With the US Out, How Can Iran Benefit From JCPOA?

In Iran, the only surprise regarding US President Donald Trump’s May 8 announcement to leave the Joint Comprehensive Plan of Action was that it was four days early.

The decision was anticipated and most Iranians believed that the deal was not doing much anyway, reads an article penned by Iranian economist Djavad Salehi-Isfahani.

Excerpts of the piece, recently published by American research group Brookings Institution, follow:

Iran’s economy is not doing well, but it is not in a “free fall”, as the New York Times put it recently, perhaps reflecting sentiments in the streets.

There are no gas lines, no mass withdrawals from banks and supermarket shelves are well stocked. Economic growth has slowed down considerably after its initial spurt following the nuclear deal, but the situation is far from panic.

Economic volatility began a few months ago in the parallel market for foreign exchange, as Trump’s resolve to take the US out of the JCPOA became more clear.

Iran’s tough measures taken to stem the fall in Iran’s currency in April have added to the volatility. The government shut down the parallel market, which aided capital flight but also facilitated a significant fraction of Iran’s foreign trade.

Prices of many non-essential imports, which do not receive subsidized foreign exchange, started to rise in tandem with the rapidly falling value of the rial in the illegal market.  

Many smaller exporters who have to sell their foreign currency earnings to the government at the official rate (42,000 rials per US dollar) are on the verge of shutting down. Other businesses are hurting because of exceptionally high interest rates, exceeding the rate of inflation by as much as 8-10 percentage points.

Iranian banks have yet to emerge from insolvency caused by the real estate crash of five years ago.

As growth slows down, Rouhani’s most important domestic economic achievement, bringing inflation down to below 10%, is in danger of being lost, as devaluation, rising wages and budget deficit are returning inflation to double digits.

In March, the government raised the minimum wage by 19% and other government wages by 10%. The budget deficit, running at 3% of the GDP, also contributes to inflation.

JCPOA is not a cure-all, but it helped Iran’s economy grow by 12.5% in the Iranian year 2016-17. During the same year, the economy generated 700,000 new jobs, 10 times as many as from 2006 to 2011, before sanctions hit hard.

How much of these gains can Europe salvage in the face of the US secondary sanctions—“the harshest ever”—is anybody’s guess.

Europe may be able to direct its central banks to provide Iran with access to earnings from the sale of oil to other countries. Central banks do not engage in commercial activity, but these are extraordinary times that call for extraordinary measures.

This would be a sign of seriousness on the part of Europe that so far has been lacking in negotiations with Iran. Since signing JCPOA, the Iranian Embassy in London, where the UK government has presumably some control over banks, has been unable to open a bank account.

Rouhani and the middle class that elected him twice see JCPOA as a way to anchor the Islamic Republic’s economic system to the western world. They see this as more consistent with Iran’s cultural ties to the West developed over the last 100 years. These ties have been further solidified by Iranian migration to the West, where traveling Iranian businessmen are sure to find a close relative.

Not so in China or Russia, to which Iran will have to turn if it is rebuffed by Europe.

The Islamic Republic’s orientation is rapidly shifting toward the East. This shift is already noticeable in foreign policy.

If the current effort to save JCPOA with the help of Europe fails, it will soon affect the direction in which Iran’s economy changes, from one striving to build a competitive capitalist system to one reverting to state ownership and non-market allocations.