Iran's untenable economy
An Iranian woman shops at a bazaar in Isfahan on July 7, 2009.
August 5th, 2011
04:00 PM ET

Iran's untenable economy

Editor's Note: Dina Esfandiary is a Research Analyst and Project Coordinator at the International Institute for Strategic Studies in London.

By Dina Esfandiary, The Diplomat

Mention of the words ‘structural reform’ these days usually conjures up images of the unrest in Greece. Bu taccording to a new report from the International Monetary Fund, Iran has also been restructuring its economy, introducing changes that have resulted in an unexpected growth rate of 3.2 percent in 2010-11.

Maybe.

Following a two week visit to Iran and discussions with Iranian officials in the spring, the IMF reviewed its initial criticisms, and applauded the regime’s removal of its decade-long subsidy programme. But economic mismanagement by Tehran has prompted scepticism of these findings – and is threatening to wipe out the potential for long-term growth.

Until December 2010, Iran was spending about a quarter of its GDP on food, fuel and electricity subsidies, and the dismantling of the subsidies system therefore removed a major financial burden for the government. The promise of $40 per month, deposited straight into the accounts of registered lower income families, has supposedly raised disposable income and acted as a stimulus to the Iranian economy.

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Iran was also able to open up its economy and adjust prices to market level. The rise in global oil prices has, according to the IMF report, improved current account and budget surplus, and helped ‘maintain comfortable international reserves.’ The jump in energy costs from the removal of the subsidies has reduced wasteful demand and lowered pollution in big cities. And all of this occurred without a peep from the opposition, allowing the government to publicize it as a major success.

But the IMF’s findings should be taken with a sizeable pinch of salt.

Following the removal of the subsidies, the fear that consumers would change their spending habits and switch to buying foreign goods, which were not affected by the rise in prices, is being realised. This means that the publicized rise in disposable income isn’t being spent on Iranian goods, and so is not being re-injected into the Iranian economy.

The $40 compensation scheme is controlled by the Revolutionary Guards, which means cash transfers can and have been blocked when the receiver is not in their good books. Industrial and agricultural producers, meanwhile, haven’t always received the financial aid promised to them, leading many of them to shut down. Some within the regime have also questioned the provenance of the funds needed for the cash transfers, saying that the subsidies haven’t led to the anticipated hike in government revenues.

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In addition, Iran’s economy has been performing poorly. Unemployment is high, stagnating just below 15 percent for the past few years, leading to criticism of President Mahmoud Ahmadinejad, who said in March that his government had created 1.7 million jobs in the past year.

According to Behrouz Moradi, the Subsidies Reform Organisation Chief, the inflation rate for the first three months of the Iranian calendar (beginning 20 March 2011) was 13.2 percent, 14.2 percent and 15.4 percent respectively. But even some Iranian officials find these figures dubious. Khabar Online, a news site linked to Majles speaker Ali Larijani, estimated that the inflation rate would reach 26 percent by the end of 2011. In addition, there’s a great deal of evidence on the streets of Tehran suggesting that the cost of living has gone up beyond what is being advertised. The cost of food, clothing and home bills have been soaring, up 137 percent according to an Iranian financial newspaper. As a result, some Iranians have refused to pay their utility bills, taking them to Khomeini’s tomb and shredding them in a sign of protest.

The country’s dependence on the energy sector, especially oil, may have benefited the economy so far, due to the rise in oil prices. But it also leaves it exposed to fluctuations on the world market and means that as the oil runs out, the government’s revenues and exports will fall dramatically.

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Iran’s economy is still largely state-owned, with the Revolutionary Guards involved in a large portion of transactions and trade. Corruption and nepotism, which extend into the public sector, have seriously restricted economic development and foreign investment. Transparency has been snubbed in favour of secrecy to avoid ‘analysing the situation from a negative viewpoint and launching smear campaigns’ according to Ayatollah Khamenei; justifying the decision not to allow the Iranian Central Bank to release any statistical information in July. It’s not surprising, then, that Iran ranks 171 out of 179 in the Heritage Foundation’s Index of Economic Freedom.

International sanctions haven’t helped. Regulations imposed on the banking sector have made it hard for Iran to do business with its trading partners, and have also contributed to the growth of an informal sector, further distorting the economy and generally raising the cost of doing business with Iran.

The structural weaknesses of the Iranian economy are largely due to its mismanagement by the regime. Although the removal of the subsidies (so dear to the IMF) should lead to growth in the long-term, for now, it has only contributed to worsening an already untenable situation.

The views expressed in this article are solely those of Dina Esfandiary. For more excellent analysis of Asia, visit The Diplomat.

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Topics: Iran

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soundoff (43 Responses)
  1. Dele.

    Bravo!!! Well written propaganda. What now is your pay? Anti-Mahmudists will surely applaud u for this.

    August 5, 2011 at 7:21 pm | Reply
    • iRun

      How are facts propaganda?

      August 8, 2011 at 1:50 pm | Reply
    • Chuck

      All you need to know about this desert outcrop or Syria is that they don't allow international journalists. That tells you all you need to know about the charlatans that control the levers and their small minded minions.

      August 8, 2011 at 3:56 pm | Reply
    • NonZionist

      He meant to write "America's untenable economy", but wrote "Iran" instead, by mistake.

      Iran is doing amazingly well. It's developing alternative energy (solar, wind, nuclear, natural gas). It's expanding its refinery capacity at Abadan and spending $3.07 billion on refinery expansion at Arak and Shazand.

      The sanctions have forced Iran to become self-reliant: While we Americans ship our jobs overseas, Iran is learning how to produce all it needs at home. The sanctions also insulate Iran from the global economic collapse we are seeing today.

      August 8, 2011 at 5:02 pm | Reply
      • Calvin

        All of the alternative energy in the world that they can create won't help one bit in making the youth of Iran more worldly humans, eager to learn other cultures and languages and open to examine other religions and belief systems. God forbid you are a young 18 year old gay male in this ridiculous society run by Neanderthals, Charlatans, Snake oil salesmen and plain mafia styled thugs. Globalization is a term that won't find its way to Iran for another generation when the snake oil salesmen have finally turned to dirt.

        August 8, 2011 at 5:44 pm |
  2. chuckles

    i say we remove all governments and just let people control the flow of trade and markets. if small communities of people own the land then foreigners must negociate to access those resources. a peaceful anarchist eutopia that will never exist.

    August 5, 2011 at 9:51 pm | Reply
    • Kraznodar

      Obviously what you envision leads to a crappy education which will result in the collapse of civilization and a return to animal powered farming.

      August 8, 2011 at 4:07 pm | Reply
  3. smile

    is it written by zakarria? is he specialist in this field two? iran s situation is very weak and bad and is becoming worse but it is still in the center of concern for u.s west all the international media arab world and they are still thinking wethter the sanctions worked or not .why so much talk about this poor iran?

    August 6, 2011 at 1:22 am | Reply
    • seraphim0

      Have trouble reading the by-line, did we?

      August 8, 2011 at 1:57 pm | Reply
  4. j. von hettlingen

    "Corruption and nepotism, which extend into the public sector, have seriously restricted economic development and foreign investment."
    The main reason why the late Shah Mohammed Reza Pahlavi was overthrown was that his regime was thoroughly corrupt and autocratic. The economy was in good shape. He made a mistake by imposing a western life-style, which gave the conservative Shia muslims the chance to oust him,

    August 6, 2011 at 8:48 am | Reply
    • Tamara Chen

      If he had given people a choice, maybe he would still be in power

      August 8, 2011 at 11:57 am | Reply
    • iRun

      I guess Iran erased the real history of the overthrow of the Shaw. Iran as a whole wanted a democracy. It was Khomeini and his thugs that took over the revolution and created the theocracy Iran has to suffer under. Iran's current government makes Nazi's look like boy scouts.

      August 8, 2011 at 1:53 pm | Reply
      • Sandman

        History is written by the victor.

        August 8, 2011 at 5:21 pm |
      • JLS639

        "Iran's current government makes Nazi's look like boy scouts."

        Correct until this line. You undermine your point with this kind of drivel. There has been nothing like the kinds of persecution of political and religious minorities in Iran that characterized Nazi Germany. What happens in Iran is mostly marginalization of those who oppose the theocrats. There has bee nothing like Kristalnacht, no mass evictions of "undesirables" or diagnosing socialists or other political activists as criminally insane. There has certainly been nothing approaching the genocides that characterized the late Nazi regime.

        August 8, 2011 at 6:00 pm |
    • Clever

      Corruption and nepotism in this highly religious country? Just goes to show that their government is built on spit and farce.

      August 8, 2011 at 4:00 pm | Reply
    • Rita

      Ahmadinejad says that there are no gay people in Iran. But they do have an unsustainable fertility rate. The average age there is about 17 or 18. They are completely eat up with religion and other fairy tales. Now we find out that they do have rampant corruption and nepotism that flows through all areas of society. What self-respecting gay would want to live there anyway?

      August 8, 2011 at 4:17 pm | Reply
  5. Brett

    Who gives a rats ass about Iran!

    August 8, 2011 at 11:03 am | Reply
    • Len

      Agreed!

      August 8, 2011 at 12:51 pm | Reply
    • NonZionist

      I do!

      We Americans used to find other countries interesting. Now we are retreating from the world and bragging about how little we care. Do you find that sad?

      Our war-making causes us to see the world in Manichaean (black and white) terms. Everything is labeled either a Friend or an Enemy. Once we stick the label on the country, we look no further. All of the Friends are "Just Like Us", and all of the Enemies are "Run By Madmen".

      This intensely boring and predictable worldview is the result of paranoia: We lose interest in distinctions, in fine points, in colors.

      If we could leave our paranoia behind, we might find much of interest in Iran, and we might even learn something. For example, we might find Khatami's call for a "Dialogue Between Civilizations" more helpful than Samuel Huntington's proposal for a "Clash of Civilizations". Or we might find value in Iran's call for a nuclear-FREE zone in the Middle East. Or we might find interesting parallels between the function of Iran's theocracy and the function of the CFR here in the U.S.: Both steer the political debate.

      August 8, 2011 at 5:17 pm | Reply
  6. Robert

    Now all they need to grow is a few good bunker busters.

    August 8, 2011 at 11:57 am | Reply
    • glenn robert

      To use on whom?

      August 8, 2011 at 12:51 pm | Reply
  7. IndiaRocks

    America, worry about your own economy for now.

    August 8, 2011 at 1:18 pm | Reply
    • Ajay

      Now dont start spamming again dude.

      August 8, 2011 at 1:52 pm | Reply
    • seraphim0

      Actually, IndiaRocks, this was written by a gentleman in London. Score for reading comprehension, eh?

      August 8, 2011 at 1:58 pm | Reply
    • NonZionist

      America's debt-based currency is what is untenable: We borrow "money" created out of thin air by a private banking consortium, then borrow more imaginary "money" just to pay the interest on the "money" we've already borrowed.

      * Debt grows exponentially
      * The banksters dominate the government
      * Democracy gets pushed aside
      * The bottom levels of the pyramid are sacrificed
      * Demand falls
      * Jobs are lost
      * Demand falls still further
      * A tailspin develops

      Iran should experiment with the alternative: Debt-FREE currency. Localities that have tried it have prospered. Google "debt-free currency".

      August 8, 2011 at 5:41 pm | Reply
  8. Lex

    Won't it be fun when they have nukes?

    August 8, 2011 at 2:58 pm | Reply
  9. Petercha

    Here's hoping that the PEOPLE of Iran rise up, overthrow their government, and install a new one that is not rabidly anti-Israel and anti-America like the current one is.

    August 8, 2011 at 3:16 pm | Reply
    • NonZionist

      Iran has been seeking better relations with the U.S., since 1995. It's efforts have been blocked by AIPAC.

      In 2003, Iran offered the U.S. a comprehensive peace. Cheney wasn't interested.

      Iran HAS helped the U.S. in the war against the Taliban. Karzai has praised Iran's contribution.

      Ahmadinejad has written open letters to the American people, to President Bush, and to President Obama. For example, see NY Times, 6 Nov 2008: President Mahmoud Ahmadinejad of Iran sent an unusual letter congratulating Barack Obama for his victory in the American presidential race.

      Ahmadinejad's attempts to start a dialogue have been systematically rebuffed. We Americans have turned Iran into our "Great Satan".

      August 8, 2011 at 5:50 pm | Reply
  10. Aytalooah Tyrone

    So, basically what you saying, Iran's economy is as bad/good as U.S.... But Iran actually has a cash reserve and U.S uses it's credit car/china.

    August 8, 2011 at 3:50 pm | Reply
  11. Kraznodar

    If Iran's government had really wanted to make things better they should have killed the subsidies and also built oil refineries in Iran instead of selling the crude oil and buying back the gasoline/petrol at much higher prices.

    August 8, 2011 at 4:09 pm | Reply
    • NonZionist

      Iran is increasing capacity at its Abadan refinery (400,000 b/d). It's also spending $3.07 billion on expansion of its Arak and Shazand refinery.

      Iran is also developing wind power and solar power. Google "Iran alternative energy". See, for example:

      " Iran pledges to boost renewable energy capacity / Official announces plan to build 2,000MW of new capacity", BusinessGreen, 21 Jan 2010

      "Iran and Brazil Can Do It. So Can We.", Washington Post, 6 Jul 2008

      August 8, 2011 at 4:48 pm | Reply
  12. Plexie

    I like Iran, they have a lot of sand, and a lot of Iranians, and, oh, did I mention that they have a lot of sand,?

    August 8, 2011 at 5:09 pm | Reply
    • Educator1

      Plexie, isn't it obvious that this discussion is between intelligent, educated people with obvious knowledge of Iran? You should perhaps turn back to the "jersey shores' chat room or go back to producing more children with your siblings..... Or maybe move your trailer to a different spot as to avoid the upcoming wind storm???? Leave the intelligent conversations to the folks that know a little about what they are talking about. OK??

      August 21, 2011 at 11:51 am | Reply
  13. Yakobi.

    Good! Hopefully other governments will tighten the screws by increasing the sanctions and their whole economy will collapse, taking down the ayatollahs with it.

    August 8, 2011 at 5:25 pm | Reply
  14. Kat

    The government in Iran has more important things to worry about than the economy, such as government issued statements about acceptable men's haircuts, and discouraging men's jeans, because according to them, jeans elevate the temperature of your manhood and could possibly render you spermless.

    August 8, 2011 at 5:30 pm | Reply
  15. dave

    F-–your couch Ni-–a!

    August 8, 2011 at 10:54 pm | Reply
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