Posted with permission of Author Kaveh Taheri. This is significant for several reasons. Iran has unleashed chaos on the Middle East for years, watch how things unfold with President Trumps latest move. While Americans are distracted with turmoil here, it’s more important than ever to keep a watchful eye. I’ll write more in my next post. I urge you to pray for the innocent people of Iran.
By Pooya Nasseri and Kaveh Taheri
Today, Iran faces immense challenges to its economy such as the devaluation of its currency, government budget deficits, high inflation, recession, debt, corruption, pension fund bankruptcy, and high unemployment rates — all of which have given rise to an economic crisis.
Some research statistics suggest that systematic corruption and a state-run, isolated economy hinder long-term domestic and international investments in the country and, thus, job creation. Despite its local market size, highly educated workforce, natural resources, and strategic location, Iran suffers from a single-product economy behind many other oil-producers in the world. According to the latest studies by the IMF, while most of the MENA countries’ scores in “Doing Business” have improved, Iran has dropped to 173 in the rankings.
Exponential reductions of Iran’s national currency value against international currencies, such as the U.S. dollar, since the Islamic Republic took power in 1979 have caused a crisis in the Iranian economy. Iran’s weak economic fundamentals and factors such as high investment risk, high inflation, a single-product economy, and political instability have negatively impacted the overall economy and have contributed to currency depreciation, including a rise in the volume of liquidity (as state subsidies) that could otherwise be injected into the infrastructure and manufacturing sectors.
Iran is dealing with a situation called “inflationary recession,” in which inflation rises and the economy shrinks, and unemployment remains high.
The World Bank and IMF estimates on Iran’s budget deficit, GDP growth, and inflation are quite concerning for the government. According to the World Bank, Iran’s economy shrank 8.70% in 2019 as compared to 4.85% the previous year. According to the IMF, the recession will continue, and the country’s GDP will shrink further by 6% in 2020; it had been estimated to shrink by 2.7% prior to the coronavirus pandemic. At the same time, the country has a double-digit inflation rate. In July 2019, the country’s 12-month average inflation hit 40.40%, as reported by the Statistical Center of Iran. People are devastated, and the country is suffering from a low labor participation rate somewhere below 45% — and way below the 66% world average — in addition its two-digit unemployment rate, which will climb to over 16% in 2020.
Furthermore, the government is struggling with a growing budget deficit. The IMF estimates a large budget deficit for Iran in 2020. The estimate says the shortfall will be equal to 8% of the country’s GDP. Sanctions and Iran’s non-compliance with international financial regulations led to a major decline in Iran’s total exports and lowered oil exports from 2.5 million barrels per day in 2015 to around 300,000 barrels per day in 2019, even before the drastic plunge in global oil demand due and prices due to the COVID-19 pandemic. President Hassan Rouhani’s cabinet faced a budget deficit of $19 billion in 2017–2018. In order to close the deficit gap in 2020, Iran needs the oil price to be $194 per barrel, which is far from the reality of today’s oil prices and global demand. Therefore, the government is trying to close the deficit gap by raising energy prices and individual and business taxes and manipulating foreign exchange rates.
However, since Iran’s economy is suffering from a lack of investment, low productivity, a low labor participation rate, and a high unemployment rate, closing the deficit gap by increasing individual and business taxes and raising energy prices will just lead to lower GDP growth and higher inflation. On the other hand, the increase in the budget deficit will prevent the government from improving infrastructure, creating jobs, and meeting its obligations, such as increasing governmental employees’ and retirees’ salaries.
The country’s financial and banking systems are also on the pathway to bankruptcy. The financial system faces serious problems such as the high rate of delayed or defaulted loan payments and a high share of fixed assets (mainly real estate) on their balance sheets. The Iranian banking system also suffers from the pension fund system and IRGC-run financial and credit institution’s bankruptcy.
This kind of monetization ultimately leads the country into a deeper inflationary recession and the complete bankruptcy of its state-backed financial systems and government.
Despite Iran’s large local market and resources, no private local or foreign investors, not even resource-seeking investors, are interested in any long-term investment and entering or staying in the Iranian market due to systematic corruption, geopolitical risks, a non-competitive economy, and non-compliance with international trade and financial regulations. In February 2020, Iran went back to the FATF blacklist for the second time, after failing to complete their action plan and enact the Palermo and Terrorist Financing Conventions in line with the FATF Standards. It is important to note that this time, the Islamic Republic had four years to comply with FATF standards, knowing that going to the blacklist means total disconnection from the international financial network and banking system and therefore international trade.
A double-digit inflation rate, a rise in the unemployment rate, a sharp decline in GDP per capita, currency devaluation, and a lack of investment and job creation, in addition to tax and energy price hikes, negatively impact the cost of living and increase the poverty rate. Greater pressure on the majority of Iran’s population will lead to more unrest and major strikes, like the latest protests that happened in more than 100 cities last November after the sudden gasoline price increases. The government brutally cracked down on the protesters, killing 1,500 unarmed individuals. The gasoline price hike alone will add around another 30% to the inflation rate. The inflation rate is expected to increase as high as 80%. People are losing their purchasing power every year. The 20% annual wages increment mandated by law cannot offset the inflation rate and will result in the shrinking of Iranian families’ basket of goods.
The continuation of Iran’s current domestic and foreign policies and further oil export reductions due to sanctions and the fall of global oil demand after the coronavirus crisis and lockdown will drive the economy into a deeper inflationary recession. The Iranian regime is obviously unable and unwilling to improve the situation, and the ripple effects from the past four decades will lead Iran to experience “Venezuela-ization” unless Iranians succeed in changing the regime and establish a well integrated system with the global economy.
Pooya Nasseri is a San Francisco–based finance and investment manager. She holds an MBA and an MS in Finance from Georgetown University. Kaveh Taheri is a Turkey-based Iranian journalist and sociopolitical researcher.