Opinion |

In Iran, It's Not the Economy, Stupid

The protests and headline data give the impression things are falling apart, but the economy is actually quite resilient

David Rosenberg
David Rosenberg
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A demonstration against a gasoline hike, Tehran, November 16, 2019 after a surprise decision to increase petrol prices by 50 percent for the first 60 litres and 300 percent for anything above that each month, and impose rationing.
Rioting over gasoline hikes in TehranCredit: AFP
David Rosenberg
David Rosenberg

If he weren’t so preoccupied with events on Capitol Hill, Donald Trump would probably be a happy man these days. Just a little over a year after he imposed the “maximum pressure” campaign on the Iranian economy, ordinary Iranians have taken to the streets in protest. They’re not just expressing their anger over rising gasoline prices but calling for the regime’s overthrow, and the government has reacted with force.

It’s just how the Trump administration fantasized it: Economic pressure would create unrest and …. Well, it’s not exactly clear whether the White House wants all this to result in new nuclear negotiations or regime change. But no matter, after a few tense months earlier this year when it looked like Tehran had gained the upper hand with anonymous attacks on U.S. and Saudi targets, it now seems to be in deep trouble over the economy.

A big hike in gasoline prices was inevitable. Gas subsidies are estimated to cost about $69 billion annually, or about 15% of Iran's gross domestic product.

With the economy itself is contracting sharply -- by 9.5% this year, according to the International Monetary Fund, that is an intolerable burden.

U.S. sanctions slashed oil exports by 80% or more and have effectively cut off trade and investment ties with the rest of the world. The rial has lost nearly two thirds of its value in the last 18 months and inflation has been running as high as 52% this year. Food inflation, which is the kind that hits ordinary people the hardest, is estimated to be at twice that level. Unemployment may reach 18% next year, the IMF forecasts.

Worse still, Iran’s economic problems don’t stop at the border. Iraq, Lebanon and the Gaza Strip, where it has formed a network of political and military ties, are in deep economic distress and mass protests that threaten the ability of local regimes to say in power. Tehran regards these alliances as critical to its national security, but it doesn’t have anything near the economic resources to bail out its clients.

Trembling in Tehran?

Is it just a matter of time before the regime in Tehran succumbs? Although Trump seems to regard sanctions as Tool No. 1 in dealing with disagreeable countries, their record in getting leaders in places like Russia, North Korea and Venezuela to bend to Washington’s will is less than perfect. The best you can say about them is that they take time.

In the case of Iran, the headline figures about economic distress are misleading in critical ways.

Iran is not quite the oil economy that, say, Saudi Arabia and the Gulf emirates are. Petroleum hasn’t accounted for more than a fifth of GDP and half of exports in the past, and it doesn’t employ a lot of people. So, while oil sanctions can inflict a lot of pain when they are first imposed, they don’t bring economic activity to a standstill.

Ironically, the non-oil sanctions may be giving the Iranian economy a small boost. Apart from oil, pistachios and carpets, Iran is not a globally competitive economy, but it does have a manufacturing and agricultural base. There’s plenty of sanctions-busting going on – by one estimate it may account for half of GDP – but the bottom line is that sanctions have crimped import competition.

Iranian industry has the local market and is expanding output. As a result, manufacturing has been growing as has employment while the rial has stabilized at a rate of 115,000-120,000 to the dollar. Media reports say there are plenty of 'Made in Iran' consumer goods on store shelves.

The “resistance economy” may not be quite the miracle Tehran leader’s tout, but it could be enough to stabilize the situation after the initial shock over oil sanctions have passed.

Forecasts for the Iran going forward point in that direction. The World Bank, for instance, agrees with the IMF that Iranian GDP will contract sharply in 2019-2020 but afterwards start growing again and inflation will settle down at a 20% annual rate.

Whether this kind of stability is enough to keep Iranians off the streets and the regime in power is far from clear.

The World Bank estimate assumes, for instance, that Iran continues to export 500,000 barrels per day of oil, which is optimistic given the tepid global demand for oil. Chronic double-digit inflation and joblessness isn’t exactly a formula for social peace, even if the rates are stable at those levels.

Nevertheless, if the Trump White House is banking on regime change, the odds remain poor.

What’s more probable is that Tehran will eventually agree to start negotiations, which is exactly what happened the last time around. Under pressure from U.S. sanctions, Iran’s economy shrank 7.4% in 2012, but by the time it began nuclear talks with the U.S. the situation had stabilized, with down GDP down a mere 0.2% that year. The worst was over economically for Iran, but apparently the leaders realized that stability like that was unsustainable.

For Trump the idea of following the trajectory of sanctions leading to negotiations is loathsome, if for no other reason is that it was an Obama policy and Trump’s raison d'etre often seems to be to do whatever Obama didn’t. Yet that seems to be exactly where we’re going.

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