Significant Macroeconomic Events in Iran Last Year and the Outlook Ahead

Iran's economic events in 2017 were numerous, but several macroeconomic changes seemed relatively more important than others. Alongside long-term structural challenges such as Iran's dependence on oil revenues, inefficiency in macro management, widespread corruption, military dominance—especially by the Revolutionary Guards—over a significant portion of Iran's economy, ineffective governance, and a weak and corrupt banking system, Iran witnessed some events in 2017 that were both positive and negative. Positive economic trends included an increase in crude oil prices, consequently raising the government's foreign oil revenues. Additionally, transactions in the housing market increased in the second half of the year, a result of a series of measures taken by the government, including lowering deposit interest rates and loan rates. The reduction in deposit rates led to dormant deposits being withdrawn from banks and, in the absence of suitable investment channels, flowing into the currency and housing markets. However, had investment opportunities in economic units been available, these resources could have accelerated economic growth. Economic growth in Iran continued, albeit in a more limited manner than the previous year. Most of this economic growth was observed in some large industries, as Iran's economic growth, within its current structure, is a product of oil sales and the injection of oil revenues into large state-owned industries that benefit from cheap dollar rents and a non-competitive market environment. Therefore, this growth is neither endogenous nor widespread; as a result, a significant portion of industries, especially small and medium-sized enterprises, remain in recession or operate below their nominal capacity. Such growth cannot solve the unemployment problem nor improve the real income and living standards of citizens. Finally, limited growth in foreign trade was another positive trend observed. However, the increase in Iran's foreign trade was less than expected and did not meet set goals. One of the obstacles to the growth of Iran's foreign trade was banking problems and political tensions in the international arena. Despite improvements in some economic indicators mentioned, several economic variables did not show a positive trend. The unemployment rate remained high, and the effects of limited economic growth could not transform the employment rate. Furthermore, although the average price index remained in single digits based on official government statistics, the prices of essential goods, such as food, rose sharply. Consequently, workers and wage earners felt the high inflation rate of essential goods, which constitute a significant portion of their expenditure basket. Despite the slight growth mentioned, recession remained in significant sectors of Iran's economy, and many economic units delayed or failed to pay their employees' wages. The volatility and repeated record highs of the dollar were also events that cannot be overlooked. Despite the government's efforts to unify the exchange rate and stabilize the market, success was not achieved. Therefore, the government resorted to a shortcut by imposing strict controls on the currency market. Such measures mean short-term suppression of the currency market, aimed at preventing the devaluation of the rial and the government, which is a political objective. Implementing such policies will, of course, incur significant long-term economic costs. Sustainable balance in the currency market requires improvements in fundamental macroeconomic variables, such as reducing inflation rates compared to international averages, increasing currency inflows, or reducing actual demand for it, which demand other policies that the government cannot implement. Ultimately, with the implementation of the JCPOA and the arrival of political and economic officials from around the world, especially Europe, in Iran, it was expected that the government would reap the political and economic fruits of the JCPOA by overcoming sanctions and expanding banking relations with the world, leading to increased foreign investment in Iran. According to government officials, to improve the economy in Iran, approximately $50 billion must be attracted annually to achieve high and sustainable economic growth, reduce unemployment, and improve purchasing power and living standards. Western economic circles, despite expressing eagerness to cooperate with Iran, hesitated in taking practical action, as they still did not assess the situation in Iran as stable. With increasing tensions between Tehran and Washington, a significant portion of the positive economic and trade atmosphere following the JCPOA dissipated, and Iran's economy could not achieve tangible and widespread results from the post-JCPOA period; thus, the economic relationship between Iranian banks and businesses with the world did not improve as expected. The outlook for 2018 appears bleak, given the recent shifts in Donald Trump's administration and criticisms of missile activities and murmurs surrounding sanctions against Iran's missile program. There is not a particularly positive outlook for Iran's economic opening to the world, and tensions between Iran and Western countries may even increase unless Tehran accepts new and serious changes. Furthermore, one of the significant obstacles that, despite any improvements, makes the outlook for the next year precarious is the lack of capable and coordinated governance over Iran's economy. The governance and various power and policymaking institutions in Iran have not been efficient and lack coordination. This is why the public sector, semi-public sector, and finally the Revolutionary Guards' empire each control part of this economic fiefdom of Iran without the necessary managerial competence, endangering the political and economic stability of the country.