Main Culprits Behind Economic Woes

EghtesadOnline: Iran’s economic problems are multifaceted. This is not aimed at overlooking the incumbent government’s responsibility for the current state of affairs.

News ID: ۷۸۵۶۶۴

09 November 2020

In an article published in the Persian newspaper Ta’adol, economist Hadi Haqshenas elaborates on an array of causes that have led to the deterioration of the country’s economic indices in recent years. Translation of the full text follows:

The Government of Prudence and Hope [led by President Hassan Rouhani] has faced extraordinary situations from the beginning of its term in 2013 up until this year, which is the final year of the administration.

In fact, not a single government in the postwar years [including the Iran-Iraq war of 1980-88] had such difficult experiences: It started off with sanctions and negative economic growth during the years ending March 2013 and March 2014, during which the economy was moving toward very slow or zero growth. Over those two years and the past three years, US sanctions’ regime was the main reason behind the country’s problems and negative economic growth.

You could easily call the 2010’s decade “out of the ordinary” for Iran’s economy. Over most of that year, oil revenues were at their lowest level. What economic officials say about the role of sanctions and restrictions in giving rise to problems suggests that the economy had been reliant on oil income for decades. Without its oil money, it can’t return immediately to normal.

Furthermore, the government had to fulfill financial commitments of the years ending March 2013-14, including the completion of Mehr Housing Project homes and compensation payments to those who lost deposits at unauthorized financial and credit institutions. Natural disasters, namely earthquake and flooding also drove up government expenses.

Meanwhile, Iran’s economy experienced a single-digit inflation for the first time in five decades after the conclusion of the Joint Comprehensive Plan of Action [the formal name of Iran’s nuclear deal with six world powers]. If US President Donald Trump had not withdrawn from the agreement, Iran could have registered economic growth for the years ending March 2019 and March 2020.

Iran’s economy, still reeling from the end of oil money, received another shock last year: the outbreak of the novel coronavirus. To see the impact of the virus on Iran’s economy, you can take a look at how global economies fared in the face of this crisis.

According to the International Monetary Fund, the average global economic growth would be -5% this year. Normal economies like Europe and the US have seen negative growth rates and double-digit unemployment rates without facing sanctions and international tensions.

How could people expect Iran to remain unfazed, despite two serious crises? The US intends to spark protests in Iran through the imposition of sanctions and shortage of consumer goods.

Inflation is a chronic disease in Iran’s economy and I believe that the economy suffers from inflationary pressure, because all governments in Iran have failed to recognize the independence of the central bank.

Parliamentary decisions have also worsened the existing problems, whereas it could have curtailed the double-digit inflation by drafting contractionary policies and overseeing their implementation in the middle term.

The lawmakers opted for different economic policies due to short-term consequences. For instance, the parliament’s decision on distribution of essential goods among 60 million people met with the extensive criticism of experts. The measure would lead to a new round of inflation. There is no doubt about the well-meaning intentions of the designers of these plans, but when there are no resources to be paid as subsidies, the government would be forced to borrow from the central bank or issue treasury bonds, the consequences of which would be an increase in money supply and inflation.

Inflation is a monetary phenomenon. If people become confident that the inflation rate would be single-digit in the next year, their engagement in speculative practices will decline and no one would withdraw their money from banks to buy cars, gold coins, foreign currency or homes.

Inflation is the root of almost all problems. People’s fear of inflation is to blame for the flow of money supply from productive sectors to speculative markets.

All in all, sanctions have been one of the main reasons behind the turbulence in Iran’s economy from 2018. On top of that, the economy has high capacity to experience inflation.

Analysts who don’t take notice of these key information give unrealistic interpretations, which do not present a transparent picture of the ground reality.