The Double Jeopardy of Sanctions, Coronavirus

EghtesadOnline: In March 2020, Iran became the epicenter of the coronavirus pandemic outside China.

News ID: ۷۵۱۰۹۶

26 September 2020

Suddenly, Iranian leaders found themselves fighting on two separate fronts: one to save the economy from US sanctions and the other to save lives and the economy from the pandemic.

Iran was barely coping with challenges from US President Donald Trump’s “maximum pressure” campaign. In May 2018, the Trump administration unilaterally withdrew from the Iran nuclear deal, known as the Joint Comprehensive Plan of Action, and imposed the harshest sanctions ever imposed on a country. Since then, Iran’s economy has been in a tailspin.

Oil exports nosedived and the currency lost two-thirds of its value, triggering rapid inflation and general macroeconomic chaos.

Iran was totally unprepared for Trump’s election and his determination to undo Barack Obama’s singular foreign policy achievement with the JCPOA, Iranian economist Djavad Salehi Isfahani wrote in an article published on the website of Brookings Institution. Excerpts follow:

The Trump administration and its allies in the Persian Gulf and Israel have been waiting anxiously for more than two years for sanctions to bear fruit, expecting a collapsing economy followed by rising social unrest to force Iran’s leaders to capitulate. Their anxiety is justified.

A disastrous US record of military intervention in the Middle East—in Afghanistan, Iraq, Libya, and Syria—has made Trump, himself a critic of these military interventions, come to see a win without war the only way for the US to assert its hegemony in the region.

The Pandemic

Then came the pandemic, which caught Iran at its weakest economic state since the end of the war with Iraq three decades ago.

Since the US withdrawal from JCPOA in 2018, Iran’s GDP has declined by 11% and average living standards (measured by real household per capita expenditure) have declined by 13%. This deterioration is easy to trace to the maximum pressure campaign because in 2016, when JCPOA was in partial operation and sanctions had eased, the economy grew by 13%.

The sanctions cut oil exports, thereby reducing the supply of foreign exchange, which caused the currency to collapse and inflation to run rampant (in 2019, prices rose by 41%).

More importantly, the loss of oil exports, which in the past accounted for about half of government revenues, tied the government’s hands in any economic rescue effort. As in the rest of the world, the pandemic had disrupted production and put millions out of work in Iran, but unlike in richer countries, its government lacked the resources to help its people weather the pandemic.

Rather than easing sanctions to help Iran manage the pandemic better, if only to stop the spread of the virus in the region, the US piled on more sanctions and chose to ignore calls from world leaders, former US diplomats and the United Nations to ease sanctions. The thinking behind a tougher stance on Iran was summed up in a March 2020 Wall Street Journal editorial titled, “No Time to End Iran Sanctions”.

Despite a shortage of medical supplies, however, between April and May 2020, Iran was able to cut the number of daily deaths by half, avoiding the humanitarian disaster that many had predicted.

Within weeks, Iran was able to bring down the fatality rate from Covid-19 from about 1.6 per million per day to about 0.6. The rate stayed low for about a month before the economic cost started to rise, forcing the government in Iran to reconsider its social distancing measures.

As far as deaths are concerned, the first wave of the pandemic in Iran and Turkey were quite similar, as death rates first increased as cases mounted and the health system came under pressure and then declined. However, Iran’s experience diverged and a second wave hit the country in late May, whereas so far Turkey appears to have avoided a fierce resurgence.

Employment figures for spring 2020 show that, compared to a year ago, 1.4 million fewer people worked and 2 million fewer were in the labor force. Even before the data came out, the government had decided that it had to end its social distancing regulations because it was unable to protect the incomes of those being laid off, or prevent an increasing number of lower-income families from falling into poverty.

Poverty and Social Protection

Iran has been relatively successful in keeping poverty low. It has an assortment of charities, large and small, as well as a welfare ministry that provides income assistance for about 10% of the population.

Since 2011, the country has also had a universal cash transfer program initiated by the populist president Mahmoud Ahmadinejad that reached more than 70 million people with monthly cash deposits. The program was single-handedly responsible for keeping the poverty rate below 10% after the intensification of sanctions in 2012.

The current neoliberal government of President Hassan Rouhani, which opposed cash transfers, allowed their value to decline with inflation so that by the time the pandemic hit, the real value of the cash transfers had declined to less than one-fourth of their value in 2011.

As a result, during the last two years, the poverty rate has increased from 11% to 16% of the total population, adding another 3.7 million people to the poverty roll.

The pandemic appears to have added to the misery. Data for the last month of the fiscal 2019-20 shows that real per capita household expenditure fell on average by an unprecedented one-third in the first month after the arrival of Covid-19 in Iran, three times faster than for the year as a whole.

In addition to income assistance, Iran has a fairly extensive health insurance program, which prevents the public health crisis from sending millions more into poverty. About 90% of rural and 75% of urban residents are covered by some form of government subsidized health insurance.

More financial assistance is on its way, thanks to another of Ahmadinejad’s redistributive schemes, known as “Justice Shares”. In 2007, he distributed shares of public companies to 49 million lower- and middle-income individuals, which they were not allowed to sell until now. The current value or each justice share is about six months’ worth of the minimum wage, which can help a low-income family of four to survive for about a year (at this time, they can only convert 30% of the value of shares). For many who choose to sell their shares, this is only a one-time solution.

The Second Wave

Iran was one of the first countries to open its economy to avoid bankruptcy and economic catastrophe and, predictably, by mid-May, fatalities were climbing back up.

The second wave has so far proven more deadly than the first. The contrast with neighboring Turkey, which has very similar health indicators to Iran (in 2019, life expectancy was 77 years in Turkey vs 76 in Iran and their HDI values were, respectively, 0.81 and 0.80), is instructive. It provides a rough idea of the human cost of the sanctions.

Assuming that Iran could have followed the path of Turkey after mid-May, when the fatality rates of the two countries started to diverge, about 13,000 deaths might have been avoided.

Given that Iran had shown that it can flatten the curve like other countries by shutting down the economy, it is not entirely unrealistic to conclude that had sanctions eased when the pandemic hit Iran, thousands of Iranian lives could have been saved.

To put Iran’s fatality rates in perspective, adjusted for population size, it is much higher than Iran’s neighbors but lower than the rate in more advanced countries like the US and Sweden.

Although the early predictions that the virus would kill between 250,000 and 500,000 Iranians by August 2020 have failed to materialize, and the second wave is slowly flattening, Iran is by no means out of the woods. Its economy is still in tatters, its currency is depreciating and inflation is still above 30%.