Government to blame for Iran’s deepening recession

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Central Bank of Iran

Central Bank of Iran

Majid Kakavand

Majid Kakavand

IRGC – Islamic Revolutionary Guard Corps

IRGC – Islamic Revolutionary Guard Corps

When the Iranian authorities boast about Iran’s “resistance economy,” they are attempting to hide the fact that the government’s economic problems have deepened to a dangerous level.

Iran’s official reserves dropped to a record low of $4 billion last year, down from $122.5 billion just two years earlier. This has partially contributed to the devaluation of the currency. Iran’s currency was trading at about 30,000 rials to the US dollar in 2018, compared to approximately 240,000 now.

In the last two years, many companies have gone bankrupt as the government continues to increase its monopoly. Iranian economist Farshad Momeni last week warned: “The number of bankrupt firms is growing dramatically. Official reports say that the number of enterprises in the country has increased from 16,800 in 2005 to 14,452 in 2014. While we had more than 2,500 bankrupt units. At a time when production is on the verge of collapse, the government is making life harder for producers by manipulating key prices due to its financial constraints. After fixed wage earners, who are among the most vulnerable social groups, taxing is affecting mostly the producers.”

It is also projected that inflation, which was 36.5 percent last year, will reach 39 percent in 2021. This is making life extremely difficult for ordinary Iranians, as the price of basic goods keeps rising while wages have mostly remained stagnant. It is worth noting that a standard rate of inflation is about 2 to 3 percent per year.

The economic situation has become so dire that the government is contemplating printing more banknotes. There are reports the regime has already been doing this while keeping the public in dark. This will increase inflation even further. Abdul Nasser Hemmati, governor of the Central Bank of Iran, this month revealed in an interview with Iran’s state-controlled Channel Three: “In 2019 and 2020, parts of the government budget were financed through the National Development Fund’s foreign exchange earnings, which simply means printing money.”

In order to finance the government, the regime has also resorted to issuing a significant amount of bonds at extremely high interest rates. But this strategy will not address the regime’s budget deficit in the long term. State-controlled newspaper Vatan-e-Emrooz last month disclosed: “Since early 2020, the government has issued and offered government bonds to finance the required materials of its budget. According to statistics released by the Central Bank, Treasury and the Ministry of Economy, the government has issued nearly 200 trillion tomans of debt securities since the beginning of this year. These bonds are generally issued with maturities of one to three years and their interest rate has been about 22 percent.”

While the regime attempts to blame the US sanctions for its problems, these are only part of the equation.

To address its financial woes, the Iranian government needs to implement major structural changes, which are not likely to occur given the regime’s history. The regime needs to reintegrate into the global financial system. But to do so it is required to implement the Financial Action Task Force’s (FATF) 10 reforms in order to bring its national laws against money laundering and the financing of terrorism in line with global standards.

But the regime will not halt its money laundering or terrorism financing. Last year, the FATF placed Tehran on its terrorism financing blacklist, stating that: “Given Iran’s failure to enact the Palermo and Terrorist Financing Conventions in line with the FATF Standards, the FATF fully lifts the suspension of counter-measures and calls on its members and urges all jurisdictions to apply effective counter-measures.”

This issue has significantly isolated the country from the global market. This means that, even if the Biden administration rejoins the nuclear agreement, many companies and financial institutions will be reluctant to deal with Iran. Even state-controlled newspaper Asr-e-Eghtesad acknowledged: “Due to Iran’s non-membership in reputable and powerful organizations such as Shanghai, Iran’s economy has benefited less from the benefits of globalization and international relations. This issue has made many foreign investors reluctant to enter the Iranian market.”

US sanctions, accompanied by the economic mismanagement of the government, a high level of corruption, the lack of a robust private market, and a state-controlled economy have pushed more people in Iran toward poverty. About half of all Iranians are reportedly now living below the poverty line.

The state’s monopolization of the economy applies to almost every sector. When it comes to Iran’s economic system, the supreme leader and the Islamic Revolutionary Guard Corps have a considerable amount of control and shares in almost all industries, including financial institutions and banks, transportation, automobile manufacturing, mining, commerce, and the oil and gas sectors.

As long as the cash-stripped Iranian government declines to implement structural changes, its economy will continue to deteriorate.

Source » eurasiareview

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