The Iranian government should increase its transparency to manage public expectations about Iran’s transition to the post-sanctions era, as overoptimism can damage the economy by creating bubbles, says a leading economist.
In an interview with Mehr News Agency, Mohammad Mehdi Behkish, who is also the deputy head of Iran International Chamber of Commerce, said that in the current circumstances, the government should only control enthusiastic behaviors.
Behkish warned that over-enthusiasm about the lifting of sanctions can start rallies in various markets that will end in busts.
“In my opinion, Iran’s economic situation cannot experience extreme and rapid change,” said Behkish, cautioning that uncertainties about Iran’s future economic prospects can lead markets to overreact.
Expectations of Devaluation
The dollar has surged to a three-year high of around 37,000 rials from 32,000 lows in July when Iran reached a deal with the P5+1 (the United States, China, Britain, France and Russia, plus Germany) that will see to the lifting of nuclear-related sanctions against Iran in exchange for limits on Tehran’s nuclear energy program. The rise has been mainly due to falling oil revenues and expectations of increasing demand in future. Some have even speculated that devaluation is in the works. Behkish, however, believes that expectations of devaluation, like the 2011 Iranian currency crisis is unfounded. “Iran’s economy is very different from how it was in 2011,” he says. In the runup to 2011, inflation had reached near the 20th percentile for years, while the rial was more or less pegged to the greenback at 9,000 rials per dollar. In other words, the rial was kept severely strong. The peg was only possible due to windfall oil revenues of over $100 billion a year. However, when sanctions squeezed oil income, other cracks in fiscal policy began to appear and inflation ravaged the economy. The result was a 70% plunge in the rial value, which the government was incapacitated to slow down or control. First, the dollar rose to 12,000, then 18,000 and six months later to over 44,000 rials. It later fell to the 30,000 rials channel and has remained there so far. Needless to say, volatility during this period hit historic records.
But that is not the case now. The rial is not overvalued as it was in 2011. But expectations of extreme changes in the economy in the post-sanctions era can create bubbles, like the boom in equities that has ended in a 30% drop in stock values since they peaked two years ago. Overreaction to these expectations can severely damage Iranian industries trying to recover from a lingering recession.
Misinformation
As an example, many media outlets speculated that Iran would gain access to over $100 billion of its frozen assets after the nuclear deal, called Joint Comprehensive Plan of Action, goes into effect. The sum was an estimate by the White House. The number has since been revised down to $85 billion, with the Central Bank of Iran now saying only $35 billion will be immediately available for spending. Much of the remaining reserves will replenish central bank reserves in repayment of loans given to the government. “The impact of this money on business activity in an economy that has grown accustomed to $100 billion a year will be minimal,” said the economist.
There are similar misconceptions about foreign investment and business performance, especially in the export-driven petrochemical industry, which has been battered by economic turmoil in the past five years. “Even if sanctions are removed, Iran will return to what it was a decade ago.”
Managing Reactions
The cure is transparency. The public should not be kept in the dark about what’s going on in the economy and what’s on the horizon. “What is the problem with having the Presidential Office give updates on what happens in the government?” said Behkish. The current trend of the economy minister and the governor of the Central Bank of Iran giving a heads up on their policies and economic conditions should be reinforced. This, of course, would be against the Iranian government’s past performance. During the 2011 currency crisis and 2012-13 economic recession, the government stopped publishing economic data and forced independent outlets to do the same. When the going gets rough, “we go into a news slumber and this exacerbates the situation. Iran’s system of information production and dissemination is impaired, and I dare say it’s backward,” Behkish said. Governance has changed in the past decade and Iran should catch up. Managing public opinion is lacking in Iran. “We should contract foreign universities to teach us how to manage public opinion. To learn what we don’t know, we must ask those with the knowledge,” the economist said.