Is Iran’s Economy Sliding?

Fruit stand in the city of Nishapur, Khorasan Razavi Province, Iran (source: author)

by Djavad Salehi-Isfahani

Last April, in a column for this blog I predicted that sanctions are very unlikely to force Iran to renegotiate the multilateral nuclear deal known as the Joint Comprehensive Plan of Action (JCPOA). In particular, I argued that the belief held by Iran hawks in Washington foreign policy circles, that economic pressure will eventually force Iran to the negotiating table, exaggerated the importance of oil exports for Iran’s economy.

New data indicate that, while Donald Trump’s policy of “maximum pressure” has reduced Iranian oil exports to near zero and seriously hurt Iran’s economy, it has not caused anything resembling economic collapse. Furthermore, these data suggest that the economy is not in a steep decline, one that would anytime soon force Iran to capitulate.

The national accounts data, published by the Statistical Center of Iran (SCI), indicate that, in the Iranian year 2018/19 (21 March 2018 to 20 March 2019), GDP declined by 4.9 percent, which is far from a collapse of output. Coming after two years of robust growth following the July 2015 nuclear deal, it puts the economy still above its 2015 level.

This decline was, not surprisingly, led by the oil sector, which fell by 14 percent, followed by manufacturing (6.5 percent), which depends on imports of parts, and construction (4.5 percent).  However, non-oil GDP, which measures the level of domestic economic activity, fell by only 2.4 percent. This is because output in services, which accounts for 55 percent of Iran’s non-oil GDP, remained unchanged, and agriculture, accounting for another 10 percent, fell by 1.5 percent.

Iran’s economy has taken a beating, but it is not a disaster, as President Trump likes to describe it. To most Iranians, his remarks last September—which he repeated in June—that Iranians “can’t buy bread,” showed how out of touch he is with the consequences of his own policy.  Travelers to Iran have noticed, as I did this summer, that supermarkets shelves were full (though mostly with home produced goods at high prices), and there were no lines in government distribution centers, which are the hallmark of real disaster economies, like Venezuela.

High prices, triggered by the tripling in the value of the U.S. dollar since early 2018, have taken their toll on household incomes. The most recent SCI survey of income and expenditures shows that in 2018/19 average real incomes per capita fell by 6.7 percent in urban areas and 9.1 percent in rural areas, more than the decline in GDP per capita. These are sharp drops, but obviously not enough to ignite urban protests, as the Trump administration had hoped.

Going forward, the question is whether the Iranian economy is on a steep decline, is stabilizing at a lower level, or is on the road to recovery. This will influence Iran’s willingness, or lack thereof, to negotiate with the U.S., and should matter for Washington as it evaluates its Iran policy in light of its failure so far to yield the desired results. As always, Iran hawks recommend staying the course with “maximum pressure,” believing that Iran will “ultimately do a 180 if they perceive that there’s no way out.”

But what if there is a way out? What if Iran can restructure its economy to become less dependent on imports and truck along with reduced oil exports? Iranian leaders may be pinning their hopes on this scenario and thinking that the worst is over when they flatly reject negotiations.

In this belief they can draw support from the International Monetary Fund (IMF). In its April 2019 World Economic Outlook, the IMF predicted that negative economic growth in Iran will end in 2020 and positive growth of around 1 percent per year will prevail till 2024. Not a rosy scenario by any means, as it implies loss of economic growth and declining per capita incomes for the foreseeable future, but it may be enough to convince Iranian leaders not to capitulate.

IMF forecasts beyond a year do not always materialize, and we do not know their assumptions about when U.S. sanctions will end. But the latest evidence from Iran’s labor force survey suggests that an end to the recession may be in sight. They show that in spring 2019, compared to spring 2018 before sanctions came back in full force, employment increased by 324,000 and the number unemployed fell by 365,000. As a result, the unemployment rate fell to a five-year low of 10.8 percent.

Significantly, half of this increase in employment was in industry, the sector that is most exposed to sanctions because its production depends on imports of intermediate inputs. Nearly half of all Iranian imports are intermediate goods.

Cynics have reason to doubt official Iranian surveys, but the rise in employment reported by the SCI makes good economic sense. For over a year, Iran’s currency has been at a historic low and its labor costs the cheapest in memory (about $5 per day for unskilled labor, half that in China). With rising profitability, it makes perfect sense for businesses to increase hiring to fill in for lost imports.

But the switch to local production faces two obstacles. First, the U.S. sanctions themselves. To sustain the structural adjustment needed to reconfigure industrial production requires access to global markets, which trade sanctions inhibit. Second, it requires a banking system to finance businesses to restructure. Iran’s banking system is too weak to do so at present.

While the prospects of economic recovery remain uncertain, it is safe to reject the assumption that Iran’s economy is on a “death spiral,” to use a favorite phrase of Iran hawks. While economic conditions are desperate for many Iranians in need of jobs and medicine, they are not desperate enough for Iran’s leaders to risk getting into a costly war with their southern neighbors and the U.S. just to end the current stalemate. Iran’s Supreme Leader, Ayatollah Ali Khamenei, who has ruled out negotiations with Trump, is for one interested in finding out if the economy will rise to the challenge of sanctions and thus become the “resistance economy” that he has advocated for years.

Djavad Salehi-Isfahani

Djavad Salehi-Isfahani conducts research on the economics of the Middle East and is currently a professor of economics at Virginia Tech. He is a nonresident senior fellow at the Brookings Institution and research associate of the Iran Project, at Harvard Kennedy School’s Belfer Center for Science and International Affairs.

SHOW 14 COMMENTS

14 Comments

  1. Khosrow

    Employment can go up because:

    Wages, adjusted for inflation have gone down

    Natives are replacing the foreigners, as many Afghans left Iran

    Inflation has made government handouts insufficient to cover living expenses

  2. Ali Mostofi

    Iran has enough food production capacity to feed herself, plenty of cheap energy to keep her population comfortable during extremes of temperature & to sustain her transportation network, and the ability to make basic medicines.

    She can hold indefinitely against the American siege as blockade runners and friendly governments and people smuggle needed items into Iran.

    Iranians have no excuses, North Korean and Cubans never had Iranian advantages and yet they still stand tall.

  3. An excellent and realistic assessment of the present and immediate future economic situation in Iran. Unlike Mr. Isfahani’s article which is by someone who has local fieldwork experience of the situation in Iran, many of the opinions by so called experts or analysts are given by persons who are either simply opposed to the Iranian regime or they have no recent in situ experience or knowledge about Iran.

  4. Dear FYI

    Employment does not go up when wages go down; on the contrary, it goes up when wages increase.

    Also, our unemployed people could hardly replace the Afghans who were mainly low skill workers. Since last year almost half a million Afghans have left Iran, not just because they found it too expensive due to the inflation but because they could not even find jobs; and what kind of job? Not in government organisations or agencies or companies or stores but mostly as undocumented workers in the grey economy; in construction works doing low paid hard jobs; in stone masonry, bricklaying, shoe polishing, running small stalls on the pavements or anywhere that municipality workers would not catch them, or in basements of restaurants or in dirty kitchens or cleaning houses or garages, or as gardeners or security guards in private housing complexes, etc. Therefore their departure cannot really affect the employment rate, not just because mostly were unregistered low skill workers but that the unemployed Iranians are not just the labourers but the educated, many from the middle classes, even among the professional.

    The Government’s meagre hand out that you have referred to has never been that effective to influence the employment rate! For example, now with the government subsidy we can buy seven kilo potatoes; so even if this meagre amount is cut off it won’t affect the employment rate. I am afraid, the facts on the ground are very different and for an expatriate who visits Iran with his dollars and often stays in posh areas and meets his like minded people from his own class it is hard to understand the suffering of ordinary people.

  5. Mr. Khosrow

    Thank you for your response, I was suggesting potential mechanisms.

    I do not have any data, one way or another.

    Is not the fact that government provides water, petrol, gas, electricity, bread, and medicine at deeply subsidized rates help cushion the effects of US economic war against Iran?

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