Iran: What’s Behind the Biggest Economic Crisis in 40 Years
Marina Forti 26 February 2019

Iranians are preparing for dark times. President Hasan Rouhani stated this clearly when he presented the 2020 budget to the Iranian parliament, the Majlis, recently. The budget reflects the foreseeable impact of what the government is calling “tyrannical American sanctions”. President Rouhani also admitted that these sanctions have already had a “negative effect on the country’s economy”, although, he added, “the United States of America will fail” because it will not manage to bring Iran to its knees.
Iran therefore finds itself facing a sort of economic war. And while it will not be easy to manage the material impact of sanctions, it will perhaps be more difficult for the government to deal with the sense of uncertainty and pessimism that has become pervasive among Iranians.

The most widespread sense in the country right now is that a window looking out into the world has been closed. The enthusiasm that accompanied the swearing in six years ago of President Rouhani, a moderate elected thanks to his promise to return a degree of openness to Iranian society and implement a diplomacy of dialogue with the world, seems very distant. Back then, expectations were running high; the country was at last emerging from international isolation, which had reached its highest point during the second term served by his predecessor Mahmoud Ahmadi Nejad.


Trump’s election


Degrees of freedom reappeared in Iranian society and the overall hope was that, with the end of sanctions, the economy would at last take off. When the agreement on the nuclear issue came into force in January 2016 (the Joint Comprehensive Plan of Action, JCPOA), optimism was at its highest. Dozens of European business delegations landed in Tehran and Western companies opened offices, investment plans were announced, hundreds of Memorandums of Understanding were signed concerning investments in infrastructure, construction, and the oil industry. All that was understandable since Iran, with its 80 million inhabitants, is a very attractive market. The population is young, well-educated and inclined to spend on consumer goods also. Finally, Iran is rich in oil and gas and other raw materials and is in an excellent geostrategic position.

Donald Trump’s election as President of the United States has frozen all hope. When in May 2018 the United States announced its unilateral withdrawal from the nuclear agreement, business delegations had already vanished and the Iranian currency, the rial, had already started to fall — it has lost 50% of its value in the past year. Economic activity began to slow down even before the new avalanche of sanctions announced by Washington materialized.

These have been applied in two stages between last September and November — initially on the automobile industry and on the acquisition of gold and dollars, then on the hydrocarbon industry. Arguably worse, these direct U.S. sanctions are accompanied by “secondary sanctions” that hit the businesses and banks of third countries maintaining trade relations with Iran. So, even if the European Union and other countries that are partners in the agreement on nuclear issues play no role in these new sanctions — in fact, on 31 January they approved a special financial channel to allow European banks to continue transactions with Iran — privately-owned companies have largely already withdrawn in a hurry to avoid retaliation from the United States.

Returning to the budget presented to the Iranian parliament on 25 December. It must be approved before the New Year begins (the Persian New Year falls on 21 March ). Budget time in Iran is always accompanied by debates in which the demands of various social or professional groups are expressed, in search of support among parliamentary representatives — the current budget is no exception. President Rouhani had a taste of this when he presented the budget at the end of December and was interrupted on a number of occasions by MPs elected in Khuzestan, the south-western province on the Persian Gulf, rich in oil but in many ways backwards and impoverished. These MPs reproached the government for not having addressed the very serious water crisis in the region.

In December, the Iranian parliament’s Research Department, which is not an official statistics institute but is considered a very reliable source, outlined two scenarios regarding the nation’s economic growth, linked to exports of oil and oil products and, obviously, also to the price of oil on international markets. The hydrocarbon market is critical because it is the state’s main source of foreign currency reserves.


Economic slowdown


During the first months of 2018, Iran exported about 2.7 million barrels a day; by September—even before the new sanctions on oil—this figure had fallen to 1.7 million (according to Bloomberg), the lowest level since February 2016. Exports continued to fall, and everything depends on how much further they decline; a million barrels a day is considered the “psychological” floor, below which the alarms go off. In the two hypotheses presented by the parliament’s study therefore, the decline in output may range between –2.6% and –5.5% of GDP. The government, which based its budget on a predicted 1.5 million barrels a day, exported at an average price of US$ 54 per barrel, chose the medium hypothesis.

So even in the very best-case scenario, Iran will be in recession. Austerity measures are therefore being implemented, with the government announcing a cut amounting up to 20% of subsidies on prices, with consequent increases for fuel and water bills. One in ten state employees may be made unemployed. Over the past year the price of food has increased on average by 60% according to the Iranian Central Bank and new increases are coming.

All in all, the economic slowdown caused by sanctions will first of all affect those with modest incomes and therefore the large Iranian middle class. This will happen also because unemployment is above 25% of the labour force according to official estimates (but many are ready to bet that the figure is higher), and affects 50% of the well-educated young in a country in which two-thirds of the population is under the age of thirty and the level of education is high, meaning that an entire generation feels cheated of its future.

The social unrest sweeping the country bears witness to this sense of despondency, with workers demanding their unpaid wages, farmers affected by the drought, teachers and students protesting. These protests are often limited and localized cases involving one or another company or office and therefore remain fragmented and thus largely unnoticed. At other times the protests make the headlines, as happened last summer when a truck drivers’ strike became a national protest, or as happened in October when the nation’s teachers took to the streets.

The case involving the Haft Tappeh sugar factory in Sush, in Khuzestan, where workers protested for months demanding their unpaid salaries, was also widely reported. Their battle gained great support in the country and the arrest of two activists, the workers’ representative Ismael Bakshi and the journalist Sepideh Gholian, caused a sensation, so much so that they were released (but both were arrested again on 20 January).


No water


To complete the picture, Iran is experiencing a very serious drought, perhaps worsened by mistakes made in managing water resources. Water shortages have fuelled protests in the provinces of Khuzestan and Isfahan. Environmental activism has also now become the target of security forces and in the past year the intelligence branch of the Revolutionary Guards has arrested eight people accused of spying. At the beginning of February, a group of MPs appealed to President Rouhani asking him to clarify their situation (as reported by the Ilna Agency, considered close to reformist elements).

Faced with a new series of sanctions, the government has adopted a policy of “crisis management”. Its priorities are those already announced in parliament last autumn, mostly to guarantee provision of essential goods, battle corruption, guarantee social services, stabilize employment and address the housing crisis. They also include reform of the banking system (in particular so as to comply with international regulations), guaranteeing liquidity for businesses and creating jobs. All in all, the government’s priority is to avoid stagnation.

Many commentators have spoken of the long war between Iran and Iraq, which lasted eight years (from 1980 to 1988), when the Iranian government was able to avoid shortages and stockpiling. In the meantime, while foreign companies leave and investment falls away, economic activity has concentrated increasingly on large, semi-public groups. One example is the announcement that construction of new subway lines in various Iranian cities will be entrusted to Khatam al Anbia, an engineering and construction company owned by the Revolutionary Guards. Once again sanctions have strengthened the Islamic Republic’s “strong powers”.

Early in February, during ceremonies marking the 40th anniversary of the Islamic Revolution, Rouhani declared that Iran is experiencing the most difficult economic challenge of the past four decades. It is hard to imagine how things today are even more difficult than the war economy of the 1980s. But perhaps the point is that at the time expectations were very high, while now Iranians only see darkness.


Translated from Italian: Francesca Simmons


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