Stagflation - Exit Package

President Rouhani's administration unveiled its highly anticipated economic report, regarded as 'stagnation-exit package'. The package is compiled with a pathological and causal approach as well as directives for overcoming economic stagnation. The given directives are compiled on the basis of a series of presuppositions, notably 'the continuation of sanctions until March 2015', 'independence from Central Bank's resources', 'managing the Dutch Disease', 'developing employment-driven activities', 'paying careful attention to small and medium enterprises' and 'inability in increasing household revenues'. The rescue package also highlights the major means and pillars of curbing the stagnation. First of all are the driving forces behind oil, gas, petrochemical and mineral industries. Second includes the capital market, money market (banks), state budget and progressive industries. The third pillar includes the potential factors that either aggravate the stagnation or improve the positive effects of economic prosperity. The quality of state budget, enhancing international ties and the predictability of exchange market are among the said factors. Increasing the demands without upping the inflation and reaching prosperity in production is regarded as another important step towards overcoming the stagnation.
The government issued a report, exploring the reasons behind the stagflation ruling over the country over the past few years while suggesting practical solutions. The 'non-inflationary rescue-package' is considered to be a steady escape route from economic stagnation through analytical and well-thought-out plans, without clinging on to emergency measures. It is the first time in well over eight years to see the Iranian government turning to a written, documented and referable approach instead of oral culture when it comes to making grand decisions. The authors of the report have investigated the country's economy through four eras, namely the time of prosperous oil revenues, the sanctions, the arrival of the 11th Iranian administration and the remaining months before the end of the present Iranian year. The notable part of the report is the given solutions for fighting the stagflation through the rest of the present Iranian year, ending late March 2015. The report assumes that financial and trade exchange limitations resulting from the sanctions will largely last through by the end of the year. As a consequence, the country's exchange revenues will be far from satisfactory.
In the explanation of the first assumption -the continuation of sanctions until March 2015- the government has stressed that any measure will have to be taken with taking the present economic condition and the continuation of the sanctions into account.
The second assumption is steering clear of Central Bank's resources. Independence from Central Bank's resources is among the necessities of overcoming the stagflation; thus the report bolsters the taking of control measures in dealing with the inflation as a means of macro-economic stability and winning back the trust of economic players.
Effective management of the Dutch Disease is the third assumption of the report for battling the stagnation. The government underlines that 'spending crude oil revenues on development plans' and 'using exchange rate as a control measure for inflation' have led to the spread of Dutch Disease and the aggravation of economic stagnation in numerous occasions in the past. Therefore, the inflation should not be sought as an alibi for repeating the tried and tested formulas in the country's economy.
Boosting small and medium enterprises is the forth assumption of the rescue package. The government's economic team suggests that it is essential to take small and medium enterprises into consideration when laying the groundwork for overcoming the stagnation, especially since SMEs were on the receiving end of macro-economic inconsistencies over the past few years. Taking certain measures to support large enterprises would effectively curb the stagnation, but will not necessarily lead to the creation of more job opportunities. Holding on to similar measures would possibly increase non-employment growth over the course of the next years.
"Inability in increasing household revenues in line with the increase in the volume of money" has been cited as another influential factor on stagnation. According to the economists involved in compiling the report, the increase in the volume of money with the aim of increasing the demands cannot possibly result in economic growth, chiefly because the reasons behind the country's stagnation through 2012 and 2013 have served to the profit of supply side, while the reduction of households' disposable income and the reduction of deposits and investments have intensified the stagnation overtime. As a consequence, while the supply faces various obstacles such as finance, raw material imports, capital imports and many uncertainties, increasing the demand will only increase the prices and does little to effectively stimulate the market. Hence, the increase in the volume of money would be a fail attempt to bring about prosperity in production and ultimately to increase the revenues of households. Conversely, inflation lowers the level of welfare among households.

The Government's Directives to Overcome Stagnation
President Rouhani's economic team has provided the ways out of the stagnation based on priority; first, the early shocks for overcoming the stagnation; second, the elements that transfer the growth mechanisms of one economic area to other areas, then lateral stimulants positively influencing economic growth, and finally, the factors that carry on the established growth through the time. The report asserts that the causes and the ways out of inflation do not necessarily correspond to each other. Thus, the directives to overcome the inflation should be set under the proposed framework and in line with economic potentials.
The report proclaims: "The aforementioned measures and policies are put forward as a set of comprehensive solutions in response to 'the non-inflationary way out of stagnation towards the supply'. These directives are essentially different from policies designed to overcome single-digit, demand-driven stagnation."
The rescue package report further provides the best solutions to overcome stagnation in a non-inflationary manner. The first of its winning formulas is equipping progressive sectors with Rial and foreign exchange resources as follows: "Three of the four bottlenecks discussed, including the sanctions, effective demands and financing production are plagued with the lack of Rial and foreign exchange resources in order to embark on supply-stimulant measures. Therefore, providing necessary financial resources could be the cornerstone of overcoming the stagnation. As a result, a number of effective elements as 'progressive forces' are discussed that serve as Rial and foreign exchange finances to fight the stagnation. Providing resources in this context is equal to creating new resources or efficient use of resources with the purpose of increasing economic growth."
According to the section above, economic mobility in oil, gas, petrochemical and mineral industries -as progressive economic enterprises- is blocked alongside tourism while the increase in 'accessible exchange' would serve as the preliminary shock for overcoming the stagnation. Furthermore, these sectors can attract Rial or foreign exchange resources along with different sectors such as housing and efficient usage of energy to give yet another shock in alignment with supply-driven economy, all of which will ultimately increase the GDP in the said departments.
The government's thorough report cites progressive enterprises in the domestic market (oil, gas, petrochemical and mineral industries as well as efficient use of energy), industrial exports, contract and consult services to the neighboring countries, tourism, housing and releasing the blocked assets as well as finance among the preliminary means of battling the stagnation. The report also suggests a number of factors that effectively transfer the prosperity of one economic sector to another. Capital market, money market (banks), state budget and progressive industries are transfer industries. In other words, the capital market, stock market and money market not also play a significant role in providing the Rial finance for progressive sectors, but also transfer the economic prosperity of thriving sectors to other industries.
The report says: "Financing the working capital for economic enterprises by the banks may reduce the limitations against the provision of liquidity. Consequently, well-thought-out planning for enhancing the situation of banks in terms of defaulted loans, or turning non-current loans to current loans could increase the power of banks in granting loans. Moreover, planning on turning the stock market to a reliable institution for collecting small savings of shareholders and financing the capital for big economic and long-term investment enterprises would further accelerate the prosperity of the country's industries and services."
According to the stagnation-exit report, the government's budget for construction would increase the country's economic mobility, should resources and capitals be invested in economic infrastructure. It is not to say that the prosperity in upper levels of the economic hierarchy, namely the energy and mine industries alongside financing the capital for investment through banks and stock market would be to the benefit of enterprises whose operations are in line with the operations of large enterprises. The development of low-level industries is a prime example of such mobility. The said factors are collectively effective in the acceleration of oil and gas industries' mobility. Appropriate spending of construction budget, improving the financial condition of banks in terms of defaulted loans and increasing the banks' potential to grant loans, developing low-level energy sectors and banks' movement towards one-year contracts (financing the working capital) are cited as the effective approaches in this regard.
The report further discusses the 'causal' factors in overcoming the stagnation. Causal factors set the intensity level of shocks with regards to stagnation and prosperity. Causal factors may aggravate the stagnation or elevate economic prosperity. The quality of state budget, enhancing global ties for the purpose of attracting investment and importing technologies, stability and predictability of movement in exchange market, improving the business environment for economic enterprises, considerable and steady decline of inflation and reducing the government's role in setting the prices of different products would accelerate prosperity in various economic sectors, according to the report. Taking advantage of budget policies, gradual improvement of foreign exchanges, significant reduction of inflation rates, relative stability of exchange market, relative improvement of business environments and avoiding financial suppression are the effective measures in fighting stagnation.
The report argues that the improvement of the country's supply-driven economy is a decisive factor in spreading prosperity among various sectors and through different periods. The stimulation of demand would bear no fruit in case the limitations of supply-driven economy are not effectively dealt with and the only result will be the soaring prices.
The report asserts: "As a result of attempts to reduce the inflation with the purpose of providing economic stability, the stimulation of demand-driven economy by the means of increasing the liquidity has remained to be an ineffective and incorrect policy. As a result, promoting and facilitating the imports, lowering the taxes, increasing the spending in the construction sector and maintaining competition among domestic enterprises through the adoption of appropriate exchange policies are specified as the stimulants of demand-driven economy without creating inflation. These measures not only increase the productivity in short-term, but are also in conformity with the Economy of Resistance as well as the government long-term perspective for establishing competitive and dynamic production and export units.
President Rouhani's team of economic experts have also examined different approaches for the facilitation and promotion of exports, lowering the taxes, increasing the spending in government construction projects and maintaining competitiveness among domestic enterprises by proposing a set of foreign exchange policies.