Making up for the past? An overview of Iran’s new economic policy package

Published August 3rd, 2014 - 04:40 GMT

On July 26, the administration of President Hassan Rouhani released its new economic policy package for the country to emerge from stagflation.

The administration released a new short-term economic policy to push the country out of the current state of stagflation. This report identifies financial shortages, slump in domestic demand, and fall in investments, besides the unjust sanctions imposed by the West, as the main obstacles faced by the country. 
The new economic policy is centered on resolving financial shortages and boosting domestic demand, given the unjust set of sanctions by the western countries persists over the next year.
In addition, the importance of increasing economic efficiency, given the limited resources, has also been emphasized upon in the report. 
On the macro level, the government aims to stabilize the economy through a set of monetary, financial, and foreign exchange policies. While on the micro level, overall improvement on ease of doing business has been identified to be a determining factor for the development of the economy. 
Therefore, given the economic challenges faced by the country, the new economic policy is designed to stimulate economic growth through channeling of economic resources towards the most efficient economic sectors with the strongest backward and forward linkages.
The Iranian government’s new economic policy is constructed upon resolving financial limitations on one hand, and stimulating the leading economic sectors to promote exports. The principle goal of the new macroeconomic policies is creating a stable as well as predictable inflation and foreign exchange market, while improvements in ease of doing business aims to create a competitive market and to reduce transaction costs.
The new economic policy released by President Rouhani’s government focuses on four main areas of: 
* Macroeconomic policies
* Policies on ease of doing business
* Financial policies
* Economic stimulants 
The new economic policy, adopted by the government, intends to utilize various economic strategies to channel the limited financial resources towards the most efficient, as well as productive sectors, boost the country’s exports, while reducing dependence on oil revenues. 
Since taking the office, President Rouhani’s administration was tasked with the mission of battling to contain the rising inflation. The government’s plan of action has been to reduce the inflation rate through monetary regulation and macroeconomic stability. The new policy adopted by the government has successfully stopped and reversed the inflation over the past 12 months from 37.5% to 27.7%. 
As outlined in the report, the government intends to boost economic growth through expansion of credit and money supply. 
The dual currency exchange system has imposed significant costs on the economy over the past few years. President Rouhani’s new policy aims to stabilize the currency exchange regime, reduce costs in the manufacturing sector, and increase their competitive edge in the international market. 
The government believes that a stable currency beside a predictable inflation could lay the foundation for macroeconomic stability and consequently the end of stagflation in the country. 
Eliminating the dual currency exchange regime, lowering transaction costs, reforming currency exchange regulations, and identifying instruments to increase the inflow of foreign investment are among the policies prioritized in the new economic policy. 
On the financial front, the government intends to utilize taxation policy, budgetary policy, and settle government debts. The new economic policy would reform the taxation regime, aiming to support the manufacturing sector and stimulate the domestic growth. 
Domestic financial restriction by banks in their lending to the manufacturing sector has further hampered growth and development, mainly due to the increasing of borrowings by the government. 
Given the limited financial resources, as well as the unjust international sanction, the government’s management and repayment of its debt could play a major role in the boosting of credit expansion and therefore domestic production.
The government has committed itself to improving the ease of doing business in the country through less intervention in the market in terms of pricing goods and services, while simultaneously pursuing its policies to ensure the channeling of financial resources to the most productive and efficient sectors of the economy.
Small and medium sized enterprises (SMEs) have had limited access to financial resources and bank credits. Therefore, the banking and credit policy included in the new economic policy is to regulate the banking sector and to make financial resources easily accessible to SMEs.
President Rouhani’s government focuses on an efficient channeling of financial resources and export-led growth as the main stimulus of economic growth for the country to emerge out of stagflation. 
Furthermore, beside export-led growth, financial allocations and non-oil export, stimulating domestic demand could play a major role in short-term as well as long-term economic growth.
Fall in domestic demand beside lower profitability of the manufacturing sector has exacerbated the current recession. Stimulating demand through monetary policy, given the limited financial resources could, in turn, worsen the inflation. 
Therefore, the growth of non-oil exports has been recognized as one of the main objectives of the government. Non-oil exports would not only lift up domestic demand, it would also bring down the reliance on oil income and diversify the country’s financial resources.
The oil, gas, and petrochemical sector holds a paramount position in the Iranian economy. Having significant backward and forward linkages with various sectors across the economy, development of the oil, gas and petrochemical sector could, in short- term, stimulate production and economic growth. 
To achieve this goal, the new economic policy has put particular emphasis on increasing both energy production as well as consumption efficiency. 
Among the policies adopted by the government are, 
* Investment in roads and public transport, introduction of 17,000 buses as well as 37,000 taxis across the country
* Increasing the efficiency of the national railways
* Boosting the country’s gas exports
* Producing 700,000 barrels of crude oil per day from West Karoun oilfield
* Increasing petrochemical exports from $9.9 billion currently to $12.2 billion in 2014-15

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