What is Happening in Iran's Economy?

This solar year has both the signature of the "Joint Comprehensive Plan of Action" (JCPOA) in its record and will be recorded as one of the hardest years in the past four decades in the contemporary history of Iran's economy. This "paradox" has created a mixture of surprise and confusion in both expert circles and public opinion, as it was expected that the positive momentum from the signing of the Vienna agreement last July, which logically should have initiated the process of lifting sanctions, would create an optimistic psychological atmosphere to revive the stagnant economic activities or at least maintain the growth rate at last year's level. However, based on what is currently happening in Iran's economy, it is evident that the growth index has even lost its slow pace from last year and is revolving around zero: 1) Business circles in Tehran use very pessimistic expressions to describe the year 1394. Masoud Khansari, head of the Tehran Chamber of Commerce, describes this year as "perhaps the hardest economic period in the last thirty years." Reza Shahrani, a member of the Steel Producers Association, considers this year's recession "unprecedented in the last fifty years," arguing that more than three million tons of steel products, equivalent to twenty percent of the country's needs, are "stockpiled" in manufacturing plants with no customers. Given the multiple periods of recession in recent decades, these expressions can be described as exaggerated, but there is no doubt that such pessimistic assessments reflect the depth of today's recession in Iran's economy. 2) Economic officials and expert circles are not far from the pessimism of business circles in assessing the current state of the country's economy. On the twelfth of Mehr, Tehran media published a joint letter written by Ali Tayebnia, Mohammad Reza Nematzadeh, Ali Rabiei, and Hossein Dehghan, ministers of economy, industry, labor, and defense, to Hassan Rouhani, the President of the Islamic Republic of Iran. In their letter, they warn that "at the current juncture, if decisions are not made urgently and based on the rules governing crisis conditions, there is a risk that this recession will turn into a crisis and then into a distrust that may take a long time to eliminate its effects." Interestingly, the month of Mehr has ended, but the Central Bank of the Islamic Republic has not yet announced the growth rates for spring and summer. However, Akbar Komijani, the deputy governor of the Central Bank, speculates that the country's economic growth rate in the spring was likely negative. Valiollah Seif, the head of the Central Bank, also does not hope that this year's economic growth rate will exceed one percent. 3) International economic organizations also confirm the intensification of the recession in Iran's economy in their assessments. The economic team of the International Monetary Fund, which visited Tehran last September, predicts the country's growth rate in the year 1394 to be between plus half a percent and minus half a percent, stating that it seems "the country's economy contracted in the first half of this year." The team describes the current economic situation of the country as follows: "The economy continues to face severe structural challenges. The sharp decline in global oil prices has slowed the momentum of economic activities. The private sector and businesses are facing a lack of demand and a massive accumulation of goods. Meanwhile, production is facing low operational capacity. The banking system is severely at risk of loan defaults, leading to high and unstable interest rates and a reduction in bank credits to the economy. The accumulated debts by the government over the past two years have complicated these issues." From all this data, it appears that Iran's GDP, after a nine percent drop in 1391 and 1392, achieved a three percent growth in 1393 according to the Central Bank's assessment, but this meager growth has also stumbled since late that year and has likely returned to the red zone below zero during the first two quarters of this year. In summary, it can be said that Iran's economy has gone through a very tough period from the beginning of the 1390s until today, and Iranians have also become poorer during this time. If we consider the IMF's assessment, we see that between 2011 and 2014, GDP per capita in Iran decreased from $6,420 to $5,353, and each Iranian, on average, became seventeen percent poorer during these four years. It is worth noting that in 2014, the GDP per capita of each Iranian reached about half that of a Lebanese. Also, based on the same index, during that year, an Iranian was poorer compared to a Jordanian, an Iraqi, and an Algerian. In his televised interview on the evening of October 21, Hassan Rouhani implicitly acknowledged the recession prevailing in the country's economy, attributing it to the consequences of the previous government's management, the continuation of sanctions, and especially the collapse of Iran's foreign revenues from oil. According to Mr. Rouhani, Iran's oil revenue has fallen from $119 billion in 1390 to $25 billion this solar year, the lowest figure in the past decade. To combat the recession, the President and his economic team presented a package consisting of thirty-three items to the country, the full text of which was published in Tehran media on the twenty-seventh of Mehr. The title of this package, as seen in the media, is "Government Policies to Address Economic Challenges Until Sanctions Are Lifted." In this title, the "logic" contained in the government's proposed package is evident. This "logic" can be summarized as follows: The country's economy is currently in a state of recession due to declining oil revenues and the continuation of sanctions. In about six months, with the lifting of sanctions and the increase in Iran's revenues from the rise in oil income and blocked foreign assets, the wheels of activity in the country will start turning again. However, during these months, until the gradual lifting of sanctions, one cannot remain idle in the face of the stagnant and even regressive state of the country's economy. The way to confront the current situation, from the perspective of the producers of the new package, is to adopt an "expansionary" policy, and for this purpose, about ten billion dollars in rials will be injected into the economic arteries of the country to "stimulate demand." Since the beginning of Hassan Rouhani's presidency until today, this is the second policy package published by an entity known as the "Government Economic Coordination Headquarters." The first package was published in Mordad 1393 under the title "Government Economic Policies for Non-Inflationary Exit from Recession During 1393 and 1394," and the second package includes policies that are to be implemented this year until the lifting of sanctions. Both policy packages have a common goal: to get the wheels of economic activities moving by addressing financial constraints and stimulating demand. However, what causes confusion in this regard is that the first and second packages, despite both being published by the same entity known as the "Government Economic Coordination Headquarters," propose completely different and even contradictory policies to achieve the common goal mentioned. Both packages aim to combat recession through "stimulating demand," with the difference that the second package seeks to stimulate domestic demand, especially by granting credit facilities to consumers so they can buy cars, household appliances, etc., to pull businesses out of recession, whereas the previous year's package aimed to stimulate demand through other means, including increasing non-oil exports, to avoid causing inflationary tensions. The previous package had no mention of mandatory credit facilities, while the new package mainly relies on these mandatory facilities. In the previous package, withdrawals from the National Development Fund were conditional, while the new package includes a withdrawal of two billion dollars from this fund. In summary, the previous package aimed to combat recession without fueling inflation, while the new package has a whiff of inflation. Given the differences between last year's package and this year's package, it can be concluded that the producers of the new package are not the same as those of the previous package and do not follow similar economic theories. The 1393 package was written by economists who consider inflation to be the "mother of corruption" and believe that without rooting out this decline, Iran's economy will never stabilize. They are confident that advancing an anti-inflationary policy requires patience and perseverance, and the worst initiative is for economic leaders to yield to populist pressures or lobbies and resort to "stimulating domestic demand," a policy that has been implemented many times and has yielded no results other than fueling inflation. If injecting money into the economic arteries and stimulating demand were to get the economy moving, the policy based on monthly universal cash subsidies should have led the country to double-digit growth rates. Of course, the 1393 package got lost in the dust of conflicts between the parliament and the government and, like many reform policies, was shelved. However, it seems that the Rouhani government has overall remained faithful to the philosophy underlying it and resisted the temptation of "stimulating demand." Given the content of the second package, it seems that this resistance has cracked, and the executive apparatus has once again turned to policies that have been tested many times and have not worked. It is likely that in the near future it will become clear what changes have occurred in the spectrum of the President's economic advisors and how the balance of power among them has evolved. In any case, some expert circles in Tehran, which have generally supported Hassan Rouhani's economic policy until now, fear that the President, under pressure from certain circles and also some figures within his government, will abandon his previous policy aimed at combating inflation and resort to an expansionary policy that may create a boom, but an artificial and temporary boom that will cause the inflation rate to resume its upward trend. It can be confidently said that if no unforeseen event occurs, the beginning of the process of lifting sanctions can significantly raise Iran's economic growth rate, and the Rouhani government is also hopeful for this perspective. First Vice President Eshaq Jahangiri recently predicted Iran's economic growth rate for the next solar year to be 7.5 percent. This prediction is likely overly optimistic, but an increase in Iran's growth rate next year to above five percent is possible. The International Monetary Fund, in its annual report on economic prospects in the Middle East and Central Asia, published on October 21, predicts that Iran's growth rate in 2016 will be 4.4 percent and could even rise to 5.5 percent thereafter. The most important factor that, according to IMF experts, could positively impact Iran's economy next year is the lifting of sanctions, which would increase oil exports, return blocked foreign assets to the country, eliminate existing problems in financial and monetary transactions with abroad (including re-establishing connections with "SWIFT"), and lower the costs of exports and imports. Of course, from the perspective of IMF experts, the increase in Iran's growth rate next year will depend on the exact timing of the start of the lifting of sanctions, Iran's ability to leverage this process to increase oil production, and the reforms that must accompany this process in the economic sphere. The issue of reforms is fundamentally important for the future growth of Iran's economy. The growth rate that Iranian economic officials are pinning their hopes on, which is not impossible to achieve, stems from a series of temporary factors arising from the positive momentum of the post-sanction period. If Iran's economy relies solely on this momentum, its growth rate will not last long and will once again falter at the slightest fluctuation in the oil market. What Iran needs is sustainable growth that lasts at least ten to fifteen years at a high level, similar to the growth rates that transformed many Asian countries. To achieve this sustainable growth, Iran needs fundamental reforms, including reducing the size of the government, privatizing the economy, ending monopolies, and ensuring the independence of the central bank.