Severe Recession in Iran's Economy

Iran's GDP fell by 6.8% and 1.9% in the years 1391 and 1392, respectively. With this two-year negative growth rate, the total value of goods and services produced in Iran decreased by about ten percent. Considering Iran's population growth during these two years, the per capita production drop is significantly higher. According to assessments by the International Monetary Fund, Iran's GDP per capita fell from $7,207 in 2012 to $4,769 in 2014. Official statistical sources in Iran assessed the country's GDP growth rate at 3% for the year 1393, an indicator seen as a positive turn in the economy and an exit from the negative growth zone. With the announcement of the end of the recession, hopes arose that Iran's economy could at least replicate the previous year's 3% growth rate in 1394. However, evidence suggests that this sluggish movement has slowed even further this year, and despite hopes stemming from the successful conclusion of nuclear talks, the risk of returning to a zero or even negative growth rate is very serious. Valiollah Seif, the head of Iran's Central Bank, is not very optimistic about the economy experiencing a positive shift in 1394. In an interview with the weekly 'Tejarat-e-Farda', he describes the current solar year as 'very hard' and adds, 'I believe that assuming the current conditions persist, we will achieve about 1% economic growth this year... If the Vienna agreement is enforced in January and we enter the post-sanctions era, we may have some leeway.' Tehran's business circles paint a darker picture of Iran's economic realities. Mehdi Pour Ghazi, head of the Industry and Mining Commission of the Tehran Chamber of Commerce, states that 'given the prevailing recession in various sectors, economic growth this year will be around zero.' He considers the general recession in the country's economy as the main reason for the negative growth in industrial production and the overall production sector in recent months. In Tehran's economic media, an increasing number of experts emphasize the severe recession that has gripped Iran's economy following last year's insufficient 3% growth. In the September 26 issue of the 'Donya-e-Eqtesad' newspaper, Farakh Qabadi writes that the situation has gone beyond 'signs of recession' and 'the possibility of the economy entering a recessionary state,' and the country is grappling with an 'unprecedented, paralyzing, and very dangerous recession.' How is it that Iran's economy, after the hopes arising from the progress of nuclear talks and especially their successful conclusion leading to the Vienna agreement, has become so immobilized? While European and Asian economic powers are sending credible delegations to Iran one after another after years, why does the country's economy show no positive reaction and, after a few limited jolts, has once again fallen into a coma? There are at least four responses to these questions: First, last year's 3% growth, following negative growth rates in 1391 and 1392, is highly questionable. Even if we do not question the reality of this growth rate, there is no doubt that its nature and dimensions were not such that they could mark the beginning of a sustainable leap in Iran's economy. This growth was mainly the result of flexibilities considered in the Geneva agreement (December 1392) between Iran and the P5+1 for some of Iran's industrial sectors. In practice, beyond some large industries (automotive, petrochemicals, etc.), small and medium enterprises continued to struggle in a quagmire of problems and had no role in achieving the 3% growth rate. Second, the Joint Comprehensive Plan of Action (JCPOA), signed last July in Vienna, has not yet been implemented, and its psychological effects have not been able to significantly impact Iran's economy. In fact, despite the signing of this very important agreement, the post-sanctions era has not yet begun, and the pressures from the sanctions remain in place. The key to the implementation of the JCPOA and the real beginning of the post-sanctions era lies with the U.S. Congress, which, given recent events, is unlikely to play a restraining role. Until the final approval process of the JCPOA in U.S. legislative bodies is completed, Iran will not truly enter the post-sanctions era, and the visits of foreign economic delegations will not change this reality. Third, the severe drop in oil prices and the lack of a foreseeable outlook for improvement in this commodity market is one of the most important reasons for the severe recession currently choking Iran's economy. In this situation, due to the failure to realize the projected revenues in the budget from oil exports, President Hassan Rouhani's government is facing a significant budget deficit and, given the heavy current expenditures and the burdensome cash subsidies, has no choice but to sacrifice even more of the development budget. In a situation where neither banks can finance economic enterprises nor the capital market, the collapse of the development budget removes the last factor that could stimulate Iran's economy. Fourth, President Hassan Rouhani's government has the advantage of not having resorted to borrowing from the central bank to address its financial problems and has maintained discipline in this regard. This discipline has been a very important factor in reducing the inflation rate. However, beyond this achievement, and also his significant achievements in foreign policy, the eleventh government has not shown any initiative in purely economic terms that indicates a fundamental change in the country's economic policies. The necessary reforms, from downsizing the state bureaucracy to real privatization, reforming the severely flawed banking system, and combating corruption, still have no place in the government's policy, and no positive message has been conveyed in these areas to Iran's business circles and foreign investors. Given this set of factors, the wheels of Iran's economy, after very limited movement last year, have once again come to a halt. There is no doubt that with the implementation of the JCPOA and the beginning of the post-sanctions era, some sectors of Iran's economy can revive again. The return of Iran's frozen assets abroad (even at the limited level announced by official sources of the Islamic Republic), lifting restrictions on banking transactions, Iran's access to international financial markets, and the influx of foreign investments into the country can all help pull the economy out of the current paralyzing recession. If these developments are accompanied by positive jolts in the global oil market in favor of exporting countries, or if Iran can at least compensate some of the losses from falling oil prices through increased production and exports, the exit from the current recession will occur more rapidly. However, the key to sustainable and desirable growth is the implementation of structural reforms. Iran's labor market is in such a precarious position that ending its tensions is not possible even with growth rates of four to five percent. The country needs growth rates of eight to ten percent over a relatively long period, which is only possible if Iran's economic structures are completely transformed from their current state, characterized by being state-run and oil-dependent, to a free, competitive, endogenous economy with close and dynamic ties to the global economy. Unfortunately, despite the hopes that were initially formed regarding the capacities of its economic team, President Hassan Rouhani's government has not made any changes in the 'governance' of Iran's economy to date. Obsessive conservatism is the main feature of his economic policy, and it seems unlikely that he will abandon this tendency in the second half of his presidency. Nevertheless, there is no doubt that Iran's economy sinking into the quagmire of recession and its consequences, especially for the country's labor market, creates a very favorable ground for rivals to attack President Hassan Rouhani's government. The only hope of the eleventh government is that with the real beginning of the post-sanctions era, significant changes will occur in the country's economic life. The political future of the current president hinges on these changes.