Challenges of Iran's Economy in 1396

Many economic actors such as investors, entrepreneurs, and traders active within Iran's economy are interested in outlining the economic outlook for the coming year. Such an outlook helps them shape their economic behavior to mitigate risks and maximize their benefits. Naturally, if challenges and risks—both political and economic—increase, the willingness of investors and traders to cooperate with Iran will decline. Iranian citizens and consumers will also adjust their consumption, savings, and investment based on these risks. These future risks and challenges will influence consumption patterns, investment flows, capital movement, and economic growth. Among the challenges that could impact and threaten Iran's economy, three significant challenges will be addressed in this note. The legacy of the past: The dependence of Iran's economy on oil continues to make it vulnerable to global oil market fluctuations. This issue, which cannot be resolved in the short term, combined with a government-dominated, opaque, and corrupt economy dominated by semi-state entities, makes Iran's economy less efficient. Additionally, low productivity, a still high international inflation rate, budget imbalances, and structural problems within the banking system are other grim legacies that will carry over from last year to the next. Within such structural shortcomings, Iran's economy heads into the coming year. These institutional deficiencies render Iran's economy vulnerable to political and economic risks. "Presidential elections" as a risk factor: Many political and economic observers in global risk management institutions are closely monitoring political developments in Iran, particularly how the "presidential elections" next year will unfold. From a socio-economic perspective, free, competitive, and fair elections are a prerequisite for increasing public trust, social capital, and political and economic stability, which naturally leads to sustainable economic growth. In the absence of such conditions, social capital in Iran is limited and at risk. Despite the shortcomings of Iran's political and electoral system, the outcome of next year's elections is of great significance. If the executive branch falls into the hands of hardliners and extremists, internal and international tensions will naturally increase, and thus, one cannot expect the international capital market to welcome investments in Iran. However, even if Hassan Rouhani were to regain the presidency in a weaker position—which is not unlikely—the enthusiasm of market players for cooperation with Iran will not remain as warm as before. Ongoing tensions among power centers such as the Revolutionary Guards, the network of Friday prayer leaders managed under the Supreme Leader, and the government apparatus have effectively led to a duality of sovereignty, which observers consider a risk factor. Additionally, Tehran's desire to transform Iran into a regional and international power and tensions in the Middle East, especially concerning Saudi Arabia and the Gulf monarchies, add to the risks. "Banking system problems": On paper, Iran's banking system is still active and apparently not under significant stress. However, behind this false calm, many of the assets of Iran's banking system are toxic and have lost their paper value. Many of the bank guarantees for large loans held by banks have little market value. In support of this, Youssefian Molla, a member of the anti-corruption headquarters, states: "Some have taken loans from banks but did not use them properly, and in many cases, inappropriate collateral was taken from them or their collateral assessments were unrealistic." He also adds: "Many individuals who received billion-dollar loans did so in collusion with the banks." Therefore, the assets of banks do not reflect the true market value of their assets and are generally insufficient to cover their debts. Currently, Iran's banking system has engaged in unhealthy competition to expand its share of the credit and banking market, keeping deposit interest rates high despite decreasing inflation rates. Alongside this policy, the interest rates on loans are also very high, resulting in high financing costs for economic enterprises, especially for medium and small enterprises. This is one of the barriers to the transmission of economic growth to other economic sectors. The accumulation of liquidity and the risk of renewed inflation: The growth and accumulation of liquidity have continued significantly in recent years, but at the same time, due to deep recession, the velocity of money has decreased. Additionally, investors prefer to neutralize risk by depositing their funds as idle savings in banks. This is because bank deposit interest rates are high and, in some cases, even exceed inflation. Evidence of this decrease in the velocity of money is reflected in recent statistics provided by the Central Bank Governor, indicating that nearly 45% of banking resources are frozen, with 15% related to banks' claims against the government. Statistics related to transactions of capital goods such as housing and cars also indicate a decrease in money circulation. Therefore, the inflationary effect of increased liquidity has been neutralized by the decrease in the velocity of money due to deep recession and the contractionary policies of banks; otherwise, the inflation rate should be higher than what we are witnessing. However, an increase in economic growth rates this year and next year is not unlikely to bring idle capital into the market and activate it in speculative activities. Such a development could contribute to inflationary waves. In support of this, a recent IMF mission to Iran states: "It is expected that the point-to-point inflation rate will temporarily rise to 11.9% by the end of 1396 due to high liquidity growth and inflationary effects from recent currency rate increases." In this context, renewed criticism of Rouhani's economic policies has emerged, this time from the Friday prayer podium, where the Central Bank announced the preparation of "the second list of major bank debtors" and the Ministry of Economy accused Ahmadinejad of "interfering" with the Central Bank.