The Many Sides of Iran’s Economic Troubles
/By Dr. Hooshang Amirahmadi
The Iranian economy continues to face serious difficulties, with seemingly no solution in sight. The one area which the Rouhani government wishes to take credit for is with regards to inflation. Indeed, under the presidency of Hassan Rouhani, the inflation rate has reduced significantly relative to the tenure of his predecessor, Mahmoud Ahmadinejad. However, as critics have maintained, this decrease has been due primarily to the ongoing recession that plagues the country, rather than government policies. For the most part, the country remains mired in a deep economic depression, with little to show in way of recovery for the average Iranian.
Initial hopes that the JCPOA would usher in foreign investment and trade have been dashed, as investors continue to perceive Iran as a risky place to do business. While U.S. sanctions have played a role, investors’ fears are due primarily to the mismanagement of the national economy. A lack of stability, an unhealthy business environment, and lack of transparency all stifle growth. All of this is compounded by the fact that Iranian banks are accused by the West of money laundering and terrorist financing. The West is asking for reassurances that Iran join the Financial Action Task Force: the prospects of this happening are very low. All in all, the government has done little to allay investors’ fears of doing business in Iran.
Official corruption is another issue of significance. The recent outcry surrounding the astronomical salaries some officials and bank executives have been paying themselves is just one example. Indeed, corruption scandals are being discovered on a daily basis. One such case involves President Rouhani’s own brother (who also happens to be his right hand man), who has been implicated in a banking scandal of colossal order, prompting Tehran’s prosecutor to demand that he be locked up in prison for life. Unless the Supreme Leader intervenes, it is likely that the Revolutionary Guards will arrest more people implicated in corruption charges.
The country’s economic growth has remained sluggish: the most recent figure reports growth for 2015 at under 2 percent. Predictions of 6 percent annual growth, optimistically made two years ago in the hope that the JCPOA would revitalize the economy, remain an unrealized dream. The government is now predicting a 4 percent growth for the current year, with the figure including increased oil revenue. Non-oil GDP will surely remain below 2 percent.
A big problem with the Rouhani government’s performance relates to its over-reliance on post-JCPOA foreign investment. According to UNCTAD, Iran’s foreign investment actually declined by about 2.7 percent in 2015 -- that is after the JCPOA. In the meantime, the government has neglected to mobilize domestic investment. As a result, investment, particularly in Iran’s industries, have remained sluggish. Indeed, most Iranian industries, especially small and medium-sized firms, are either underutilized (80 percent) or have already closed down (20 percent).
Foreign trade has also remained sluggish. Iran continues to focus on oil trade while non-oil trade (less than $20 billion in 2015) remains low for a nation its size. While neighboring oil-rich countries, such as the U.A.E., have taken concrete steps to increase their non-oil trade, the Iranian government has shown little interest in implementing the same sorts of policies. A few trade initiatives - such as the much anticipated multi-billion dollar deals with Airbus and Boeing - have not yet come into fruition. Nonetheless, the government has ostensibly focused on international trade, a move that has the support of big business and the wealthy merchant class. The linkages between the government and the interests of big business are plenty. Rouhani’s Chief of Staff, Mohammad Nahavandian, for example, is the former president of the country’s Chamber of Commerce.
Another issue of economic mismanagement relates to the increased size of current expenditures relative to funds allocated for development. Expenditures have ballooned significantly, eating into the meager funds previously designated for infrastructure projects. To make matters worse, the government has been paying for its increased operating budget by borrowing from domestic banks, making them increasingly less capable of financing private investors. Growing public and private debt threatens the very survival of many banks.
What surprises many economists in the country is the fact that while the government has significantly increased the money supply, and the nation’s liquidity has grown to the astronomical number of 1000 trillion Toumans (3,550 toumans to a US dollar), the government and banks have no money to lend the productive sectors of the economy. It is clear that a maldistribution of funds is happening, where available monies are diverted to non-productive government and private spending and foreign trade (imports). Some are also leaving the nation, making Iran’s capital flight a persistent problem.
Iran has a young and educated workforce. It’s startling but true that young Iranians (75% of the country is under 40 years old) are highly educated (over 11 million of them have a university degree), and Iran has, on a per-capita basis, one of the highest number of educational institutions in the world - ahead of Europe and even the United States. However, this young and educated population is largely unemployed or is not equipped with the type of education that will help them land a job upon graduation. Meanwhile, the nation continues to pay for higher education and produce more of the same unemployable people as well as a growing number of officials with “doctorate” degrees for the public sector.
The Iranian educational system - higher education in particular - is facing an urgent crisis. It is eating up huge funds and producing graduates who are either useless for the economy or cannot be employed by the private sector. Indeed, the regime only employs people who believe in the Islamic system, in a nepotistic system that does not reward jobs based on merit. Most such people are also trained in low-quality institutions of higher education where Hezbollahis are admitted on a quota basis. Most qualified, secular Iranians, have a hard time finding jobs in the public sector, while the private sector is incapable of absorbing them as it is in a state of decline.
Unemployment rate for the youth and educated Iranians approaches 35 percent. Many of these people have become drug addicts and are increasingly withdrawing from the formal labor force. Some fly overseas through illegal channels (Iran has one of the highest populations of “brain drain”), and others engage in criminal activities. This situation is true for both male and female graduates. The colossal social and economic costs of unemployment have been pointed out by many researchers in the nation, but the situation continues unabated.
Lack of economic growth, and high unemployment, have increased both absolute and relative poverty in Iran. Some 30 percent of people in Iran live below the poverty line and the income and wealth gaps have widened alarmingly. The Islamic republic revolution had promised to improve the plight of the country’s poor, and to bring social justice. These problems have not been adequately addressed: instead, they have metastasized. The situation with the Iranian poor has indeed significantly worsened relative to their pre-revolutionary plight. The situation with the poor is indeed explosive. They forced a revolution on the Shah and could force another one on the Islamic Republic.
Complicating these economic problems are growing social ills, political authoritarianism, ethnic unrests, and worsening relations with the neighboring states. Relations with the Arab states and Israel have significantly deteriorated in the aftermath of the JCPOA. Iran’s costly involvements in Syria, Palestine, and Lebanon continue to drain the country’s resources. Meanwhile, instability in neighboring countries such as Afghanistan, Iraq, and Turkey, have an impact on Iran. Relations with the US remains tense, with many questioning the utility of the JCPOA in delivering benefits to Iran. The prospect for Iran’s recovery in the foreseeable future remains close to nil.
