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Will new 5-year plan solve Iran's economic problems?

Iran's incoming parliament is set to debate the government's ambitious five-year development plan, but will the plan be enough to address the country's economic needs?
Gas flares from an oil production platform at the Soroush oil fields in the Persian Gulf, south of the capital Tehran, July 25, 2005.  REUTERS/Raheb Homavandi/File Photo - RTSG4X4

In an interview on Iranian television earlier this week, newly re-elected Speaker Ali Larijani stated that "the economy would be a top priority for the new parliament" and that the finalization of the sixth Five-Year Development Plan would be treated with urgency.

The plan, which covers the period from March 20, 2016, to March 20, 2021, is still waiting for final parliamentary approval, as the outgoing assembly did not have enough time to debate the bill presented by the government last year. As such, the new parliament will have to discuss the detailed bill and finalize it as law. Considering the fact that there is greater affinity with the administration of President Hassan Rouhani in the new parliament, it is relatively safe to expect few changes to the text of the bill. The question is whether the plan includes those economic, structural and legal reforms that will be needed to generate an economic momentum in Iran.

As in previous planning cycles, the initial strategic goals of the plan were formulated by the Expediency Council and then issued as a decree by Supreme Leader Ayatollah Ali Khamenei. The original decree foresaw a number of objectives that have been addressed in a nuanced way in the final bill presented to parliament. Below, I will discuss some of the main features of the plan, especially contrasting the original objectives with its final text:

  • Khamenei's decree set the goal for an average 8% economic growth during the five-year period. The plan uses the same 8% objective, but underlines that an average 2.5% annual growth should be generated through "efficiency improvements." This is a noteworthy objective, and economists have argued for some time that Iran needs to increase efficiency on all levels. Interestingly, Article 18 of the plan even obliges "the judiciary" and "armed forces” to observe the "efficiency improvement cycles" in accordance with the "National Efficiency Organization." This is a reminder of the complexity of the power structure in Iran and the need that all state entities to follow the same patterns to achieve greater results. From a quantitative point of view, the only way Iran can achieve an average 8% annual growth will be through significant efficiency growth, which further underlines the need to adopt the latest technologies and continue modernization of Iran's infrastructure.

  • The decree focused on the need for "continuous improvement of the business environment and competitiveness" — a topic that is addressed throughout the plan in different forms. This includes the drafting and implementation of a new taxation law by March 20, 2018; empowerment of the so-called competition council that will prevent monopolies; greater transparency in the relationship between the government and key market players (read: greater transparency about rent-seeking); and anti-corruption campaigns.

  • Both the decree and the actual plan have multiple references to the need to modernize the financial sector. This includes provisions such as improving the performance of capital markets and insurance companies with the participation of domestic and foreign investors; increasing the regulatory role of the Central Bank of Iran (CBI) over the banking sector with a clear objective to prevent corrupt practices; an end to the operation of financial institutions that are operating without a CBI license (read: religious savings and loans funds); achieving a better balance in the share of bad debts in Iranian banks; and obliging the banks to extend more loan facilities to small and medium-sized enterprises. In the plan, there is also an objective to increase the market capitalization of the country's stock markets to 90% of gross domestic product (GDP), which seems like an impossible task from today’s perspective considering that the current market capitalization of the Tehran Stock Exchange is less than 25% of nominal GDP.

  • Both documents have stated the goal that necessary incentives should be provided to absorb foreign investment. The plan even quantifies the goal by stating that $12 billion worth of foreign direct investment (FDI) should be attracted per year. While achieving the mentioned target would be a major improvement over the current level of FDI, it is still well below the level that the Iranian economy will need in the next few years. At the same time, a serious absorption of FDI will also require judicial and structural reforms that are outside the government's control.

  • In line with the provisions of the decree, the plan also foresees that by the end of the 5-year period, 30% of petroleum export revenues would be deposited in the National Development Fund (NDF), which is Iran's sovereign fund. This will be achieved by increasing the deposit rate by 2% each year from the current 20%. The plan also underlines the NDF's obligation to grant foreign currency loans to the country's private sector — a task that had been forgotten in the past few years.

The plan offers a number of other goals and objectives, such as reaching a Gini coefficient of 0.34 by March 2021; achieving a single digit inflation rate of 8.9% and an unemployment rate of 7%; improving Iran's ranking in the ease of doing business index to 70 from its current place of 118; reducing the budget dependency on oil export revenues to 22% from the current 31.5%; increasing the share of tax revenues in the GDP to 11.5% from the current ratio of 6.5%; and realizing a ratio of government revenues to expenditures of 105.6% from the current figure of 68.4%.

Another interesting stated objective is that the plan obliges the government to transfer 25% of its operational and service activities to "professional networks, the private sector and Community-Based Organizations (CSOs)" within the five-year period. This is an important reference to the government's desire to empower CSOs and allow them to take over activities that had been conducted by government agencies before. One of the upsides of this approach is its potential impact on reducing the level of petty corruption in agencies that offer government services.

The plan is also explicit about some of the key economic and industrial objectives over the next five years, such as the expansion and modernization of the rail sector; promotion of value-added activities in industry and mining; greater export orientation and the prioritization of strategic industrial sectors, including oil, gas, petrochemicals, transportation, construction, information technology and agriculture; and increasing the penetration rate of high-end technologies in these sectors.

All in all, the plan promises to provide another good basis for needed reforms in Iran, but as history has shown, the problem in Iran is not a lack of proper laws and regulations, but an unwillingness or inability to implement them. Therefore, it would be more appropriate for the Rouhani administration to improve the country's bureaucratic structure and capabilities and to prepare the ground for the implementation of existing and emerging laws.

It remains to be seen how the new parliament will debate the provisions of the plan and which of its elements will actually be implemented.

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