Economic Implications of Sanctions Reimposition

EghtesadOnline: The US administration’s decision to pull the plug on the Joint Comprehensive Plan of Action, the formal name of the nuclear deal struck between Iran and world powers, including the United States, in 2015 and impose more elaborate sanctions on Iran has numerous implications, not all of which are necessarily negative.

News ID: ۷۴۵۶۴۴

15 July 2018

According to an opinion piece, written by the economist Djavad Salehi-Isfahani for Financial Tribune’s sister publication Donya-e-Eqtesad, this will depend on the support extended by the European signatories.

Salehi-Isfahani is a professor of economics in Virginia Polytechnic Institute and State University and a senior fellow of Global Economy and Development in the Brookings Institution.

The translated version of the article follows:

The only thing that caused surprise inside Iran, perhaps, was that US President Donald Trump announced his decision to withdraw from JCPOA too soon. After all, everyone knew that with Trump at the helm, there were no prospects for the future of the nuclear deal anyway.

However, contrary to the Iranian officials’ prior intention to withdraw from JCPOA, this time they decided to adopt a more prudent stance, trusting three of the European countries (France, the UK and Germany) to come up with measures for countering the US initiative and protecting Iran’s interests as per JCPOA.

The Iranian decision to forego extreme reactions, such as resuming uranium enrichment, or disavowing the non-proliferation treaty, was most probably due to concerns over growing economic instability, which led them to remain steadfast, regardless of the pressure applied by domestic hardliner groups.

Although the officials have not been shy about voicing their deep concerns, it may be possible for them to keep JCPOA afloat, as the risk entailed in Iran-Europe relations being jeopardized is far greater than their conflict with “the Great Satan”.

The Economic Situation

It is true that Iran’s economy is not functioning properly, but this does not mean it is in a “free-falling” state.

To paraphrase a recent statement by a New York Times author, Iran’s economic indices are reflected on the streets: There are no lines at gas stations, banks do not refuse to give out loans and supermarket shelves are far from empty. It is true that Iran’s economy has lost its growth momentum, but it is nowhere near critical conditions by any measure. Economic unrest in Iran began several months before Trump’s announcement to withdraw from JCPOA, as it was clear he had no interest in standing by the agreement. However, the Iranian government’s policies of command economy resulted in increased market fluctuations as well.

The government’s decision to deploy a fixed-rate monetary policy and the way in which money was allocated caused problems for many small- and medium-sized enterprises in exchanging money gained from export.

Furthermore, many products, which entailed procurement of foreign currencies from the non-state market, experienced an increase in prices. Other businesses were still afflicted with high interest rates on bank loans and banks had not been able to pay off their debts and fix their balance sheets after the downfall of the real estate market five years back.

With the growth rate decreasing, President Hassan Rouhani’s economic achievements, such as reducing inflation to below 10%, might be undone and the government might have to deal with a weaker currency as well as an increase in budget deficit.

Iran’s current budget deficit is estimated at 3% of gross domestic production, which may lead to an increase in inflation. The government increased baseline wages by 19% and other wages by 10% at the beginning of the current Iranian year (March 21), an action which may not be entirely unrelated to the incidents that took place a few months before that.

It is true that JCPOA is not the solution to the problems of Iran’s economy, but statistics point to a 12.5% growth for Iran after the agreement and a total number of 700,000 jobs created, ten times as many as the jobs created from 2006 to 2011.

The question is to what extent European support can help maintain these achievements.

It is unlikely for European countries to be able to continue purchasing Iran’s oil, which makes up one-third of its total export gains. It is also unlikely that European multinational corporations could be persuaded to invest in Iran, as the considerable gains of such corporations in the US would dissuade any CEO from risking falling out of favor with the country.

However, European countries can allow Iran access to its oil export income through their central banks. Although central banks never take part in economic matters, extreme circumstances call for extreme measures.

Doing this would show Europe’s seriousness to save JCPOA. In the most predictable scenario, Iran’s oil sales will drop from 2.5 million barrels a day to 1 million. If Iran is able to obtain what it needs from other countries, it can register a growth of 3-4%.

What’s key here is that JCPOA is more than just a nuclear deal to Rouhani and the middle-class people who voted for him twice. Rouhani’s voters see JCPOA as a step toward strengthening ties with the West–ties almost a century old, having started when Iranian traders traveled to western countries, which have improved in recent years due to an increase in immigration rates.

If Europe fails to stay in Iran’s good graces, the latter might become inclined toward Eastern countries despite the motto “neither East, nor West,” a considerable change in terms of foreign policy.

If the ongoing attempts to salvage JCPOA with the help of the Europeans fail, the pressure will soon change Iran’s economic policies and make it move toward state ownership and credit allocation in the market, something to which Trump’s advisors are oblivious.