The matter at hand is the decision earlier this month by the Trump administration not to certify the so-called nuclear deal, and that means Iran will soon be subject to harsh U.S. sanctions. Overall the result will be a squeezed economy.
Current situation
Even the latest official statistics for the Iranian economy don’t look good. The unemployment rate stands at 11.9% and the inflation rate at 8.3%, according to TradingEconomics.com. However, at least some of the government figures may be more aspirational than actual.
Take, for instance, the inflation rate. Steve Hanke, professor of applied economics at Johns Hopkins University, makes a regular and sophisticated estimate of how much the price level is moving within the country. For May 8, he estimates Iranian inflation at 71.7%.
Hanke also says the state now has the third highest misery index ranking. The index is the percentage unemployment rate plus the percentage inflation rate. Higher index numbers mean more misery for the population.
While these figures don’t exactly sound like the Iranian economy is doing well. Things will be far worse in the coming months.
It is true that the European partners to the Iranian nuclear the deal, such as Germany and the U.K. are trying to salvage some form of continued arrangement with Tehran, Iran’s seat of government. However, that matters little because few significant corporations would want to spark the ire of the U.S. administration in a way that might cut off their access to the lucrative U.S. market. Remember, that in capitalist economies the government typically doesn’t buy nearly as much as do corporations. It will be the latter that will shun doing business with Tehran.
If you doubt that European companies are worried then consider the following from Reuters discussing the desire of some to get a waiver from the sanctions if they continue to do business with Iran:
[French oil giant] Total said any waiver would need to include protection from secondary sanctions that Washington might impose on companies that continue to do business with Iran. These might include the loss of financing in dollars by U.S. banks, the loss of U.S. shareholders and the inability to continue its U.S. operations, it said.
Or put simply, there is a heck of a lot at stake for any European company that wants to keep trading with Iran.
The Reuters report continues by noting there is little the Europeans can do to counter the U.S. move. It is reasonable to expect scant European government protection from U.S. sanctions and therefore few companies based there will continue trading with Iran.
Harder sell
The first fallout will be that Iran will find it harder to sell crude oil on the global market. The revenue from these sales is a vital source of foreign currency. The Washington-D.C.-based Institute of International Finance sees a reduction in Iranian energy exports of around 300,000 barrels a day, according to a recent report by the think tank.
However, at least some others see things differently with a more substantial reduction in energy exports depending on how companies choose to react.
While Tehran may be able to sell oil to some countries, such as India, China, and Russia, it seems likely that the buyers will ask for a deep price discount given the situation in which Iran now finds itself.
Either way, expect Iran’s currency to continue falling, which will ultimately push up prices of goods and services for consumers inside the country. “We expect average [consumer price index] inflation to accelerate,” states the recent IIF report.
It is important to remember that when the annual inflation rate reaches triple digits (100%) that the spending power of money halves every 12 months. That will place a considerable hardship on the local population of Iran, just as it has in the more extreme example of the hyperinflation in Venezuela.
Protests ahead?
So what? It is when people can no longer afford to feed their families that uprisings happen. Note it was rising food costs that sparked both the so-called Arab Spring in 2011 as well as China’s Tiananmen Square protests in 1989.
Already Iran has experienced mass protests due to the deteriorating economic conditions. They started late 2017 and continued into the early part of this year. See the CNN report here. It may happen again before long.
Capital-drought?
Making matters worse, foreign investment in the country will get hit also. “Uncertainty related to the fate of the nuclear deal will weigh heavily on investment,” according to IIF. Investment is vital for any country to grow. The money either has to come from savings inside the country or from foreign investors. However, due to the sanctions, the money coming from external sources will be severely restricted.
Not only will lack of capital inflows hurt economic growth but it will hamper any efforts to develop or modernize Iran’s domestic industries. In simple terms, the coming capital-drought will place even further stresses on the already beleaguered economy.
IRGC in crosshairs
A separate part of the U.S. sanctions involved a move against the governor of the Iranian central bank and one of his deputies. Both people are accused by the U.S. Treasury of financially supporting the Iranian Revolutionary Guard’s Corps’ Quds Force division. The Quds Force is believed to be the primary way the Iranian government passes support to Hezbollah, according to the Counter Extremism Project website.
“The new measure [by the U.S.] gives substance to the president’s promise to counter Iran’s “aggression” in the region,” states a recent report from geopolitical consulting firm Eurasia Group. Perhaps more important is that it will “suffocate Iran’s ability to move money to its main ally” Hezbollah, the Eurasia Group report continues.
Or alternatively, it may just make it more expensive for Tehran to get the cash to Hezbollah, which seems more likely. The added costs of moving cash around will further drain the state’s coffers and strain the economy.
The bottom line is that the immediate future for Iran’s economy looks bleak.
Source » forbes