Iran's Economic Challenges Go Beyond US Sanctions

Published December 26th, 2018 - 10:50 GMT
Iran's government faces acute economic challenges as it announces its annual budget. (Shutterstock)
Iran's government faces acute economic challenges as it announces its annual budget. (Shutterstock)

Iran's government faces acute economic challenges as it announces its annual budget, expected on Tuesday, and not all of its problems are the result of US sanctions, said an AFP report Tuesday.

The rial has lost around half its value against the dollar since US President Donald Trump announced he was withdrawing from the 2015 nuclear deal in May and re-imposing sanctions.

That has driven up prices and blocked much of the foreign investment President Hassan Rouhani had hoped to attract, with the International Monetary Fund now predicting the economy will shrink by 3.6 percent next year.

But analysts say many of the country's woes pre-date Trump and the sanctions.

Iran-based economist Mohammad Mahidashti says the banking system is the "biggest problem -- riddled with fictitious assets and non-performing loans".

Banks issued huge loans under Rouhani's predecessor Mahmoud Ahmadinejad with little apparent care for whether they would be repaid, explained AFP.

Parliament's economic commission said in March that half of all these loans -- worth around $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.

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Rouhani said recently 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 around 2013.

"We have close to two million empty houses in Iran. There is simply no demand out there," said Narges Darvish, an economics lecturer at Tehran's Alzahra University, according to AFP.

But 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 governor Abdolnasser Hemmati instead blamed "horrific growth in money supply".

Its 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 dollars.

And when rising expectations that the US would re-impose sanctions pressured the rial in earnest in early 2018, the government's reaction was a mess, according to economist Mousa Ghaninezhad.

"They claim they believe in the free market but they have no coherent strategy," he told AFP.

At one point, in April, the government forcibly shut down exchange houses and tried to fix the rate at 42,000 rials per 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.

But the damage has been done. Imports are now vastly more expensive at the same time 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 November, 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 says state-controlled industries like steel and petrochemicals benefit from huge subsidies -- totaling around $40 billion (35 billion euros) 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 told AFP.

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, according to Foreign Minister Mohammad Javad Zarif.

"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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