Iran's economy in desperate need of solutions

Facing declining oil prices and rigid sanctions by the United States, the Iranian government needs to find new ways to fund its public spending. The solutions might prove unpopular both with the public and the powerful elites.

According to the US Energy Information Administration (EIA), Iran has the world’s fourth-largest deposits of oil and the world’s second-largest deposits of natural gas. These vast resources have prompted many Iranians to believe their country is wealthy, and its wealth will never end. Few point out that Iran’s abundant oil and natural gas resources can translate into wealth only if there is a market for them. And these days, what Iran lacks for its vast oil and natural gas resources is a market. And even if Iran regains its market, few are optimistic about the oil market performance as long as the coronavirus pandemic ravages the global economy.

In May 2018, US President Donald Trump announced that the United States would leave the nuclear agreement with Iran. Since then, the United States has been pursuing a pressure campaign with sanctions on Iran’s oil exports. By September 2018, Iran exports fell to 1.9 million barrels per day from a peak of 2.7 million per day in June 2018. By April 2019, Iran’s oil exports dropped to 1 million barrels per day, and by October 2019, Iran’s average oil exports hit just 260,000 barrels per day. The sanctions have cost Iran billions of dollars in revenues.

Iran’s oil production reached 3.8 million barrels per day of crude oil in 2017, as well as 7.2 trillion cubic feet of dry natural gas, earning $55 billion in net oil export revenues. Iran experienced an increase of 21.8% in its net oil export revenues in 2018, pocketing $67 billion. Its war-ravaged neighbor Iraq, with the world’s fifth-largest deposit of oil, earned $91 billion in net oil export revenues in the same year marking a 38% increase compared to 2017. According to the EIA, Iran’s net oil export revenues for the first six months of 2019 reached $20 billion, while Iraq earned $52 billion during the same time. As Iran’s government oil revenues declines, its spending did not change. It continued to pay subsidies, directly and indirectly, accepting a widening budget deficit.

There is little wonder why Iranians are experiencing a very high inflation rate these days. According to the Central Bank of Iran, Iran’s economy is experiencing an average inflation rate of 41.3%. According to the World Bank, inflation has been alarmingly high for food items, with the consumer price index for meat products rising by 116%. The Rouhani administration needs money, and it needs lots of it. Its step to increase gasoline prices in November 2019 was an act of desperation to mend its deficits. The decision brought to the streets scores of angry citizens and resulted in nationwide protests, which turned bloody quickly. The budget deficit was standing at two-thirds of the Iranian government’s annual budget. And this was before the novel coronavirus spread to Iran. The pandemic has deepened Iran’s economic recession, but it has not created it.

When the coronavirus outbreak hit Iran, it imposed a challenge on an economy already in crisis. The government mostly funds Iran’s health-care system. As the cost of dealing with coronavirus cases increased, the government requested permission to withdraw 1 billion euros from the National Development Trust Fund to address the economic impact of the spread of the virus that causes COVID-19. However, many found the number to be insufficient — the diminished effectiveness of any help from the government due to augmented inflation and condensed economic activities notwithstanding. Iran’s chances of an economic recovery are dim. Even if the sanctions are lifted, the global demand for crude oil is drastically contracted due to the global economic recession. The EIA predicts that OPEC will continue to lose net oil export revenues for the rest of 2020. The demand for Iran’s crude oil is further weakened by the fact that its major clients — India and China — have already found new suppliers. If President Hassan Rouhani and his Cabinet think an understanding with the United States will end Iran’s economic problems, one must remind them of the realities of the global market. They are already looking for other sources of revenue.

Iranians are often heard saying, “We pay for this country either by giving up our wealth [oil] or our income [taxes].” As the oil revenues plummeted, the Iranian government and the parliament are planning to impose new taxes and to sell public holdings. The new parliament, dominated by hard-liners and conservations who openly criticize Rouhani, is introducing new taxes on capital gains with a focus on real estate holdings. The new legislators admit that the infrastructure for the successful implementation of new taxes is lacking, but they cannot wait. Fearing that such fees would impact capital markets and saving patterns across Iran, pushing Iranians to invest in the highly volatile Tehran Stock Exchange, many economists are warning the parliament to study their potential consequences carefully. The government is searching for new ways of selling its holding in various companies via new privatization programs or directly via the Tehran Stock Exchange. Some officials propose to impose taxes on religious foundations and their associated conglomerates, something which has never happened in the past.

For Iranians, the outcome is increasing prices and decreasing real income — a combination that thrills no one. Facing sanctions as well as declining global demand for oil while using its traditional customers in Asia, the Iranian government needs a solution. Some might have hoped that the political establishment finally finds the courage to carry out structural reforms that are much required in the economy and long overdue. However, the government does not want to change its ways, and the new parliament does not want to change the government. Both are looking to increase revenues without reducing barriers to economic growth, combating corruption or reforming public spending in the country. An increase in either prices or taxes will upset the general populace, and imposing taxes on foundations and economic entities associated with the regime will anger the political elite. Without new sources of revenues and new trade partners, prices will continue to rise, and the economy continues to contract. Iran’s economy has been paying for the indecisiveness of successive administrations in reforming and increasing corruption. It seems that it has reached the end of its tether.