Home Economy Iran’s Economy Has More Capital Depreciation Than It Has Capital Production

Iran’s Economy Has More Capital Depreciation Than It Has Capital Production

Iran's economy has undergone massive upheavals over the past years.

Inflation stagnation, currency jumps and sanctions imposed on the regime due to regional terrorism and the nuclear and missile program are three factors that have exacerbated previous structural crises that have severely crippled the Iranian economy in the past two years.

The results can be seen in the turbulent economy and the livelihood of the Iranian people.

Like all social issues and problems for which the regime avoids providing accurate statistics, the central bank of Iran does not officially release economic growth statistics like the other statistics of the country.

But the System Productivity Organization, based on data from the central bank, has calculated that the economic growth rate has fallen from -5.4 percent in 2018 to -9.4 percent in the first six months of 2019.

In a way, for the first time, the Iranian economy has crossed the confluence of capital production and depreciation, and so has passed the so-called threshold of capital depreciation.

With this way of functioning, the absorption of capacity and growth in the economy of Iran will become an unattainable dream.

On economic growth and productivity share of 2019, and according to the calculations, the economic growth rate in the 2018 year was -5.4%, of which the productivity share was -6.1 percent and the share of production factors was 0.9 percent.

To calculate these indices in the first six months of 2019, the official statistical authorities of the government deliberately failed to perform their duties and refused to provide statistics on labor and capital stock.

According to calculations carried out by the National Organization for Productivity of Iran, based on figures released by the central bank, economic growth in the first six months of 2019 fell 9.41 percent compared to the first six months of 2018.

This is also referred to in the economy as “burnt welfare”.

Given that gross fixed capital formation is one of the key factors in achieving economic growth and development, governments are striving to achieve higher economic growth by strengthening the capital market by applying transparent rules and regulations.

The purpose of investment is to create new production capacity so that it can attract the labor force and cover the depreciation of existing capital. In this case, economic growth will be positive.

But if the new investment is not providing for the depreciation and effective labor supply, economic growth will not come to pass, and if is the economic growth is positive for a short period of time, it is due to the activation of idle production capacities.

Accordingly, for the first time in the country’s 50-year history, capital consumption (depreciation) has surpassed its formation (production); that is, new investments in 2019 have not even offset the depreciation of fixed capital.

Thus, not only is there no new production capacity or absorption of effective labor (employment), but the capacity of the country’s production has also been reduced.

In other words, if we consider a ratio whose denominator is the capital stock of the economy and the numerator is the amount of annual investment, the downward trend of this ratio means a decline in the capital of the economy, which would result in negative economic growth.

According to statistics provided by the central bank of Iran, this ratio has been going down sharply since 2008.

With the decline in the ratio of investment to GDP, the rate of capital accumulation has slowed, and with the continuing decline in the ratio of investment to the inventory of capital and reaching the threshold of the depreciation rate of capital, the inventory of capital has also decreased.

If this trend continues, production capacity will be narrower, and negative economic growth will be unavoidable; low economic growth will exacerbate the scarcity of current resources in the economy (further reducing investment).

Continuing this cycle will eventually exacerbate economic problems, unemployment crisis, and widespread poverty.

The formation of gross fixed capital in Iran has decreased from about 1,200 trillion rials in 2004 to 1,038 trillion rials in 2018.

Investigating the change in the share of investment from the country’s GDP in recent years also shows that the share of this variable has declined from about 32 percent of GDP in 2004 to 15 percent in 2018.

Statistics on the Gross Domestic Product (GDP) of the country at constant prices of 2011; in recent years, indicate that this variable does not have a stable and growing trend, and has gradually slowed its growth and, after 2011, completely declined and decreased significantly.

This is worse for the inventory of capital in machinery so that after a sharp drop in 2012, the downward trend has continued.

It should be noted that the proportion of investment in Iran in the early 2000s was between 30% and 32%, but the major share of investment in this decade was in the real estate sector, with a smaller share dedicated to strengthening economic infrastructure and highly productive sectors with (high value-added).

This is while achieving high economic growth requires a significant percentage of GDP (40%) to be invested in productive sectors and economic infrastructure.

The Iranian regime’s economy was never successful in attracting capital and using it efficiently for four reasons:

  1. Failure to attract foreign direct investment (FDI) due to financial underdevelopment and instability in the regime.
  2. Decline in private sector investment due to unsuitable business environment and economic outlook, inflation and economic and political instability.
  3. The deadlock of the country’s economy (70% of the economy is owned by the government and the IRGC) and the dependence on oil revenues that have been severely curtailed by sanctions and crises.
  4. Investing in unproductive and low-income sectors (insufficient investment in high-quality infrastructure and productive sectors)

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