The Expectations of The Industrial Sector in Iran: The New Year and The Election

ECONOMYOPINION 15.04.2021
Birkan Kemal Ertan Assistant, Economy

The expectations of the industrial sector, as a crucial dimension of the economy, are significant for the future terms in Iran which get closer to the election with the new year.

The year 1400 in Iran, which started on 21 March 2021, is defined as the year of “Production, Support, and the Elimination of Obstacles” by the Supreme Leader Khamenei regarding the economic agenda of the country like in the past years. The Supreme Leader emphasized the name of 1399, “Year of Production Leap” and suggested paying attention to the support and obstacles in production in the next year in his new year speech. According to the statements of the Supreme Leader, it is important to determine the obstacles in production to minimize them. The significance of the economic development incentives, particularly in the industrial sector, was also stated several times in the speech.

Struggling with coronavirus along with the ongoing sanctions have imposed critical difficulties for the capacity of the Iranian industrial sector in 1399. The government had changed its focus from the industrial sector to the finance sector, especially by supporting the stock market and the stock exchange market for minimizing economic loss. Consequently, the industrial sector was ignored by the government. Nevertheless, the bubble burst in the stock and stock exchange markets put the government into a more troubling position and caused the loss of the political support of the industrial sector to the reformists. Several conservative political elites in Iran, including the Speaker of the Parliament Mohammad Bagher Ghalibaf, made many statements concerning the support to the industrial sector by emphasizing the real sector.

What are the Thoughts of the Industrial Sector about the Economy in Iran?

After the speech of the Supreme Leader which emphasized the obstacles and the necessary support in production for the new year, the Ministry of Industry, Mine and Trade conducted a survey with the actors of the sector. 955 people joined the survey which was held online and included several questions regarding the relevant context. The participants gave multiple answers to the single questions. “What is the biggest obstacle for the production?” was the first question that was asked to the participants. “Macroeconomic Instability” became the most famous answer with 630 votes. It was followed by “High Inflation Rate” with 400 votes, “Liquidity Shortage” with 360 votes, “The Sanctions and the Embargoes” with 330 votes, “Promotion of the non-real sectors” with 249 votes, and “Changes in the Currency Regulations” with 147 votes.

Graphic 1: What is the Biggest Obstacle for Production?

Source: Donya-e Eghtesad

 

The Ministry also asked “Which issue, that is the responsibility of the ministry, does require improvement?” in another part of the survey. 420 people answered the question “The Process of Industrial Licensing” while 415 people chose “The Infrastructure of the Industrial Parks”. 350 people voted for “The Problems about Import” and it is followed by “Financial Allowance for Certain Goods” with 281 votes and “Obstacles of Export” with 280 votes.

Graphic 2: Which issue, that is the responsibility of the ministry, does require improvement?

Source: Donya-e Eghtesad

 

“What Should be the Priorities of the Ministry in the New Year?” was another question in the survey. 620 people answered “Deregulation in the Manufacturing Sector” while 520 people chose “Investment Incentive”, and 380 people voted for “Separation of the Commerce and Manufacturing Sectors”.

Graphic 3: What Should be the Priorities of the Ministry in the New Year?

Source: Donya-e Eghtesad

 

According to the survey, the primary demands of the industrial sector may be categorized as economic stability, financial support, and minimum intervention. However, Iran’s internal and external political processes and the expectations of the sector about these processes are critical for these demands to come true.

Is Stability Possible in the Industrial Sector?

The answers in the survey regarding economic stability represent a process of expectation from the government. The government needs to minimize its problems about the Nuclear Agreement for economic stability. Thus, it may send positive messages to the industrial sector for their expectations. Removal of the sanctions and embargoes thanks to the Nuclear Agreement could reinforce the industrial sector’s demand for economic stability with positive expectations. However, if there were no positive developments concerning the Nuclear Agreement in addition to the continuity of the sanctions and embargoes, the industrial sector’s expectations of stability would not come true. Consequently, the investments in the sector would be suspended. It would cause high levels of volatility in the growth rate of the industrial sector. The economic stability and the recovery of the industrial sector are validated by the industrial sector’s growth data in the last years.

Graphic 4: The Growth Rate of the Industrial Sector* (1390-1399**)

Source: Central Bank of Iran

*Industrial growth rate is calculated according to fixed prices of the 1390s.

** The data for 1399 includes the first 9 months.

 

According to the statistics of the Central Bank of Iran, the industrial sector grew only 1.37% between the years 1390 and 1399. In addition, as seen in Graphic 4, this growth rate includes high levels of volatility. The major reason for the high volatility is the sanctions and the embargoes that Iran has been exposed to in the international community. The sanctions between 2012 and 2018 caused negative shocks in the industrial sector.

It is Necessary to Reduce the Intervention and Make Structural Reforms

The embargoes and the sanctions represent a technical limitation for Iran’s industrial sector. The government regulates the exchange rate, implements import and export restrictions, and imposes high tariff rates to increase resource security and fix the impairment in the international trade indicators in the period of embargoes and sanctions. Nevertheless, these kinds of interventions expand the effects of the negative shocks and cause negative expectations about the future. Moreover, it has resulted in a rise in the informal economic activities of the actors in the sector.

Even though these periodic impacts are peculiar to the period of embargoes and sanctions, the interventions to the sector give rise to irreversible situations like capital flight. The actors of the several sectors, particularly the actors of the industrial sector, shift their capitals to neighboring countries due to the extreme interventions. According to unofficial statistics, capital flight hit 100 billion dollars in the last two years. The increase in the expectations of intervention will certainly enhance capital flight in the future.

The structural reforms, furthermore, are required to be made in the industrial sector. These reforms must include improvements in the complex bureaucratic structure of the Ministry of Industry, Mine and Trade. Due to the fact that the Ministry has responsibilities in both industry, commerce, and mining sectors, there are critical administrative problems in Iran on the issue. The Ministry includes the most important sectors of the state economy and it has several centres of attention. Consequently, this situation represents a drawback for the sectors' development. Apart from the bureaucratic reforms, modernization of the industrial sector’s infrastructure to reach global standards is also crucial. The manufacturing processes in Iran are still far from productivity and the standards of the equipment are insufficient to support productive manufacturing.

The Industrial Sector and the June Election

The new year marks of the Supreme Leader, as the primary determiner of the state’s policies, and the past experiences about the sector reveal the fact that the new government, which will take over the administration in June, needs to consider the problems and the demands of the industrial sector. In this context, the conservatives come into prominence by their emphasis on the real sector, regarding the support of the industrial sector which could not find sufficient appreciation in the era of reformists. Furthermore, if the ideological and political harmony between the Supreme Leader and the conservative government is taken into consideration, the conservatives may seem more appealing to the actors of the industrial sector. In addition to their harmony and support, the conservatives’ demands for stability in the industrial sector and wishes for reducing the intervention are also remarkable. The industrial sector wants to minimize the negative impacts of the sanctions and embargoes or full removal of them. Consequently, they will follow the developments about the Nuclear Agreement closely and shape their future strategies and expectations under these developments. Loosening the interventions, as the marks of the sanction and embargo period, becomes more of an issue in this regard.

Iran, Industrial Sector, Sanctions, Instability, Reforms

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