Is Iran Headed For Another Recession?

Image by World Economic Forum

Image by World Economic Forum

Garnering over 50 percent of the vote, Hassan Rouhani assumed a decisive victory on June 2013 and became Iran’s new president after Mahmoud Ahmadinejad’s eight year long reign. Vowing to pull the country out of its sanction filled, depressed economy, he won the elections by a landslide. Less than three months ago, during a December 24th speech, Rouhani proudly announced that, after a two year recession, he had made good on that promise. The economy had expanded four percent in the six months from the start of this Iranian year on March 21. Inflation, once around 40%, had more than halved, now at around 17%. But this recent victory may be short lived.

The plunge of international crude oil prices has many questioning Iran’s financial health. Numerous Iranian officials are convinced Saudi Arabia has refused to cut its oil production in an attempt to weaken Iran. With a budget based on sales at US$100 a barrel, Tehran has been forced to cut that projection to $72 this month. Rouhani’s successful revival of the economy is now in serious jeopardy and has him publicly recognizing the importance of non-oil exports.

Another pressing matter? Have all international sanctions against Iran lifted.

“The nation can’t achieve sustainable economic growth while living in isolation. Opening up doesn’t mean letting go of the nation’s ideals and principles,” he said, during a Jan. 4 speech. For years now, Iranian oil exports have suffered harsh Western sanctions as punishment for Tehran’s nuclear program, which Iran contends is peaceful and for power generation only. These sanctions have crippled Iran’s ability to export oil, bleeding it from precious revenue, which is down close to 50% since 2011. The EIA (US Energy Information Administration) estimates that Iran’s oil exports have fallen from 2.5 million barrels a day in 2011 to about one million barrels today as a result of sanctions.

Despite growing efforts to appease the West, Rouhani is facing strong opposition from hardliners back home, such as Supreme Leader Ali Khamenei, who insist the West cannot be trusted to lift sanctions and that Iran can weather the storm and even flourish under an autarchic “resistance economy.” Efforts to lock a deal with world powers over the Iran’s nuclear program have secured Iran some relief from economic sanctions, though negotiations are rumored to have been prolonged until July due to major differences. This potential deal has managed to somewhat halt the collapse of the TIPEX Index, a broad measure of Iran’s stock market.

Another hot topic? The case for foreign investment.

Its $1.2 trillion purchasing-power parity makes Iran the world’s 18th-largest economy. According to the U.S. Energy Information Administration, this country holds the world’s fourth-largest proven crude oil reserves and has the world’s second-largest natural gas reserves. While Rouhani is frantically calling for foreign investment to support the economy, conservative hardliners in Tehran are squirming at the idea of alien companies at home.

Moreover, there is the issue of transparency – or lack thereof. For 2014, Iran ranked 136 out of 175 by the Transparency International, a Berlin-based anti-corruption lobby. Iran’s military force, the Revolutionary Guard Corps, has long enjoyed an extensive commercial empire, controlling seaports and numerous land borders. The flight of foreign energy firms eventually resulted in the Guard’s engineering companies controlling Iran’s oil resources. An organization that once focused solely on defense is now deeply involved in Iran’s business affairs. Their sizable wealth can be largely attributed to their disregard of tax payments, something average business owners can simply not compete with. It is therefore implausible that the Revolutionary Guard Corps will welcome foreign firms that will inevitably disrupt their monopoly. While Ahmadinejad fostered the Revolutionary Guards’ power, Rouhani is now calling for transparency, something that is only intensifying the ongoing power struggle.

As one of the youngest societies in the world, over 60 percent of its nearly 80 million inhabitants are under the age of 30. It is estimated that the government creates only about 300,000 of the approximately 1 million jobs needed annually to absorb young people entering the labor market. With an abysmal 26% youth unemployment rate, the number of Iranians moving abroad continues to escalate as many are forced to leave home and gamble their luck in countries like Sweden, Germany, Canada, Australia and North America. According to the IMF, Iran has one of the highest rates of brain drain in the world. Iran’s government predicts that close to 150,000 highly talented people leave each year. According to the World Bank, this translates to an annual loss of $50 billion. Given that it is national governments that primarily fund Iran’s higher education system, this migration pattern is especially devastating: in financial terms, each skilled worker who leaves the country represents a hefty failed investment.

For many Iranians this is a poignant time, as they struggle to make ends meet. Bread has already gone up 30% since December. An increase in value added tax is on the cards, along with higher fuel and food prices. In the wake of this unfolding financial crisis, Iran must now forge a lifeline with the West or embrace isolation and hope for the best.

Image courtesy of World Economic Forum

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About Itziar Aguirre

Itziar currently works as a Property Sector Analyst at HFF, a commercial real estate capital intermediary. She holds an MBA in Accounting and Finance from the University of St. Thomas and an MSc in Comparative Politics from the London School of Economics.

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