Upheavals of the past decade affecting all macroeconomic variants have landed the Iranian economy in stagflation.
You can see the signs of unresolved structural problems, as short-term solutions to fix them have compounded the situation. Now add sanctions and misguided policies to this collection and you see the country beleaguered by an array of economic and non-economic crises, says Yalda Rahdar, the deputy head of the National Iranian Entrepreneurs Organization, in an article for Iran Chamber of Commerce, Industries, Mines and Trade’s news portal. A translation of the text follows:
Economic growth has been very unsteady over the past decade: In the fiscal 2016-17, gross domestic product, the broadest measure of the economy’s output, was 14.2%. In 2019-20, it shrank to -6.3%.
Producer Price Index hit 65% and Consumer Price Index reached 50% in Q2 of 2021-22, the highest level registered in a decade. The exchange rate of US dollar has increased 7.5-fold from Q1 2016-17 to Q2 2021-22. Unemployment rate has decreased to 9%, but that is mostly the result of recession and a decline in labor force participation. Investment hit its 15-year low in 2019-20, reaching 980 trillion rials; the outweighing of accumulated depreciation growth over investment growth is the sign of infrastructures depreciation.
Policies envisioned in the Budget Law 2022-23 are nothing if not inflationary; they impose excessive costs on the manufacturing sector. The elimination of subsidized forex, as predicted in the budget, will lead to a rise in prices and place heavy pressure on low-income deciles. This comes as the government has failed to propose policies that would help the poor or the working class.
Misguided decisions, along with internal and external shocks, have given rise to uncertainties, robbing people, economic players and officials of the ability to make decisions. Iran is living in consequential times; it has to deal with all kinds of environmental, economic and social crises
The government has also decided to increase the exchange rate used in the calculation of customs fees. As a result, all government charges, including tax, will increase and this would have a negative effect on production and inflation.
Decisions made regarding taxation and energy prices are also inflationary; the persistence of sanctions and budget deficit will worsen inflation as well. The 57% increase in minimum wage is a shock to supply, exacerbating pocketbook and workforce issues.
Besides the above-mentioned factors, the fate of Iran’s economy in the current year is intertwined with the outcome of nuclear talks. You can see the negative impacts on capital and forex markets of the canard that negotiations with world powers have failed.
Studies show that the consequences of sanctions have been grave, reducing the average per capita expenditure since 2011-12. Poverty rate has risen across the country. The unraveling of sanctions will help increase sales of oil and income, and decrease the excessive costs of trade and accordingly lead to more production, appreciation of local currency, decline in inflation and rise in capital formation, albeit temporarily.
Russia’s invasion of Ukraine and its juncture with Iran nuclear talks is one of the reasons behind the failure of negotiations. This development and rising global energy prices as well as Western sanctions against Russia could create numerous opportunities for Iran, but unfortunately the negotiations remain in limbo.
Misguided decisions, along with internal and external shocks, have given rise to uncertainties, robbing people, economic players and officials of the ability to make decisions.
Iran is living in consequential times; it has to deal with all kinds of environmental, economic and social crises. It is important for the authorities to take effective measures to solve these problems as soon as possible, otherwise not only the country’s economy will collapse, but also the most important asset of any society, i.e. social capital, will be seriously damaged.
