Like almost everything else in Iran in 2018, the economy was largely affected by two factors: The reimposition of U.S. sanctions and the protest demonstrations that swept across the country in over 100 cities at the beginning of the year.
The protests in late December 2017 and January 2018 were not totally propelled by economic factors. Concerns about rising inflation, high unemployment and corruption were only partly behind the protests, which had stronger political motivations. It will long be remembered how protesters chanted slogans against Supreme Leader Ali Khamenei and demanded regime change.
Meanwhile, the United States withdrew from the nuclear deal with Iran in May and re-instated crippling sanctions affecting Iran's economy. The sanctions were re-introduced in two phases. During June and July, concerns raised by fear of looming sanctions that would start initially in August brought about massive demonstrations in the Iranian bazaars in Tehran and other major cities. Again anti-regime people chanted anti-regime slogans.
Foreign Currency Market and Devaluation of Rial
The forex market was the worst hit part of Iran's economy in 2018. Before the second round of sanctions that targeted Iran's oil exports, banking system and shipping, the drop of Iranian rial’s value brought it down to as low as 190,000 per dollar, which marked the most serious devaluation of Iran's currency in history. The rate of exchange for the dollar in late summer was more or less six times as high as the beginning of the year.
The 30,000 rials per U.S. dollar rate of mid and late 2017 rose to 47,000 rials in January 2018. In mid-February, Iranian police cracked down on unlicensed money changers in Tehran, arresting around 100 traders.
The U.S. dollar kept rising against the rial reaching a record high on March 13, as attempts by the Central Bank of Iran (CBI) during the preceding months to defend the local currency appeared to have failed. One dollar was traded for 48,000 rials in Tehran on March 13.
On March 26, the Iranian rial fell to a record low breaking through the 50,000-to-the-dollar mark for the first time as analysts blamed negative signals from Washington about the future of the 2015 nuclear agreement. The rial lost around a quarter of its value in six months, hitting 50,860 against the U.S. dollar in late March.
On April 10, Iran tried to enforce a “single rate of exchange” of 42,000 rial for U.S. dollar and a the next day a hardline Ayatollah called for the execution of “a few main foreign exchange dealers” to prevent further devaluation of the rial.
On April 15, Iran’s central bank banned the sale of foreign currencies at exchange bureaus. Under new government guidelines, exchange bureaus no longer had the right to buy, sell, or transfer foreign currencies, and the central bank would no longer provide cash foreign currencies to the bureaus.
A new directive issued by the Central Bank of Iran (CBI) on May 14 set strict limits on the amount of foreign cash travelers could take with them out of the country; days after Donald Trump announced the U.S. withdrawal from the Iran nuclear deal.
In spite of often ineffective measures by the central bank and the government to save the rial, the free fall of Iran’s currency continued and in September and October the rial fell to a historic low with the rate of exchange of over 190,000 rials per dollar.
Regardless of the ongoing insecurity and instability of Iranian markets, particularly after the reimposition of U.S. sanctions, the Iranian government has been constantly trying to conceal the crisis or to test various tactics to confront it, though with very little if any success.
As the Islamic Republic is planning to celebrate its 40th anniversary in February 2019, bringing about at least a semblance of stability to the market is a matter of prestige and saving face for the regime.
Through central bank interventions and restricting business activities, the rial has recovered a good chunk of its losses against major currencies, but still three times lower than a year ago. And that was pretty much Tehran's only success or good luck in sorting out its economic problems. Sanctions hit other sectors of the economy badly enough to make most Iranians less better off by the end of the year as their investments and assets lost at least two third of their value.
According to the latest report by the parliament's research center, 11 percent more people have fallen below the poverty line in the Tehran region.
The parliament puts the poverty line in the Iranian capital, Tehran, at a monthly income of about $233, based on the free market exchange rate, for a family of four and slightly more than one-fourth of that for a single person.
Up to 15 percent of Iranians live below this absolute poverty line nationwide, the parliamentary report says, adding that until 2016 the percentage of those living in poverty was still a single-digit figure. Independent economists and analysts have put this figure much higher; between 20-25 percent.
A Budget With Shrinking Revenues
On December 14, the intervention of Islamic Republic's Supreme leader interrupted the process of presenting Iran's new budget bill for approval. Khamenei wanted to review the budget himself before parliament took it up.
A catalogue of problems including uncertainty about the Islamic Republic's future, perceived threats and vulnerabilities due to U.S. sanctions, and the Iranian leader's lack of confidence in the government’s ability to cope with the ongoing economic crisis appear to have led Khamenei to directly intervene in the budget.
Furthermore, increasing the defense budget by withdrawing money from the National Development Fund could also be the objective of Khamenei's intervention, as some MPs have pointed out.
Finally the budget was submitted to parliament on December 25, but there are no details about its appropriations.
According to Planning and Budget Organization Chief Mohammad Baqer Nobakht, the budget for the fiscal year starting in March 2019 is 12% more than the budget for the previous year and should reach 4,330,000 billion rials. But with a higher dollar exchange rate they have set for the new budget, the figure in dollars will come to around $75 billion, $29 billion less than the current budget passed last December.
The budget is drawn based on selling one to 1.5 million barrels of oil per day (One million barrel less than the figure in the current year's budget bill) at a projected price of $54 per barrel but all this may change as a result of upcoming developments and the way US sanctions affects Iran's oil export. Already world oil prices have significantly dropped, making Iran’s oil cheaper than $54.
It was reported in September that Iran may be considering a plan to ration foodstuffs and other essential commodities.
On September 2, the parliament discussed a bill that called on the government to import essential commodities and sell the goods at subsidized prices at cooperatives and state-owned shops, said the parliament's website.
MPs who have tabled the bill listed meat, rice, sugar, bread, and other items as essential commodities. MP Mohammad Mahmoudi Shahneshin suggested essential commodities including foodstuffs should be distributed via coupons or other means, Iranian media reported.
The Iranian government has lost two thirds of its revenues, according to statements from the head of the Planning and Budget Organization (PBO) on December 5 that were quickly removed from official websites. The budget shortfall is largely due to losses in oil revenue as a result of sanctions.
Inflation, Rising Cost of Living
The Iranian Statistical Center has announced that the inflation rate in Iran for the period between 23 October and 22 November has risen by 34.9 percent compared to the same period last year. The term "hyperinflation" became popular in the Iranian media after an economic publication quoted Steve Hanke, an economics professor in Johns Hopkins University, using the term when he said in the summer of 2018 that he believed the annual inflation rate in Iran was 151 percent.
Meanwhile, the International Monetary Fund projected in November that Iran's inflation rate will jump to over 40 percent by the end of the year even as its economy sinks into a deep recession,
In a report on Middle Eastern economies released on November 13, the IMF projected that U.S. sanctions will push Iran's economic output down by 1.5 percent this year, with its recession deepening into a 3.6 percent contraction next year.
"This largely reflects the expected impact of the reimposition of U.S. sanctions on Iran, which is likely to reduce Iranian oil production and exports significantly over the next two years at least," the IMF said.
Residential real estate prices in Tehran have risen 54.4 percent in the past 12 months, according to the Central Bank of Iran (CBI) on July 28.
In its latest report on the capital city’s housing market, CBI also reported that the price per square meter for Tehran residential units increased to 69.7 million rials (roughly $1,600).
The report pointed out that housing prices have increased 7.1 percent per square meter, compared with the last Iranian calendar month (May 22-June 21).
Impact of Sanctions, Denials and Admissions
High inflation affected the quality of life for many Iranians. The latest figures released by the Central Bank of Iran (CBI) in early November, put the rise in real estate prices between October 2018 and the same month last year at 83.5 percent.
The CBI says house prices in Tehran are now based on the benchmark of 86,100,000 rials per square meter of built-in area. This amounts to around $575 per sqm or $52 per square foot at the open market exchange rate, which is more relevant in this case since sellers cannot get cheap dollars based on the government rate.
At the same time, Iranian workers lost 90% of their purchasing power, said the chairman of the Supreme Center of Council's Committee (SCCC) for wages, Faramarz Tofiqi on October 5.
In another development, while economists are warning about a hyperinflation that would soar up to 65 percent, President Hassan Rouhani has ruled out the danger, calling the economists "liars."
Rouhani said early November that U.S. sanctions have had no effect on Iran's economy because Washington had already practically reimposed them earlier. "The sanctions have had no impact on our economy because America had already used all the weapons at its disposal and there was nothing new to use against us," Rouhani said in remarks carried live on state television shortly after having to reshuffle the economic team of his cabinet.
Rouhani's denial of the impact of sanctions contradicted earlier remarks by his vice-president. On September 11 Iran's first vice-president Es'haq Jahangiri admitted that U.S. sanctions against Iran have been "highly effective."
Jahangiri also said that Iran is experiencing "a difficult and sensitive situation," but it has not reached a "deadlock" yet, Iranian Students News Agency ISNA quoted him as saying in a speech in Tehran.
Jahangiri added, "The U.S. has declared an economic war on us. Meanwhile they are waging a political and media war in order to influence public opinion in Iran."
The impact of sanctions on life quality became evident as early as August. Health ministry spokesman admitted that the country was suffering from shortages of foreign-made medications, but, insisted that “it can be overcome”.
Blaming chaotic fluctuations in Iranian forex market and nosediving national currency, Iraj Harirchi said, “Since forty-fifty types of foreign medications have recently become scarce in Iran, the government has allocated $3.5 billion to purchase drugs.”
The comments were published almost a week after the first batch of the new U.S. sanctions imposed on Iran was implemented. However, food and medication are not targeted by the sanctions.
On October 11 Iran's Supreme Leader Ayatollah Ali Khamenei ordered officials to urgently find solutions to ease an economic crisis spurred by the re-imposition of U.S. sanctions. The advice did not lead to any practical result, and Khamenei had to speak about the issue many times later, including on December 12 when Khamenei said in a speech, “With the help of sanctions and actions directed against our internal security, they want to sow discord, create problem and start a civil war in our country. They have done all they could”.
Khamenei’s statements come at a time when Iran’s ailing economy is facing the strong headwinds of U.S. sanctions. The national currency has lost a lot of value, prices are reaching hyper-inflation levels and labor unrest has become a daily problem.
Years of mismanagement, populist policies, corruption and sanctions have led to a huge government debt to banks in Iran.
According to the latest figures released on September 12, the debt has reached 2,840 trillion rials by early July this year. Compared to the debt figure in late March, the government's debt had a 9.7% rise within only four months. The total amount is roughly $68 billion based on the current lowest official exchange rate.
Based on the Iranian Central Bank's report, the annual rise in the Rouhani administration's debts to the banks has been an alarming 22.4 percent.
This is in addition to amounts borrowed from the National Development Fund to cope with budget deficit or to boost the budget of military forces deployed to Syria and other military spending elsewhere in the region.
A senior commander of the Islamic Revolution Guards Corps, IRGC, had said on January 17 that Iran’s military budget is $7 billion and Iran is the “fourth cyber power” in the world.
ISNA quoted Mohammad Hossein Sepehr, deputy to Supreme Leader’s representative in IRGC, who has drawn a parallel with neighboring countries, saying that Pakistan’s military budget is $8 billion, UAE’s $15 billion and Saudi Arabia’s $30 billion.
However, General Sepehr’s numbers are much less than what President Hassan Rouhani’s government had submitted in his last year's budget to parliament. In that proposal, Iran’s military budget was more than $10 billion.
In January Khamenei authorized the withdrawal of four billion US dollars from the country’s foreign currency reserves, officially named the National Development Fund (NDF).
Some $2.5 billion of this sum has been allocated to “strengthening Iran’s defense capabilities,” and the rest is to be spent on the Iran’s state-run broadcaster and a few development plans.
As the first round of reimposed U.S. sanctions took effect, the Iranian economy was taking a beating, and Iran’s leaders expressed concern about maintaining social cohesion in the face of increasing economic pressures.
Iranian auto parts manufacturers said on August 15 that 450 thousand workers in this industry are likely to lose their jobs as a result of Iran's currency losing value. This coincided with Iranian media reports about rising prices of foodstuff and cost of housing on a daily basis.
Reports indicate that even among those with a job, Iranians who are on fixed incomes have been losing their purchasing power during the past few weeks as the cost of living goes up.
Earlier, on August 7, then Iran’s Minister of Cooperatives, Labor, and Social Welfare, Ali Rabiei, predicted the country will lose one million jobs by the end of the current Persian year on March 20, 2019.
In the meantime, thousands of employed workers took to the streets in various cities including Ahvaz, Arak, Haft Tappeh and elsewhere demanding months of unpaid wages. Walk outs and protests continued throughout the year and some strikes still remained unresolved by the end of 2018.
Fearing U.S. secondary sanctions, a majority of foreign companies in Iran left the country in the summer of 2018.
The Big Picture
New statistics released in July by the World Bank reveal that Iran has had a painful economic decline during the past four decades of the Islamic Republic's clerical rule.
It appears that those who take pride in Iran’s widespread military presence in the region, deliberately or unknowingly ignore the collapse of the country’s national economy.
New statistics released by the World Bank estimate Iran’s total Gross Domestic Product (GDP) during the past year at 439 billion dollars.
GDP, simply put, is the total value of all the goods and services produced in a country within a year. Divided by the total population of a country, we arrive at per capita GDP.
Figures released by the World Bank reveal that the Iranian economy has dropped from 17th to 27th place in the world during the past four decades. Still Iran maintains a relatively high ranking due to its oil exports.
During the same period, Turkey has ascended from the 27th place to the 17th, without any significant fossil fuel natural wealth.
At the same time, Turkey’s GDP which was half the figure for Iran in the early 1980s, has nearly doubled during the past forty years.