Iran’s government faces acute economic challenges as it announced its annual budget yesterday, and not all of its problems are the result of US sanctions.
The rial has lost about half its value against the US dollar since US President Donald Trump announced he was withdrawing from the 2015 nuclear deal in May and reimposing sanctions. That has driven up prices and blocked much of the foreign investment Iranian President Hassan Rouhani had hoped to attract, with the IMF now predicting the economy is to shrink by 3.6 percent next year.
However, analysts say many of the country’s woes predate Trump and the sanctions.
Photo: EPA-EFE
The banking system is the “biggest problem — riddled with fictitious assets and non-performing loans,” Iran-based economist Mohammed Mahidashti said.
Banks issued huge loans under former Iranian president Mahmoud Ahmadinejad, with little apparent care for whether they would be repaid. Parliament’s economic commission in March said that half of all these loans — worth about US$27 billion at the time — turned sour.
Desperately short of funds, banks have tried to attract fresh deposits with interest rates of 30 percent or more.
While providing a much-needed source of liquidity initially, the interest on these deposits has only added to banks’ instability.
Rouhani has said that “unhealthy” banks were being kept afloat by continuously borrowing from the central bank, and the debts of private lenders have doubled in the year to September.
Banks are also saddled with unsellable properties after pumping cash into a construction boom that ran out of steam in about 2013.
“We have close to 2 million empty houses in Iran. There is simply no demand out there,” said Narges Darvish, an economics lecturer at Tehran’s Alzahra University.
However, the government is loath to let banks fail, fearing a public backlash — especially after the collapse of dodgy credit agencies helped fuel widespread protests a year ago.
The US withdrawal from the nuclear deal fueled a run on the Iranian rial, but was not the only factor behind the currency’s weakness. In September, Central Bank of Iran Governor Abdolnasser Hemmati instead blamed “horrific growth in money supply.”
Bank data shows that the amount of cash flowing around the Iranian economy has increased 24 percent annually for the past four years.
Given that Iran’s economy offers few profitable and secure investment opportunities, citizens had already long sought to change rial savings into US dollars. When rising expectations that the US would reimpose sanctions pressured the rial in earnest early this year, the government’s reaction was a mess, economist Mousa Ghaninezhad said.
“They claim they believe in the free market, but they have no coherent strategy,” he said.
In April, the government forcibly shut down exchange houses and tried to fix the rate at 42,000 rials per US dollar — which only fueled panic and drove speculators into the black market. Recognizing its mistake, the government reopened exchange shops and sacked the central bank governor a few months later.
A fierce crackdown was also unleashed on those exploiting the situation, with dozens of traders put on trial and at least three businessmen executed since October.
However, the damage has been done. Imports are vastly more expensive as sanctions make it harder to move goods into the country.
Prices have been rising as a result — the cost of food and drink rose 60 percent in the year to last month, according to the central bank.
Despite a privatization drive, much of the economy remains in the hands of the state, either directly or because groups connected to the government or military are the major shareholders. This has stifled the private sector, which struggles to attract investment and compete for projects, analysts say.
Economist Ehsan Soltani said that state-controlled industries such as steel and petrochemicals benefit from huge subsidies — totaling about US$40 billion a year in fuel and electricity discounts — but create relatively few jobs and returns.
“These industries are only wanted because of rent and corruption,” he said.
Hopes that the nuclear deal would bring a flood of foreign investment to boost the private sector have been dashed by the return of sanctions.
Meanwhile, efforts to bring greater transparency — notably, new laws against money laundering — have been opposed by powerful vested interests, Iranian Minister of Foreign Affairs Mohammed Javad Zarif said.
“Those places that launder thousands of billions [of rials] are certainly financially capable of spending a few hundred billion on propaganda” against the laws, Zarif told Khabar Online news agency last month.
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