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Salaam (Morning daily)
May 19, 24 & 26
By: Mohsen Shamshiri
Summary: What follows are excerpts of an interview conducted by the daily Salaam with Dr. Farshad Momeni, a member of the scientific staff of the Allameh Tabatabaie University on the prospects of the Iranian economy under the government of the newly-elected president Hojjatoleslam Mohammad Khatami.
Q: WHAT WERE THE ECONOMIC CONDITIONS THAT THE NEW GOVERNMENT INHERITED IN 1376 (1997)?
A: I have always stressed considering the ideological pattern and theoretical framework of the policies adopted, and I have tried to avoid any stand on individuals. Of course this does not mean ignoring the role of individuals.
One of the very bitter and unpleasant examples set by the economic management of the country in the period after the war till May 23, 1997 was its reducing the level of assessment of the policies of the economic management of the war time - which were the product of the specialist work of that period and like any other policy were based on a specific theoretical framework - to the level of taste of specific individuals. And those individuals were attacked and their hard work was rejected unethically and mercilessly without their side's being provided with an opportunity to give an answer.
The second characteristic of the economic management of the country after 1989, with few exceptions, was its considering any assessment and criticism of the orientations and executive policies an attack on the individuals.
As a result the possibility of correction of the mistakes and prevention of damage was reduced to a minimum. Furthermore, the attempts made in the critical moments to make up for the losses were inevitably hasty. This is why the reactions were in practice reminding one of going to the other extreme.
The third characteristic was considering any criticism to mean disregarding the hard work of those involved. But criticism of the economic orientation does not mean denying the hard work of the executives. If a car is put in an incorrect course naturally speeding up means getting further away from the objective.
It seems that this critical assessment which as before is based on the ideological stands and theoretical orientation of the former economic management can be useful for the present economic management and especially the honorable president to consider a share for the orientation and theoretical foundation of the current economic policies as much as they are sensitive about change of individuals and their role in the existing shortcomings.
Of course common sense makes it imperative for individuals with different viewpoints to carry out different policies. I think this itself is one of the manifestations of political development.
ECONOMIC CONDITION
The state of economy the new government took delivery of in 1997 can be reviewed from various aspects. One is considering the slogans raised between 1368 and 1375 (March 1989 - March 1997).
There were a number of pivotal slogans during that time. The slogans of the previous economic management were in fact a kind of criticism of the economic orientation of the war time.
For instance that management was strongly critical of the economic management at the war time for narrow-mindedly blocking the way for active presence of the private sector.
Another criticism was that the wartime government with its exchange control policies put some pressures on the economic system and organized the foreign trade in the direction of encouragement of the imports and weakening of the exports.
Another point it was raising was the use of foreign capital. It was thinking the (war-time) government's commitment to the articles in the Constitution was not compatible with the new conditions of the world and the necessities for national development in Iran.
On the basis of those orientations ideas such as prevarication, deregulation of foreign trade (which in practice was turned into freedom of imports), weakening the value of the national currency, encouragement of foreign investment and so on were put on the agenda although most of them did not have any slightest legal place.
It used to be said in that period if the private sector was permitted to have extensive operation the efficiency of the economic system would increase enormously.
However, little attention was paid to the point that the Constituting in principle has no objection to that, but because of the semi-colonialist conditions before the Islamic revolution it believes in the reform of the orientations of the private sector and it has considered for it a third role (after the state and cooperative sectors) until those reforms have been carried out.
But providing the private sector with freedom of action took place before preparation of grounds and fundamental reforms in its behavior models.
In practice as a result the government, which was insisting on prevarication in an extraordinary way and carried it out in an extensive area even free from the legal considerations, had to stop that because of the distressing conditions.
If we review the newspapers in late 1373 and early 1374 (early 1995) it becomes clear that since sufficient beds had not been prepared for operation of our private sector to have an overall development content the same people which used to accuse the previous managers of narrow-mindedness staged such a propaganda which suggested every problem in the economic system was related to the private sector.
They went to the extreme of issuing hording sentences for warehouses with just tens of tins of cooking oil or a few hundred tins of infant formula. This created a very harsh and undesirable climate, and in this way in my view they tarnished an important part of the achievements after the victory of the Islamic revolution.
In other words these extremist orientations tarnished the achievements after the revolution to a large extent whereas the foundations used to be built during the war especially through the channel of the cooperatives for active presence of the private sector with a development content.
They were making publicity about the devaluation of the national currency with ideas such as competitive exchange and single exchange rate and so on and were saying that as soon as we weakened the national currency the production would increase.
But the same management which was making that claim at that time is now publishing official documents in which it has to mention some of the realities.
Such a thing is bitter in one respect, but more bitter than that will be our forgetting this costly experiment and deciding to try what has already been tried in the past eight years!
For instance in the economic report for 1375 (ended March 97) it is said that one of the fundamental reasons for the speedy growth of production between 1368 and 1372 (89-94) was the existence of an unused capacity in the first years of the plan. With the approach of the final years of the plan this economic growth rate declined. And in 1372 it was down to 1.6%.
We are thankful that some of the realities are stated in that way. But we should bear in mind that this 1.6% growth took place by using resources much more than what had been forecast under the law. In other words if the excessive exchange and rial injections had not taken place we would have witnessed much more terrible declines.
But this admission itself indicates that for reasons outside the power of previous economic management, such as the war and the limitations resulting from the destruction of the economic installations by the enemy, the economic growth was facing some disruptions and we should not attribute that relatively low growth to the policies of that period and especially the depreciation of the national currency.
The second lesson is that in a period in which none of those difficulties and threats existed and the exchange and rial resources available to the government were much more the growth achieved in the final year of the plan can be compared with the lowest level of growth during the war time.
Furthermore, the imports in the period of heavy depreciation of the national currency was unprecedented in the history.
Q: THERE HAVE BEEN A LOT OF TALKS ABOUT ECONOMIC RECESSION IN IRAN. WHAT HAVE BEEN THE REASONS AND HOW SHOULD IT BE TACKLED?
A: The recession topic in a way has been turned into a lever against the government. By stressing the recession excessively some pressure groups are trying to obtain some concessions.
Of course I hope the government would adopt a vigilant approach, but we must pay attention that the recession was organized by the previous management of the economy within the framework of the structural reform completely consciously. Without paying attention to the oil price crisis in the final years of the war they were taking pride in it in their publicity. The psychological war launched against the economic management at the war time was that the shops were empty and there were long queues for various goods.
In principle one of the reasons for their choosing the structural adjustment programme independent of the legal considerations was the point that by nature structural adjustment programme is a demand control programme. In other words by sharp increases in the prices of goods and services they drive a section of the buyers, especially the weak income groups and middle classes, out of the demand scene.
We remember that they were expressing pride in the media and at the Friday prayer services that they had created such a situation that there was no queue anymore and that shops were after customers.
At that time the then economic affairs and finance minister, who is now governor of the Central Bank, in an article in the Majlis va Pazhohesh (Majlis and Research) magazine proudly announced: "The inventory of our production units increased by more than four folds between 1368 and 1372 (89-94)."
If we pay attention well we will see that actually the recession is in certain areas. It is mostly in relation with the basic needs of the households and also the durable goods. This has been designed deliberately and now the results are showing themselves more extensively.
Therefore, if action should be taken it must be in relation with the structural adjustment programme as a whole.
But side by side the said recession there is a relative recession in the commercial fields and the related activities.
We should make distinction between the recession in this area and the recession in relation with the basic needs because of the absence of effective demand. These are two problems and the management of the economy cannot treat them with one remedy.
In a study reported in one of the publications of the Plan and Budget Organization recently it has been shown that actually a part of the recession is in the speculative and brokerage activities and it is related to the fact that because of the dominant structure of the commercial services in the Iranian economy in the boom periods most of the gain is made by that sector. And naturally in the recession periods this sector loses more compared with the other sectors.
But the difference between this group and the first group, the people at large, is that this groups has numerous levers and platforms. Accordingly, while it is raising the banner of fight against recession apparently for poor groups and talks about recession from that position in practice the solutions will be in the direction of its own wishes and interests.
Therefore, I think the government must separate those two aspects and organize its approach in such a way that preference is given to the interests of production and development compared with the activities which in principle do not have a development content. The recession in those sections, if it makes those active there more in the direction of productive activities, is among the valuable things. Incidentally, there have been indications in the past couple of years in this connection.
In 1376 (ended March 98) alone $ 6.5 bn of the debts frozen in the previous years were matured. And according to the Central Bank reports such debts in 1377 are nearly $ 5 bn.
Another point is the volume of the liquidity. The Central Bank reports show that the dimensions of the changes in the monetary trend as a result of the structural adjustment policy have become very worrying.
Perhaps it would be better if we consider the liquidity trend since 1368 (March 89) to show the effect of the liquidity and the threats to the economy. But in order to avoid suggesting the problem is very big we use the figures of the final year of the first plan and the first years of the second plan to demonstrate the trend on the demand side while there has been no meaningful change on the supply side of the economy and to demonstrate the problems the government has been grappling with because of that.
According to the available figures the liquidity in 1372 (ended March 94) was Rls 48,000 bn. It exceeded Rls 116,000 bn by the end of 1375 and the beginning of 1376 (March 97).
Another problem for the new government is that because of certain considerations the former economic management had frozen the inevitable trend of the increase in the prices of goods and services until the day of presidential election. And it was not permitting any increase in the prices as much as it could.
All this was put on the agenda of the Council of Economy after May 23 in the form of piled up demands for increasing the prices of goods and services.
I think a review of the reported agendas of the Council of Economy after May 23 shows the problem well.
The then economic management and a group of the MPs had concluded they should have extraordinary expenditures in the first months of 1376. Since the necessary revenue sources did not exist they raised the dollar price of a barrel of oil in the budget law for that year and on the basis of that superficial revenue they included some expenditures.
That increase in the oil price was not materialized but the expenditures collared the government. As a result the government faced very acute difficulties in the last two months of 1376 (ended March 98).
Another important point in the analyses of supporters of structural adjustment is the budget deficit and the government's debt.
While the pivotal slogan of the government between 1368 (89-97) was reduction of the budget deficit and they had the biggest claims in this connection it will not be bad if we review the total debts of the government at the end of 1367 (March 89) and compare them with the time after that. But if we make the comparison in that way we too have fallen into the trap of unethical methods of comparing the worst years of the war with the best years after that.
But to give an idea what the adjustment programme did to our government from the economic viewpoint I refer to the volume of the government debts, which is the total debts of the government and the state companies and institutes, in 1372 (93-4) until 1375 (96-7) and the beginning of 1376 (97-8).
According to the Central Bank the government's debts rose from about Rls 32,000 bn in 1372 to nearly rls 66,000 bn in 1375.
To be fair the new government has shown very serious desire to avoid any rise in the debts and to pay some of them as much as it is possible.
We can also consider the trend of the profit rate paid to the bank deposits.
The profit rate for 1-year deposits was 11.5% in 1372 (93). It rose to 14% in 1374 (95). The profit rates for 2-year, 3-year and 5-year deposits have risen to 15%, 16% and 18.5% from 13.5%, 14.5% and 16% respectively.
According to the Central Bank figures the undertaking of the banking system for payment of profit to the above deposits was Rls 10,000 bn in 1376 (97) which is an astronomical and very shocking figure.
There is also a system of support, in connection with tax exemptions and so on, for these deposits.
The tendency of the structural adjustment program to create a positive interest rate in an underdeveloped economy puts the greatest pressure on production centers.
While production process involves hard work and tiring controls, the expected profit after taxation from it cannot be compared with the (above bank rates).
In other words the monetary management is giving signals to all to change mind about healthy and constructive activities and to be after an easy income.
As far as I remember one of the missions given to the new economic management of the country, especially in connection with the Plan and Budget organization, was assessment of the experience of the years 1368-1376 (89-97). We do not know weather this has been done. Although I consider it unlikely that the assessment by the present management of the PBO, given its specific views, would have the sufficient capability, but such a mentality would be palpable.
The reports by the PBO indicates the fact that with greater increases in the exchange rate there are meaningful disruptions in various economic and development processes.
I think I should express my regret that while by definition and according to the law the most important duty of the management of the Central Bank is safeguarding the value of the national currency in the recent months the honorable governor of the Central Bank has commented on all small and big economic, social, political and cultural issues but has so far not given any report to the nation about his main task.
The macro mangers of the country should reflect more on the point that with this
freedom of action which has been given to the management of the Central Bank independent
of the legal considerations every now and then it is effecting meaningful depreciation of
the national currency and the impression is that such depreciations create suitable
revenue opportunities for the government to solve its problems.
In the report it has been specified the increase in the prices of capital goods was more than the increase in the prices of the consumer goods and services.
Naturally since the biggest investments in the Iranian economy are made by itself the government suffers the biggest losses as a result of the depreciation of the national currency.
In the report it is also said that in connection with the consumer goods the government's basket has also suffered more losses as a result of the inflation compared with the households.
The reason for this is completely clear: in the Iranian economy the government is the biggest consumer as well as the biggest investor.
Therefore, we should not be pleased with such opportunities for revenues because later more pressure is imposed on the people in the shape of inflation and recession.
As far as I know in no study at the academic levels or by the economic management circles has the real rate of exchange been calculated to be more than Rls 1,500.
Therefore, selling exchange above that level by the government -- although it creates the illusion of being rich in the short term --will bring heavy inflationary pressures and recession.
I think one of the most important things that the government should put on its agenda is its submission to the reality which has been proven by all the scientific studies about the real rate of exchange.
The most immediate step that can be expected in this areas is prevention of unreasonable increases which are taking place.
Q: HOW DO YOU ASSESS THE ADJUSTMENT PROGRAM IN 1377 BUDGET AND THE POLICIES FOR NEXT YEAR?
A: There should be a debate at the national level about the theoretical foundations and empirical evidence of the structural adjustment program.
Regrettably the overall orientation of the 1377 budget indicates the present economic management has not wanted to consider seriously the experience of the previous period of enforcement of the structural adjustment program in Iran. And considerable signs can be seen about efforts for revival of the structural adjustment program.
I think since the third plan is going to be drafted in 1377 it will be appropriate if the Presidency organizes a debate in whatever way it considers necessary so that we would be able to draw the five-year prospects of our economy with a more profound view.
Q: WHAT IS YOUR VIEW ON THE RATE OF PROFIT PAID TO DEPOSITS AND PARTNERSHIP BONDS?
A: Another point which I propose is serious revision of the profit rate paid to the bank deposits. The profit rate must be such that we would not increase the opportunity cost of production more than what the government is doing as the remnant of the orientation of the previous government, is the contrary.
Truly I do not know the justification for the government's announcing guaranteed profit for the partnership bonds. And the bonds are in the areas that such a yield is inconceivable...
The government shoulders extraordinary pressures... and it is imposing the adverse effect of that on the economy and the people...
If only the president's view that every serious policy must go through a process of inviting comments and discussions would be acted upon...
The third point is the revision of the policies which have been tried since 1368 [89] and have not had the expected results.
For instance and especially in view of the prospects for the exchange revenues for 1377 [89-9], I call the attention of the economic management and the macro management of the country to the destructive role of the free ports in relation with the very limited exchange resources of the country.
On the basis of the reports in the country's media until now although they have imposed billions of dollars expenditures on the country the free ports have not secured any of their original objectives. For how many more years is this very costly trail and error process going to continue? Does our government think that with the exchange revenues expected for 1377 it pay that heavy price? Should we witness the import of consumer, and mostly luxury and unnecessary, goods while our production units are operating at a very low capacity because of the exchange limitations?
Even if the government concludes for whatever reason that the import of such goods is necessary for the country why are they not opening the way for the customs system?
My proposal is that a salvation committee should be set up for production. We are putting extraordinary pressure on producers.
Q: WHAT IS YOUR VIEW ABOUT THE SEMI-FINISHED PROJECTS AND THE PROBLEM OF SECURING RESOURCES FOR THEIR COMPLETION?
A: When the supporters of the structural adjustment programme were considering foreign borrowing to be inevitable we were strongly opposing it. One of the main arguments was that the capacity creating infrastructure capital is not just exchange and rials and that we have far more serious limitations in areas other than exchange and rials. And inevitably they prolong investment [projects] so much that their utilization would lose its economic justification.
Regrettably attention was not paid to those reminders and the foreign debts were imposed on Iran. A major part of the foreign debts was not related to productive investment either.
A Health Ministry official had an interview some time ago indicating the same kind of problem.
He was saying that because of the pressure groups various hospitals have been built in Iran but there is no demand for their beds. That means expenditures have been imposed on the government for showing off or for political motives.
The official was saying that every year Rls 1,500 bn is spent by the government to make up for the depreciation of those buildings which have no utility.
I think many projects launched because of the pressure groups can be reviewed and reconsidered.
It seems many airports have been build or are being built and they can be assessed within that framework.
At the level of development management there should be serious commitment so that we would not give in to the pressure groups as long as a project does not have technical and economic justification. In this way we should create an opportunity to reassess the semi-finished projects within the framework of the interests of national development.
Q: WHAT POLICIES CAN BE ADOPTED IN CONNECTION WITH THE EMPLOYMENT CRISIS?
A: About the structural adjustment program it is said it has many theoretical and practical contradictions.
According to the official figures the unemployment rate in Iran is 9%. If this rate is true it is on the threshold of the natural unemployment rate. In other words if we consider the ceiling of natural rate of unemployment to be 7% a full employment economy has that rate.
While it is claimed the unemployment rate is 9% the biggest concerns of the macro management in the country and also various areas of management are things such as recession and unemployment. This shows we have tried to be happy with some of the figures whose relationship with the reality is very limited.
I think all those who have made the macro management of the country insensitive by presenting figures like that and analyses like that should be called to account.
A similar thing is mentioned in another areas by some of those who were involved in the structural adjustment program.
The former deputy head of the Plan and Budget Organization for economic affairs at a seminar held at the Planning and Development Research Institute, affiliated to the PBO, a few months ago claimed that the lot of the low income groups improved during the structural adjustment programme.
He said: ``The income distribution in the years of economic reform was better than at times that the official policy of the government has been direct control.''
Indeed this is a very interesting point and we shall be pleased if he and his colleagues explain how the income distribution could improve when the average annual inflation rate during the said period was nearly 25%, when the interest rate had a meaningful increase, when the inventories increased sharply, when the government's undertakings about rationed supply of basic requirements was reduced sharply, when the average number of people supported by every working person increased, when a considerable part of the investments which should have taken place did not take place and when the ratio of taxes to the GDP showed a meaningful decline.
To us this claim is as interesting as the claim that the unemployment rate is 9%, i.e. the country is on the threshold of full employment!
As far as employment is concerned it must be said the structural adjustment program is by nature an anti-employment program since:
- It fans the budget deficit crisis and forces the government to sharply reduce the development expenditures for current expenditures;
- By depreciating the value of the national currency it renders the savings of the private sector ineffective for productive investment;
- It makes existing production units face liquidity crisis because of the said policy and as a result firms have to operate below their capacity;
- By paying heavy interest rates the opportunity cost for productive investment goes up sharply;
- In the name of manpower adjustment it justifies the layoff of employees;
- And by deregulation of imports, especially through the free ports, it causes the bankruptcy of some of the production firms and so on.
It can be observed that naturally by stopping any of those destructive policies grounds will be prepared for creation of job opportunities.
In addition to the above, one of the ways to get out of the existing acute problems is promotion of modern exports. This will not be possible unless the government works out policies for proper relationship between exports and modern producers and unless the impotence and weight of those - who with their propaganda and political and social pressures are guarding the interests of the brokers and speculators in export activities - is reduced to the minimum.
We should also refer to the agricultural production and the destructive effect of the adjustment program.
Another point is that in the 20th century instances in which the price of oil has been determined independent of political-strategic considerations have been very rare. Therefore it is not unlikely at all that after a brief period there will be a reverse of the existing downward trend.
Therefore, one of the important points is the continuation of care about the use of the exchange.
This is exactly like what the developed countries did. When they adjusted their economies on the basis of high prices of oil and reduced their need for oil to a minimum at the time of the reverse oil shock in 1985-6 by taxation they blocked the way for return to irregular consumption of energy.
In fact if we make ourselves committed to tightening the belts destructive exchange events will be prevented and it will be possible to use the oil resources more wisely in the national development process.