The new U.S. sanctions, igniting in November 5, put unbearable pressures on the Islam republic of Iran. The Treasury imposed penalties on more than 700 Iranian and Iranian-linked individuals, entities, aircraft and vessels. The move brought to more than 900 the number of Iran-related targets sanctioned by the Trump administration in less than two years. Among those are 50 Iranian banks and subsidiaries, more than 200 people and ships, Iran’s state-run airline Iran Air and more than 65 of its planes. The U.S. sanctions freeze any assets that those targeted have in US jurisdictions. They bar Americans from doing business with them and affect non-Iranian companies that deal with sanctioned Iranian firms and officials.
However, the facts reveal that Iran’s economic difficulties prelude the US sanctions and witness a recession at least since spring 2018. a precarious situation.
Iran’s GDP falls by 0.8% in the 2018/19 Iranian fiscal year and 2.5% in 2019/20. The IMF’s predicts recessions of 1.5% and 3.6%. Recession means unemployment and no revenue for many Iranians. Many economic sectors suffer. The housing and construction market, the second industrial sector activity after oil and before car, has dropped-off in sales. People do not commit in these times they consider as uncertain. Banking system ruins. Insolvent banks and the government borrow money from the Central bank to support failing companies to pay workers and avoid protests. But, how does the Central Bank provide money? By flooding the economy with liquidity. Little is done to address the money-laundering issues flagged by international watchdogs at the Financial Action Task Force.
With the persistent recession, the national employment deteriorates even for the well-educated. A third of men and half of women under thirty with college degrees are unemployed. 44% of Iran’s unemployed have a college degree. 20,000 people start doctoral programs every year, but there are only jobs for 4,000-5,000 of them.
Jobless Iranians, among others, considerably suffer from persistent inflation which invariably drives domestic costs up. Two official Iranian consumer price indices, the Statistical Center and the Central Bank, estimate the rate of inflation, respectively, 5.4%, and 6.1%, in September 2018, meaning an inflation of 88% and of 103% for the whole year.
With inflation, the parity of the national money, Rial, also deteriorates. In late September, state pressure on traders tended to stop by force the exchange rate drop. The regime arrested numerous traders and imposed the death sentences on at least two purveyors of gold and foreign exchange. The rate artificially stabilized for a while, but finally settled at about 140,000 rials to the U.S. dollar, three times its rate around March 21, the Iranian New Year. The government continues to waste its resources in dollar to prop up the rial instead of addressing other problems.
Controversial fiat exchange rates drain public finances and enrich corrupt elites. The Central Bank announced on October 20 the provision of $9.5 billion at an official rate of 42,000 rials per dollar for essential goods. However, extensive evidence suggests that many of these goods are sold at prices that echo the free market rate of about 140,000 rials per dollar.
Adding to these issues, the shadow economy also develops in detriment of the domestic welfare. Example. Although Iranians are not moving further, their demand for gasoline is increasing dramatically. From 75 million liters per day in August 2017 to 100 in August 2018. Why? Because while the value of the national currency incessantly, the price of gasoline in rials remains intact (since May 2015). So, at least 20 million liters of gasoline is smuggled abroad each day, for selling Iranian cheap gasoline, 10,000 rials ($0.24) per liter, or $0.07 at the free market rate to the neighboring countries where gasoline sells more: $1.20 in Turkey, $0.73 in Afghanistan, $0.65 in Pakistan, and $0.63 in Iraq. As the domestic refineries can only make enough gas to meet the real domestic demand, and not the smuggling-induced inflated demand, the Islamic regime must import the smuggled gasoline back.
Are some positive signs? Mitigated. The Tehran Stock Exchange went up 90% from the Iranian New Year in March to mid-October. However, this is not an indicator of prosper economy. Activities are slowing as previously mentioned. People invest only in stocks deemed capable of preserving the value of their money. For instance, those of locally made Pride cars, infamous for their low quality, which are sold out for months in advance despite the continuous price increase because of the protected domestic market. Whatever, the investments are, as inflation continues to soar, the value of stocks, once valued in dollars, continuously decline sharply.
Another positive sign is that exports increase, and imports decrease. Non-oil exports totaled $13.7 billion from April to September 2018, compared to $11.1 billion a year earlier. However, in national statistics, exports of oil-based elaborate products are considered as those of non-oil. As overall exports increase, and imports decrease, the trade balance improves, discharging some pressure on reserves. This improved trade balance lessened the fall in GDP.
Who is responsible of the Iranian economic disaster? In mid-October, more than thirty economists met with President Hassan Rouhani on October 15 to share their concerns about the government’s “politically motivated”, “short-term” decisions, and the questionable quality of people on its economic team.
To his credit, however, it is worth recalling the rent-seeking and unshakeable role of many powerful non-governmental however regime-based forces, especially the Islamic Revolutionary Guard Corps (IRGC). The IRGC’s penchant for building dams—600 in the last thirty years, compared to 14 in the shah’s last twenty years—considerably enriches its proponents, but unfortunately causes environmental problems such as diverting water to inefficient agricultural projects and exposing this rare source to the burning Sun of a very warm country. In response to numerous environmental activists’ protests, the IRGC arrests them. However, Hassan Rouhani and his administration do not seem to enterprise any option to these forces as they both belong to and appreciate the same regime. All Rouhani asks them is being more tolerant to his government and policies at least for the remaining two years of his last term.
What is obvious is that life gets tougher for Iranian people with this new wave of US American sanctions. What is not obvious is whether the Islamic Republic can outlast the new round of U.S. pressure until Trump leaves office. Nothing is less sure as the Trump administration has re-imposed the sanctions as counterterrorism measures to increase the likelihood of their surviving after U.S. political shifts.
Under these measures, the Us administration has already sanctioned various Islamic Republic’s entities such as bank, investing institution, IRGC-related foundation, steel mill Tractor Manufacturer, Zinc Mines Development Company, etc. Many other classified entities might be added to the list for both terrorism and nuclear proliferation concerns.
Would European countries in disagreements with the Trump administration’s withdrawal from the nuclear agreement find ways to work with Iran? Two considerations, political and economic, provide responses to this question.
Politically, the EU might continue to show support for the agreement to confirm its dependence from the USA. However, if the Trump team makes a convincing case linking the Islamic regime to terrorism, not only in the Middle East, but also in Europe and beyond, then more Atlantic counterterrorism cooperation might occur.
Economically, the European firms barely accept to invest and trade with the Islamic regime because of the risk of the heavy economic sanctions and of the exclusion from the American market, financial networks and technologies.
Can the Islamic republic find a way out if it accepts a much broader agreement on nuclear and non-nuclear matters, such as stopping animosity with Israel, interfering in the affairs of the Middle East countries and supporting terrorism.