UNITED24 - Make a charitable donation in support of Ukraine!


Iran - Economy

Iranís inflation began to rise dangerously after the United States pulled out of the 2015 nuclear deal and imposed sanctions in 2018. Without oil export revenues, the government faced a serious budget shortfall. The currency rial has fallen eightfold since early 2018. Food and housing expenses in Iran have increased between 300 to 740 percent in the six years 2015-2021, while wages went up by around 270 percent. The US dollar rose 730 percent, housing costs climbed 740 percent on average. Housing costs increased in par with the value of the dollar, since Iranian real estate owners regard their investment as a hedge against devaluation, and ask prices and rents in dollars to keep their income intact. Beef and chicken prices have also increased by over 300 percent, while Iranian-produced rice, which is a main food staple, has gone up by 500 percent.

A conservative newspaper in Tehran warned on 26 December 2021 of a ďmajor social explosionĒ if the governmentís proposed new budget is adopted. "If the government's budget bill for the next Iranian year, which starts in late March, is implemented, it will create a lot of problems for the people and might lead to a major social explosion that cannot be controlled," Jomhuri Eslami (Islamic Republic) daily wrote in an editorial. The paper called on parliament to amend the bill.

President Ebrahim Raisi in his televised interview on 05 December 2021 said, "We are not going to surprise the people by sudden hikes in prices." only three days after Raisi promised on live TV that he would not surprise the people, the price of Iranian-made cars went up by 100 to 500 million rials each. This further discredited Raisi because the cars are being produced by or in partnership with the government. Social media users said that "The economic Mafia made the president look like a fool.Ē

In November 2019, a government decision to increase fuel prices led to immediate street unrest, put down by security forces who killed hundreds of people. As a result, the regimeís legitimacy took a big blow. Petrol in Iran - the world's number five oil producer - is cheaper than in most countries. The government in Iran announced 15 November 2019 that - effective immediately - petrol would be rationed and prices would triple. In the early hours of Friday morning, Iranian state television broadcasted a statement by the National Iranian Oil Products Distribution Company saying petrol will now be rationed across the country using smart fuel cards. Vehicles for private use are to be restricted to 60 liters (16gal) of fuel monthly, while the price of petrol will jump 50 percent to 15,000 Iranian rials ($0.13 at open market rates) per liter. Any fuel purchases in excess of allotted rations will incur an additional charge of 30,000 rials ($0.26) per liter.

The Iranian Parliament on 04 May 2020 voted for a government monetary reform bill which will change the country's currency name and drop four zeros from banknotes. Under the new law, which will come into effect after the final approval of the Guardian Council, the national currency unit will change from the rial to the toman with 10,000 rials of today being equal to one toman in the new currency. Currently, 10,000 rials equal 6.5 U.S. cents and the new currency will be worth the same on the free exchange market. During the monarchy 10,000 rials was worth close to $150. The rial will completely be scraped and the toman will be revalued to equal 100 parsehs. The old coins and bills will remain credible alongside the new toman notes during a transition period of two years after which all financial transactions will solely be made in toman.

Iran's president said that U.S. sanctions have cost Iran $200 billion in lost foreign income and investment over the past two years. President Hassan Rohani made the comments while launching a railway project near Tehran on 31 December 2019. "Iran would have earned $200 billion surplus income...if the country were not involved in an economic war," he said. The United States imposed new sanctions against Iran after Washington abandoned the 2015 nuclear deal in which Iran agreed to curb its controversial nuclear program in exchange for sanctions relief and other incentives. Since the United States abandoned the deal in 2018, Iran has lost 90 percent of its oil exports, a key source of revenue. Its currency has plummeted and inflation has surpassed 40 percent. The sanctions have driven away foreign investors and have contributed to a precipitous fall in the Iranian currency, the rial, and a major shrinking of the economy -- which the International Monetary Fund predicts will have contracted by a whopping 9.5 percent over the course of 2019.

Kenneth Katzman, a senior Iran analyst at the Congressional Research Service, told The Washington Post in September 2019 that Iran still has about $100 billion in reserves, adding that under current conditions that would last the Iranians at least another two years. Henry Rome, an Iran analyst at the Eurasia Group in Washington, said Iran's economy will remain in a very difficult position in 2020, while noting that a full economic collapse is unlikely. "Non-oil exports and employment remain robust, and the government is slowly regaining control over inflation and the currency," Rome said. "And the Iranian regime has an ultimate backstop: security forces willing and able to kill their fellow citizens. That very much limits the risk to stability in the near term."

Iran said 16 June 2019 its economy fell into a worse recession last year than international organizations expected, as the United States began re-imposing tough sanctions on Tehranís vital oil industry and other financial sectors. In a report, the Statistical Center of Iran said Iranian gross domestic product contracted by 4.9% in the last Persian year that ended on March 21. The World Bank, a Washington-based institution that provides loans to countries, published a report earlier this month estimating that Iranís GDP shrank by 1.9% in 2018 after growth of 3.8% in 2017. The International Monetary Fund, another global lending agency headquartered in Washington, released a report in April saying it found Iranian GDP contracted by 3.9% in 2018. Both agencies also predicted Iranís recession will deepen this year, with the World Bank forecasting -4.5% growth and the IMF forecasting -6% growth.

By early 2018 the Islamic Republic seemed poised to turn into the Venezuela of the Middle East. The rial had lost more than 50 percent of its value, becoming one the most hyperinflated currencies in the world. The Iranian central bank pegged the rial to the dollar, but in the black market the dollar and other top currencies were still being exchanged two times higher than the official rate. Investors turned to the gold market as a safe haven to preserve the value of their money in the absence of a functioning ďfreeĒ foreign exchange market. Burgeoning real estate prices are largely explained by speculative investments. The key shortcoming in the Iranian economy is the nonexistence of a proper capital market.

President Eshaq Jahangiri said 10 July 2018 that it would be a mistake to think that the new US sanctions against Tehran would have no influence on Iran's economy. Eshaq Jahangiri said that Iran would "sell as much oil as [it] can" despite US efforts to reduce Iran's oil exports, as quoted by the Fars News Agency.

Iranian Supreme Leader Ayatollah Ali Khamenei set an average economic growth target of 8 percent per year during the five years 2016-2021. Some Western diplomats and economic analysts predict that within a decade, Iran's gross domestic product could surpass the economic powerhouses of the Middle East: Saudi Arabia and Turkey.

President Hassan Rohani said on 17 January 2016 that "the nuclear deal is an opportunity that we should use to develop the country, improve the welfare of the nation, and create stability and security in the region." He said Iran should use the expected influx of money and investments to spark the "economic mutation" of the country, which has been suffering double-digit inflation and unemployment rates for years.

Iran needs up to $50 billion in foreign investment per year to reach its goal of eight-percent annual growth, Rohani said. With international sanctions lifted, more than $30 billion in assets overseas would become immediately available to Iran. Official Iranian reports put the total amount of frozen Iranian assets overseas at nearly $100 billion.

Tehran says it needs about $100 billion to rebuild its energy sector and another $30 billion for its mines and steel industry. Iran's automobile factories also need to be upgraded, along with the country's aging civilian and military airplanes.

Much of Iran's aviation infrastructure is based on Russian equipment that could be sent into Iran despite the US sanctions. But the United States had made it more difficult for Iran to upgrade its aging airliners. From 2000 to 2015, there had been more than two dozen major air crashes involving Iranian civilian and military aircraft -- with more than 1,000 deaths. Iranian authorities complain that US sanctions imposed since the 1979 Iranian Revolution have prevented Tehran from purchasing new aircraft or spare parts, even if only 10 percent of the parts were made in the United States.

Iran's nuclear deal includes a long list of companies and individuals involved in Tehran's nuclear program who are to be taken off EU and U.S. blacklists -- unfreezing their assets in the West and removing travel bans. In the financial sector, the lifting of sanctions would allow Iran to borrow money by issuing government bonds on the international market. Iranian banks also would be able, once again, to open branch offices and accounts in EU countries.

A UN ban that had prevented non-Iranian financial institutions from operating offices or accounts in Iran would come to an end. And for the first time in decades, US financial institutions would be allowed to transfer funds to and from Iranian banks and financial institutions -- including the Central Bank of Iran.

Following the lifting of economic sanctions, Iran launched a 2025 strategic economic plan aimed at doubling its USD 415 billion economy. To achieve this mission in the next decade, the Iranian Government has to ease the current climate of economic recession, reduce unemployment and become the largest exporter and the largest economy in the region. Iran has to diversify from its dependence on oil & gas, enhance manufacturing in non-oil sectors, develop a knowledge-based sustainable economy, and attract investments to the tune of USD1.5 trillion. This emphasis on manufacturing growth has opened avenues for Australian companies and investors to participate in Iran's economic momentum as providers of technology, finance and manufacturing process enhancement support.

Ali Mirmohammad, Senior Consultant and Business Development Manager Ė MENASA, Iran, Frost & Sullivan, said March 10, 2016, "Iran needs to increase its annual GDP growth to over 8% in the next two years. Focusing on developing the entire value chain in the mining and petrochemical industries is a priority area to form a good foundation for diversification. Efforts to make the country globally competitive are directed towards creating a favourable business climate for companies to enter and invest in developing its core focus sectors. These investments spanning industry verticals offer huge opportunities for technology providers, engineering and service providers as well as investors."

Australia's Foreign Minister, Ms Julie Bishop stated that a resolution in this area will further economic ties as Australia looks to engage with Iran in a number of ways to advantage Australian businesses. In a demonstration of its commitment and ambition to achieve economic progress in line with their 2015 plan, the Iranian Foreign Minister is travelling with a large economic delegation to offer specific opportunities in metals and minerals, healthcare, infrastructure engineering, as well as agricultural businesses.

"Following the announcement on the Joint Comprehensive Plan of Action (JCPOA) agreements between Iran and 5+1, the Australian government had gradually started economic negotiations with the Iranian government in certain sectors, though were less swift to move in on this lucrative market than Europe was. While Australia currently contributes less than 0.4% of the USD 52-55 billion Iranian import market, it has potential to boost its contribution in the industries of mining, agriculture, medical and medicines, meat, as well as engineering and services. The Iranian Government is keen on attracting foreign investment through BOO, BOT and/or PPP modes and is encouraging joint ventures with local partners primarily in infrastructure, downstream segments of oil & gas, mining and petrochemical projects," added Mirmohammad.

Investment in Iran also provides strategic access to Europe, Africa, Russia and CIS countries. While instability in Iran's current business environment posed some business risk, availability of manufacturing infrastructure, skilled labour, access to over 400 million consumers and importantly low cost of products offer immense opportunities for Australian investors to invest or enter joint ventures with local Iranian partners, targeting not only the local Iranian market, but prospectively increasing market share through access into African, European, Russian, GCC and CIS countries.

Russia has already allocated over USD 40 billion to develop required infrastructure to ease export from Iran, and plans to cut import duties for Iranian companies; a move that would benefit Australian companies in JV's with Iranian companies exporting to Russia.

Other incentives that the Iranian Government extended to foreign investors in Iran include 80% exemption of income for 4 Years in manufacturing investments, 100% of income for 10 years in less developed areas (all investment activities), 100% of Income for 20 years in free economic zones (all activities), 100% of income for no limited time in agricultural business, 50% on tourism income for no limited time and 100% on income derived from exportation for no limited time. Additionally, foreign investors that build factories in Iran and export 30% of their products will benefit from a 50% tax break in addition to other incentives.

Pre-revolutionary Iran's economic development was rapid. Traditionally an agricultural society, by the 1970s Iran had achieved significant industrialization and economic modernization based on an import-substitution model, largely aided by the growing worldwide demand for oil. However, the pace of growth had slowed dramatically by 1978, just before the Islamic Revolution. Since the fall of the Shah, economic recovery has proven elusive due to a combination of factors, including state interference in the economy and fluctuations in the global energy market. Economic activity was further disrupted by years of domestic political upheaval immediately following the revolution.

These conditions were worsened by the war with Iraq and the decline in world oil prices beginning in late 1985. After the Iran-Iraq war, Iranís economic situation began to improve: GDP grew for 2 consecutive years, partly from an oil windfall in 1990, and there was a substantial increase in imports. Iran's social policies during the Iran-Iraq war additionally resulted in a baby boom, which has left Iran with a large, underemployed youth population today. As a result, Iran suffers from a "brain drain" as its educated youth leave the country to pursue better economic opportunities abroad.

In March 1989, the government instituted a new 5-year plan for economic development, which loosened state control and allowed Iranians greater latitude in accessing foreign capital. However, mismanagement and inefficient bureaucracy, as well as political and ideological infighting, hampered the formulation and execution of a consolidated economic policy, and Iran fell short of the plan's goals. Economic growth was further hindered by a decrease in oil revenues in 1991 and growing external debt. Former president Khatami followed the market reform plans of his predecessor, President Rafsanjani, and indicated that he would pursue diversification of Iran's oil-reliant economy, although he made little progress; high inflation and expansive public transfer programs, as well as powerful economic and political vested interests, posed obstacles for rapid reform during the Khatami era.

Unemployment, a major problem even before the revolution, has continued to plague Iran. However, unemployment statistics only tell part of the story--underemployment continues to affect a large portion of Iranís young, educated workforce. Although Iranís poorer, rural population initially enjoyed a psychological boost from the attention given them by the new Islamic government, they are only marginally better off in economic terms. The government has made some progress on rural development, including electrification, road building, and increased access to education, but Iran still suffers from inefficiencies related to agricultural land usage that are politically difficult to reconcile. The agriculture sector still suffers from shortages of capital, raw materials, and equipment--problems that date back to the 1980-1988 Iran-Iraq war.

Although Islam guarantees the right to private ownership, banks and some industries--including the petroleum, transportation, utilities, and mining sectors--are owned or controlled by the government. Under President Rafsanjani, Iran first began to pursue some privatization through its nascent equities markets. However, the industrial sector, plagued by low labor productivity and shortages of raw materials and spare parts, remains uncompetitive against foreign imports.

Today, Iran's economy is struggling as a result of sanctions, a bloated and inefficient state sector, and an overdependence on the oil sector. Although the Supreme Leader issued a decree in July 2006 to privatize 80% of the shares of most government-owned companies, private sector activity is typically limited to small-scale workshops, farming, and the service industry. As a result of inefficiencies in the economy, significant informal market activity flourishes and shortages of goods are common. A combination of price controls and subsidies continues to weigh down the economy, while administrative controls and widespread corruption undermine the potential for private-sector-led growth. Previous government-led efforts at economic reform--such as fuel rationing in July 2007 and the imposition of the value added tax (VAT) in October 2008--were met with stiff resistance and violent protests. In 2010, the Iranian Government passed the Targeted Subsidies Reform, which aims to remove state subsidies on certain commodities and replace them with direct monthly social assistance payments.

Inflation and the unemployment rate continue to be in the double digits. Widespread underemployment among Iranís educated youths has convinced many to seek employment overseas. While Iranís economic quandary may look grim, Iran has fared worse--notably during the Iran-Iraq war.

Due to a combination of factors ó including UNSCR 1929, financial sanctions imposed by the U.S., EU, and other like-minded countries, and foreign banksí interest in avoiding CISADA actions or the reputational risk of doing business with Iran ó the number and quality of foreign banks willing to transact with designated Iranian financial institutions has dropped precipitously over the year 2011. Iranís largest state-owned banks ó each of which has been sanctioned by the U.S., the EU, and several of our allies ó are largely unable to access the international financial system. Iranís shrinking access to financial services and trade finance has made it more difficult for Iran to attract foreign investment, pay for imports, and receive payment for exports. This has exacerbated persistent macroeconomic weakness due to the Iranian governmentís mismanagement of its economy.

One good illustration of the economic pressure resulting from this financial squeeze is Iranís difficulty in defending the value of its currency, the rial. For nearly a decade, the CBI has supported a single, official exchange rate for the rial, using hard currency earned through oil sales to stabilize it. Since the adoption of UNSCR 1929 and various UN member statesí actions to implement the Resolution, however, the CBI has struggled to maintain stability in Iranís currency markets. Sanctions have increased the cost and difficulty of accessing adequate foreign exchange, weakening the CBIís ability to respond adequately to pressures in currency markets, particularly as accelerating inflation has exerted unusual pressure on the rial exchange rate. This has produced a multiple-tier currency market in Iran ó including an official exchange rate and an even-more-expensive market rate.

Join the GlobalSecurity.org mailing list

Page last modified: 20-05-2022 17:51:04 ZULU