The Iranian economy has been facing multiple challenges over the past decades, which have resulted in a series of consequences for both the state and its citizens. Persistent inflation and low growth have affected the livelihood of average Iranians. The state’s strategic choices, which have intensified adversarial relations with the West, led to an extension of the US-led sanctions, and required the Iranian government to allocate resources in support for regional proxies and friendly states within the global anti-US network. Budget deficit, due to low government revenue, has prompted the government to prioritise allocating resources to advance strategic aims over addressing major economic challenges domestically. Though it is unclear how sustainable the current government economic policies are, they are likely to have substantial and negative socio-economic consequences for the country, particularly in the aftermath of the popular uprising in 2022.
President Raisi’s government sought to maintain growth and inflation with 40% budget expansion in the current fiscal year (March 2023-March 2024). The budget increase was perceived as a potential economic boost to the country. However, considering the existing inflation level at the beginning of the current fiscal year, the budget expansion was not sufficient to maintain growth or control inflation. In that budget, the government planned to raise taxes by 50%. Collected tax revenue did not exceed 40-60% of planned budget level. Moreover, the government’s hydrocarbon revenues have been below the planned level. In January 2023, when the government proposed the current year’s budget, the total planned hydrocarbon revenue (calculated with market exchange rate at the time that was roughly USD1=420,000 riyal) was about USD20 billion. That was based on an unrealistic goal of exporting at least 1.4 million barrels of oil per day, at the price of USD85 per barrel. Indeed, Iran has been offering discounted price to the largest buyer of its hydrocarbon export, China; and free supply to Syria, as a part of the continuous assistance of Assad’s government. In addition, the country has faced substantial evaporation of hydrocarbon revenues due to financial mechanisms involving various intermediaries and front companies – which buy Tehran’s oil at below market prices – used to avoid banking sanctions. In addition, the country has been facing substantial evaporation of hydrocarbon revenue through bypassing financial mechanisms that involve several middlemen, and front companies to circumvent banking sanctions. Another factor that drove hydrocarbon revenues below the expected level was the stalling of Chinese trade with Iran in January 2024, due to the Iranian government’s decision to reduce discounted supplies to China.
Iran’s expanding involvement in the region, which requires allocation of financial and military support to various proxy groups, has undoubtedly put financial pressure on the government. There is no exact estimate of the financial cost of Iran’s support for its proxies. The United States’ States Department has estimated in 2019 that Iran spends about USD700 million per year on its regional proxies. A former member of the parliament, Heshmatollah Falahatpisheh, told local media last year, that Iran has spent between USD20 and USD30 billion only on the war in Syria.
In addition to the regional groups, Iran has been providing support to a wider anti-American network globally. General Rahim Safavi, an advisor to Iran’s Supreme Leader, has disclosed oil for fuel exchanges between Iran and Venezuela. He said, “Venezuelans are communists, but they stood up to the Americans and we are helping them, giving them software, and giving them ideas such as how to mobilize people and how to repel cyberattacks.” While there is no exact estimate of the level of financial supports from Tehran, there is compelling evidence to conclude that part of the country’s economic challenges is caused by prioritisations of global and regional strategic aims over the domestic challenges that affect the citizen’s livelihood.
The Major Economic Challenges for the Citizens
Inflation has remained one of the main economic challenges for Iran’s citizens. The current Iranian calendar year was named by the country’s Supreme Leader, Ayatollah Khamenei, as “the year of controlling inflation.” This reflects the political significance of inflation in Iran. Multiple episodes of currency devaluation had weakened riyal and worsened inflation. In March 2023, year-on-year inflation for average consumer price reached almost 64% and inflation for some food items had reached more than 90%. Since the beginning of the war in Gaza, riyal went through another devaluation episode. The head of the Central Bank of Iran, claimed that the government has no currency and gold reserves limitation, attributing the latest devaluation of the national currency to media hype and psychological reaction of the society, while there has been speculation on the impact of the war in Gaza on the Iranian economy.
Due to the rise of political and economic uncertainties, Iranians have been converting their savings from riyal-based assets to liquid assets like hard cash in foreign currency and gold. This is mostly to hedge their saving values against depreciation of the national currency. However, this has increased capital outflow and demand for so-called “suitcase savings” over the past few years.
Additionally, corruption has been at its highest in recent years in Iran. In late 2023, a scandal surfaced on the corruption in a chain of entities in Iran that were involved in importing tea to Iran. Nearly USD4 billion was siphoned from the subsidised foreign currency that is provided by the government to import tea. The government has been providing lower rates to companies that import medicines and essential goods. Tea, the national drink in Iran, is considered an essential good by the government, hence allocation of preferential rate. In practice, this policy has allowed well-connected individuals to access government exchange rates. Amid the government’s tax raise initiatives, ongoing subsidy cuts, and persistent budget deficit, loss of government assets to this scale, will have negative economic impacts.
All in all, budget deficit, caused by allocation of resources to advance strategic goals, low revenue, and high corruption, have undoubtedly been playing a crucial role in rising inflation in Iran. As noted above, plans for increasing government revenue has not been successful, therefore, the government has continuously printed money to meet budgetary obligations. Increasing money supply combined with slow growth (from 4.7% in 2022, 3.8%) that lead to further decline of standard of living in Iran is indeed politically worrying considering the degree of tension between the state and citizen in 2022 uprising.
Link : https://www.ispionline.it/en/publication/the-economic-challenge-ahead-for-iran-165060
