Iran presented its first budget after re-introduction of US sanctions that has been adjusted according to the economic restraints faced by the country. The budget speech was a sketchy purview of the economic measures to be taken and most of it was devoted to condemning American sanctions. Responding to the challenges faced by the country, the budget announced a 20 percent increase in public sector wages. The economy of the country is reeling under rampant inflation and the local currency Rial has been tremendously devalued.
Iran faces embargo on its oil exports considered the most crucial aspect of the country’s economy. The country’s oil production is already reduced to 2.5 million barrels per day that hardly is able to meet the financial requirements. Though the US granted waivers to eight key buyers of Iranian oil including China, India and Turkey but this measure also carried the adverse side-effect of bringing down the oil prices. President Rouhani’s government is left with no option but to pursue a resistance economy.
The economic woes faced by Iran presently are enormous as the American pullout from Iranian nuclear deal pummeled the economy. The worsening economic situation compelled the Iranians to secure their savings in dollars and gold and Trump’s withdrawal triggered a run on the Iranian rial that has since lost around half its value. President Rouhani alluded to this fact when he mentioned that at one point early this year the foreign exchange reserves of Iran were practically zero. The government has pressured exporters to return their dollars to Iran and they would lose tax incentives if they failed to repatriate their cash.
Iranian central bank used the returning dollars to shore up the collapsing rial which has recovered to around 110,000 per dollar on unofficial exchanges. The rial’s fall drove up prices across the board, with food and drink costs up 60 percent in the year. The country’s judiciary launched a fierce crackdown on currency speculators, dubbed “economic disruptors” that has seen dozens of traders put on trial and at least three businessmen executed. The so-called “sultan of coins”, Vahid Mazloomin, was hanged in October after being found guilty of amassing two tons of gold coins.
The current placement of sanctions is nothing new and so is the endemic fraud found in the economy as the country is riddled with scores of other problems including bad loans and domination of key oil and gas sectors dominated by semi-state groups that have opaque links to the government and the military. The economic uncertainty was so overpowering that the budget was delayed several times as it was reported that the supreme leader had demanded unspecified changes to the final budget document.
The US sanctions drove away much of the foreign investment making the IMF to downgrade the country’s economic growth and the economy will shrink by 3.6% next year. The economic problems are existent in the economy and sanctions have aggravated them. Iranian economists consider the banking system as the biggest problem confronting the economy. Half of the banking loans are not performing and there is hardly chance of recovery of almost worth around $27 billion at the time. The banks tried to attract fresh deposits by hiking interest rates to 30 percent.
Most of the bank loans are tied up in unsellable properties after pumping cash into a construction boom that ran out of steam around 2013. There are close to two million empty houses in Iran and there is hardly any demand for them. Government is trying to prop banks up and is loath to let them fall fearing strong public backlash.
The country suffers from capital flight and the central bank has repeatedly warned of horrific growth in money supply. The cash flow in the economy has seen an increase of 24 percent every year since the last four years. In the absence of profitable and secure investment avenues the people convert rial into dollar and any fall thereof damages their investments. To stem the tide the government at one time forcibly shut down exchange houses and tried to fix the rate at 42,000 rials per dollar but the move multiplied panic and increased the volume of black market.
The damage to imports is extensive as they are vastly more expensive as sanctions make it harder to move goods into the country. The state-controlled industries such as steel and petrochemicals are given large subsidies totaling around $40 billion but these outfits have failed to create jobs and have brought in poor returns. These industries are dens of rent-seeking and corruption.
Iran is one of the rare countries that is enormously blessed with oil wealth but its governance system is considered out of date with the prevailing systems. Its diehard policies against its opponents have created much bad blood about it. Its regional ambitions have also caused widespread discord and have pitted many of its Arab neighbours against it.
Syed Amin-ul-Hasan is a management expert