Jun 24, 2019

Having access to working capital is considered the most basic requirement of manufacturers in Iran. Under normal circumstances, industry generally obtains liquidity from four main sources: financial institutions, the National Development Fund, the capital market and, ultimately, credit lines and foreign investment.

Accessing capital is becoming more vital, but also more difficult in the presence of barriers imposed by Washington's "maximum pressure" sanctions campaign on Iranian banks and companies. The Iranian government seems to be left with perhaps two options to sponsor domestic industries: the stock market and the banking system. But the Iranian equities market is not deeply developed or investor-friendly. As such, Iranian firms currently are largely reliant on domestic lenders to meet their day-to-day cash requirements. However, the failure of the Central Bank of Iran (CBI) to implement modern monetary policies in past years complicates the situation.

Economic logic says banks' scarce resources ought to be allotted to profitable businesses to reinvigorate them, rather than to those already on the verge of bankruptcy. Although the liquidity shortage has been a core problem for manufacturing plants, Iran's business climate will not be improved by recklessly pumping cash into them.

In the National Business Climate Survey, released in April and conducted by the Iran Chamber of Commerce, Industries, Mines and Agriculture over the first quarter of fiscal 2019-20, respondents said three factors are mainly responsible for the unfavorable business environment: unpredictability and changes in the price of raw materials and products; the instability of economic policies, regulations and procedures for businesses; and the difficulty of getting bank financing. As the report confirms, the helicopter money policy that CBI firmly follows to try to improve Iran's business climate didn't count as a major hurdle for production.

It is evident in this survey and similar academic studies from previous years that the government’s unwise price intervention has led to the failure of well-performing Iranian enterprises. This potentially could speed up shut-downs and slow any job creation there might be, plunging the economy deeper into recession.