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Update on Iran’s Economy

April 19, 2018

Update on Iran’s Economy

After experiencing acute economic hardship following a comprehensive set of sanctions imposed against its nuclear program in 2011, Iran’s economy started recovering with the arrival of the moderate president Hassan Rouhani to power in 2013. Yet, this recovery has been short-lived. Despite a promising economic growth of 4.3% for 2017-2018, Iran’s economy is currently grappling with serious structural problems such as inflation, currency devaluation, and a low rate of investment.

 

Rouhani’s government had expected the gradual lifting of sanctions to improve the economy. Yet, various foreign banking restrictions still persist, rendering the interaction of the Iranian economy with the global financial sector difficult. In fact, even though most international sanctions were lifted in 2016 following the nuclear deal, nearly all major international banks still refuse to work with Iran.

 

The economic environment is further complicated by the fact that the Revolutionary Guards still exercise significant control over the economy, creating costly bottlenecks and corruption. The international banking restrictions, the presence of the Revolutionary Guards in the economy and the bureaucratic red tape have been some of the factors slowing down foreign direct investment in the country. Despite the fact that Rouhani highlighted that Iran’s economy needs an annual $50bn injection of foreign investment, the country merely managed to attract $12.2 billion in 2016. Given Iran’s high dependence on oil, it needs at least $130 billion in foreign direct investment to increase its current output of 3.8 barrels per day by 1 million barrels per day. Peugeot, Renault, and Total are among the European companies that have resumed operations in Iran or announced billion-dollar investments. Italy has recently signed a 5-billion-euro ($6 billion) investment deal with Tehran, but given that the EU countries are edging closer to a fresh round of sanctions against Iran to prevent the American administration from withdrawing from the JCPOA, there is a possibility that Tehran’s efforts at strengthening its business relations with the EU could be hampered.

 

Lately, against the backdrop of growing political and economic uncertainty, the currency (rial) plummeted to a record low level of 60,000 against the American dollar on the black market, losing a third of its value this year. When Rouhani took office in 2013, one American dollar was worth 36,000 rials. The precipitous decline of the currency has had a negative impact on the business environment, forcing businesses to postpone major decisions given the prevailing atmosphere of uncertainty. In order to stem the tide of rial’s steep fall, the Rouhani government has recently announced that they would unify the official and free market exchange rates for rial by opting for the official rate of 42,000 rials per dollar. The government has threatened to arrest violators of the official rate, causing the closure of various currency exchange offices in Tehran. Yet, it remains to be seen to what extent this unified rate will be enforced. The fact that various quasi-state actors have been benefiting from buying the dollar at the lower official rate and selling it on the black-market rate puts them at odds with the Rouhani government’s recent plan, further demonstrating the complexity of Iran’s currency problem.

 

The rial’s continuous loss of value coupled with the Rouhani administration’s inability to weaken the power of the unelected entities have diminished the public trust both in the Iranian currency and in the authorities’ capacity to improve the status quo. Many ordinary Iranians cast the blame on the government for poor planning and bad management of the economy. Given the lack of public trust, despite the government’s announcement of a unified rate for dollars, many currency exchanges in Tehran have recently closed their shops in a bid to avoid long queues.

 

Vahid Yucesoy for iStrategic