Wage Policies:
Another policy adopted by the government in 1385 was to force employers to raise the minimum wage level of permanent and contract-based employees by different rates giving contract-based employees high enough salaries to encourage companies to switch them to permanent employment. This decision proved disastrous as most employers and entrepreneurs threatened to lay-off large numbers of contract-based employees to curb rising costs. This situation finally forced the government to reverse its decision and adopt similar rates of increase for salaries of both permanent and contract-based employees.
Later in the year, the government focused on financing Small and Medium-size Enterprises (SME) with a plan for the short term return of capital as well as adopting microfinance models to promote employment opportunities for the country’s over 4 million unemployed. It is estimated that a total of 500,000 projects were approved by banks for these loans which totalled around 100 trillion Rials ($10.8 billion).
Real Estate and Construction
The prices of cement and steel witnessed a swift rise in the first few months of the year forcing the government to impose a ban on exports while eliminating all import tariffs of these products. It is estimated that a total of $3 billion worth of steel products were imported during the past year.
The rise in the prices of raw
materials as well as increased liquidity in the market helped boost housing and
property prices in the second half of the year. While in some areas of the
country, the prices rose by over 50%, in
Auto Production and Gasoline Consumption
Although the government initially opposed the idea of privatisation, the push by the country’s Supreme Leader and other decision-making institutions forced the government to implement privatisation plans according to the decree presenting the new interpretation of the Iranian Constitution. According to this plan, the government’s share in the economy should drop to 20% from the current 70-80% within the next 8 to 10 years. By the end of 1385, shares of two of the largest Iranian companies, National Iranian Copper Industries Company (NICIC) and Mobarakeh Steel Complex (MSC), were offered for the first time on the Tehran Stock Exchange.
Another plan of the Ahmadinejad government which was implemented to some extent in 1385 was the introduction of a share distribution model dubbed Justice Shares, based on which the government will offer its shares in state-owned companies to all Iranian families with priority given to poor and underprivileged families. Families then pay back the government from the dividends generated by those shares over a period of 20 years. As a result, in the second half of the year, around $2.5 billion worth of state shares were transferred to underprivileged families totalling 4.6 million people. Each person received around $550 in shares with a maximum of 5 payments for each family.
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