Mustafa Amin writes from Tehran: In case you’re wondering how things are going with the Iranian economy, let me tell you that they are not good. And it might get worse, to be perfectly honest with you.
There’s been very little economic growth in the last few years in Iran. And now unemployment is rising, inflation is mounting and the business climate is – how can I put it mildly? – darkening. The bad news for the Ayatollahs is that it’s only the beginning of the downturn. So where’s Iran heading, some of you, keen Iran watchers, are probably asking yourselves: a social explosion? And you know what I’ll say to that? You might not be far from the truth.
Mind you, the Ayatollahs are turning a blind eye on all that mess at present. Their top priority at the moment is to complete an entire nuclear fuel cycle. About 3,000 new and faster working centrifuges are on their way to Iran’s main uranium enrichment facility at Natanz. A third satellite is to be sent into orbit soon and the range of Iran’s missiles is being extended. All this, of course, is hugely expensive. As a result the rest of the economy is being squeezed to achieve these high profile projects.
So, how serious is the situation? Iran may be growing at less than 3 per cent; unemployment is over 15 per cent, inflation over 20 per cent and food prices have risen by at least 50 per cent. The good news is that Iran has a balance of payments surplus, low external debt and about $90 billion in gold and currency reserves. This may be enough to keep the country afloat for a while. But not for long.
The thing is that the UN and EU sanctions are biting. As of July 1 no Iranian oil could be exported to the West. Iranian banks cannot facilitate trade. So a lot of deals have been done with India, South Korea, China, Russia and others using gold, barter, the local currency and other means to effect payment.
In December 2010 subsidies for oil, gas, electricity, water, bread and milk were abolished. The idea was to bring them into line with world prices. This was done to force consumers to be more economical and to cut public spending. The poor were to be compensated with cash handouts. But the state had no accurate indicator of who was poor. The result was that almost everyone received a handout. So this sensible reform has failed.
However, the biggest headache facing the government is the foreign exchange market. It has been forced to permit a two track exchange rate for the rial: the official and the local market rate. The net result is that the currency is now only worth 55 per cent of its 2010 value on the free market.
This has been a boon to Iran’s farmers and manufacturers. They now face less foreign competition at home and it is easier to export. There is another fundamental problem. Iran imports about a third of its food and almost a half of the industrial products it needs. These are paid for by exporting oil, gas and petrochemical products. Oil production is declining but during the first quarter of this year prices rose so there was no net fall in revenue. Still, 70 per cent of budget revenue comes from oil and gas. A drop in the oil price could have serious consequences.
Iran’s economy is in a poor state with little relief on the horizon. Its international competitiveness is declining and living standards are bound to drop for almost everyone. Will Iran continue to spend vast sums on prestige projects and neglect the rest of the economy? Probably. But that might be a recipe for social unrest. My guess is that we should prepare for a hot summer in Iran.