The Iranian Economy is Bankrupt – Part Two
According to Iran Gate, some experts believe that the Iranian economy is practically on the verge of bankruptcy and even the collapse of the economy is not far-fetched. Although the number of these economists is not large, almost no analyst describes the Iranian economy as anything but in a severe crisis. In such conditions, can we say that the Iranian economy is bankrupt and there is no hope for its future?
In a three-part series, Iran Gate attempts to provide an image, albeit incomplete but well-analyzed and principled, of Iran’s future. The general conditions of the country have practically led to a situation where citizens have little hope for Iran’s tomorrow. However, away from emotional and excited atmospheres, we must try to examine the general coordinates of Iran’s economy. In this report, which is the second part of a three-part series looking at Iran’s economy, an attempt is made to assess the possibility of the Iranian economy’s collapse.
Today’s Coordinates of Iran’s Economy
By looking at the current conditions of the economy, it can be understood that the markets and the productive sector of Iran’s economy are in a pre-collapse stage.
Inflation Rate
A country that has grappled with double-digit inflation for about five decades has now entered a phase of stabilizing the inflation rate in the 40% channel. However, this stabilization phase is analyzed considering the reliability of official statistics, while some experts believe the current inflation rate has exceeded 70%, and governments are not honest with the people in this regard.
Yet, even considering the accuracy of the current government reports, one can see very concerning signs of consumer inflation and point-to-point inflation rates. These signs indicate the growing lower class and the shrinking middle class of society.
By comparing the consumer inflation rate between the upper and lower income deciles, one can reach the very alarming conclusion that for the first time in the history of the modern state in Iran, the consumer inflation rate for low-income groups is more than 7 to 8 percent higher than for the wealthy.
In such conditions, not only does the class gap deepen, but we must also anticipate a severe earthquake in the foundation of Iran’s economy that will create a very deep chasm in society and practically split the citizens in two.
Budget Deficit
On the other hand, the noteworthy and highly concerning point in Iran’s economy is the volume of the country’s structural budget deficit. This year, the government’s structural deficit exceeded one quadrillion tomans, and economists predict this amount will grow by at least 15% in 2023, which means an imminent fundamental disaster in the country. A disaster stemming from the sharp decline in government revenues and the inability to provide the necessary current resources for paying its employees’ salaries.
Comparing the budget deficit statistics of countries shows that Iran has had the largest structural budget deficit in the world at over 53%, which is likely to reach about 57 to 59% in the next solar year. On the other hand, it should also be noted that international pressures on the Islamic Republic of Iran will be much greater than this year and the previous years.
Events that have occurred in the past two months have caused even the European Union, which has been practically accused of appeasing the Islamic Republic, to join the ranks of sanctioning the government once again. The Americans have also officially announced their withdrawal from the JCPOA negotiations. It is even heard from some more radical circles in the United States that the White House should take steps to intensify comprehensive pressures on the Islamic Republic.
These conditions paint a picture for Iran where in 2023, it should expect a much larger budget deficit than in 2022, as even the current limited revenue sources will be completely blocked or, at best, significantly limited in the coming months and even weeks.
Liquidity Growth
One of the features of Iran’s economy that has become a tradition is compensating for the budget deficit by borrowing from the Central Bank. This action, known in everyday and colloquial language as printing money, does not have a natural outcome in the monetary policy framework other than intensifying the inflation rate.
As mentioned, the Iranian government has traditionally been accustomed to borrowing directly or indirectly from the Central Bank. The Ebrahim Raisi administration, contrary to its claims over the past year, has followed this tradition excessively. Therefore, one can expect the rate of liquidity growth, which has resulted from excessive borrowing from Central Bank resources, to increase at a much faster pace so that the thirteenth government can only pay its employees’ salaries. But as mentioned, the burden of this tradition will fall on the people, who will suffer deep and impactful wounds on society’s body with the whip of inflation.
Economic Growth Rate
Looking at the economic growth rate of the 2010s in Iran and comparing it with the population growth rate causes concern for any economist. Iran’s growth rate over the past ten years has been close to zero in total, while the country’s population has increased by nearly 10 million people, and due to the declining population growth rate, the share of elderly and disabled age groups has become much larger and more significant than in the 2000s and before.
This situation has occurred while the economic growth rate in the first half of the 2010s was about 4%, coinciding with the first government of Hassan Rouhani and ongoing diplomatic interactions with the Western world and the subsequent economic opening. However, the United States’ withdrawal from the JCPOA and the halt in interaction with the world caused Iran’s economy to endure as an island with repeated temporary fixes until today. Now, it has reached a point where hopes for returning to the global economy and the international trade structure have completely faded.
However, the government presents strange statistics on economic growth and, despite the outlook provided so far, promises an 8% economic growth rate to the people. The report on the first half of 2022 indicates the baselessness of this promise. To achieve such growth, at least 2 million barrels of oil must be exported daily from Iran’s oil terminals, and industries must return to the production level they had during the JCPOA.
Although returning to the same production level, considering population growth, cannot mean repeating the economic growth of those years, overall, without attracting foreign investment and benefiting from modern world technology, it will lead to further backwardness of Iran’s industry. So, it can practically be said that the existing signs indicate the baselessness of the 8% economic growth promise, and the thirteenth government is well aware of this.
The Bankruptcy of the Economy is True
This report only addresses four main components in assessing the state of Iran’s economy, but by focusing on these four, it can be understood that people’s purchasing power has decreased, the rial stands at its weakest historical point, the government is unable to pay its employees’ salaries, and industries are forced to lay off workers and even declare bankruptcy and closure, which will result in nothing but an increase in the unemployment rate.
In a word, Iran’s economy is currently based on speculation and has significantly distanced itself from being categorized as a productive economy. For example, speculating on the exchange rate to cover government budget deficits is one of the consequences of this general trend of the economy towards promoting speculation. These tendencies, which are inevitable, have caused Iran’s economy to move towards the abyss with full speed.
However, some economists believe Iran still has a considerable distance from the point of economic collapse, thanks to natural resources such as oil. But considering the non-productive nature of Iran’s economy and the description provided about the four vital economic components, it shows that there is little hope for the economy to return to the mid-2010s. In such conditions, drawing a development outlook for the country’s economy is not only a dream but also unrealistic and deceptive.
- Where is the Destination of an Economy Without Public Trust? – Part Three
- No Hope for the Future of Iran’s Economy – Part One