Sanctions Lifted But Economic Challenges Remain for Iran

by Djavad Salehi-Isfahani

If there is a big economic payoff to the implementation of the Joint Comprehensive Plan of Action (JCPOA) and the lifting of international sanctions against Iran, the financial markets in Tehran are not yet impressed. The rial barely moved as “implementation day” arrived. The Tehran Stock Exchange, which has been depressed for the last two years, did gain about 4% during the week before. But compared to the weight of the sanctions being lifted, the investors’ response was underwhelming. Of course, financial markets had been expecting the removal of sanctions for a few months and may have incorporated its impact already, but even their recent behavior seems oddly mute.

But the markets are correct to expect little economic improvement in the short run. The economy is in its deepest recession since the Islamic Revolution in 1979, and no one expects it to bounce back any time soon. Last month, an IMF report forecast zero growth for the current Iranian year ending on March 20, 2016, and 4-5% growth for next year. President Rouhani’s promise for economic growth next year, which he is making ahead of the crucial election for the Parliament and the Assembly of Experts next month, is also a modest 5%.

These forecasts are at odds with the long-run benefits for Iran of the lifting of sanctions. Iran expects to receive about $30 billion of its frozen funds in coming months. In addition, it will save about 20-30% on its international trade operations, worth as much as $20 billion per year. For comparison, oil revenues this year are about $20 billion. Foreign investments and loans could easily add another $10-20 billion per year. So, with the infusion of external resources potentially amounting to 20% of the GDP, and vast idle capacity in industry, why such low expectations for growth next year? A normal economy would bounce back with 8-10% growth.

Barriers to Growth

The answer is that Iran’s economy is anything but normal. There are knots and bottlenecks formed in the economic system as a result of sanctions that cash infusions can’t undo. Removing those obstacles would take internal reforms and time. The most important of these reforms is in the banking system, which is unable to help businesses take advantage of the improved business environment because of the accumulation of bad loans. These loans are mainly the result of investments in real estate that went sour after the intensification of sanctions in 2011-2012 triggered an end to the oil boom of the preceding decade. The construction sector is still in deep recession, shrinking by 27.3% in 2014-15 alone.

This situation is not unlike that of the US and European banks after the economic crisis of 2008. The difference is that Iran’s financial institutions are much less regulated and, like the rest of Iran’s economy, much less transparent. The stress tests, the stimulus packages, and the quantitative easing that helped restore solvency to the US financial system are either not well understood in Iran or are not tools available to Iranian authorities.

For starters, the authorities are not quite sure of the extent of the toxic assets held by specific financial institutions. Many unregulated savings and loan institutions— carrying sacred Islamic names to signal honesty and piety—are insolvent but continue to operate Ponzi-like schemes. They offer high interest rates—close to 30% or twice the rate of inflation—to attract funds that they turn around to use to pay interest to existing deposits. To compete, established banks have to offer high interest rates as well. With the real cost of borrowing for the private sector in the 5-10% range, investment is being choked off just as improved ties to the world economy are about to stimulate it.

Rouhani’s own economic policies, focused on reducing inflation, have not helped the situation. This is the message that four members of his cabinet tried to deliver to him when they wrote their famous letter last September warning that continued austerity would undermine national security. Rouhani responded by offering small programs of subsidized credit for middle-class buyers of automobiles and consumer durables, but he has not changed his overall economic austerity approach. His proposed budget for 2016-17, which he submitted to the parliament last week, keeps real government spending constant.

Low oil prices, expected to last at least for the next year, have forced the government to rely more on tax revenues. Oil exports are expected to increase by about 50% in volume over the next year, but this may bring prices further down, resulting in only a small gain in total oil revenues. For the first time in recent history the budget projects to raise more revenues from taxes (one-third of total) than oil (one-fourth). Of course, raising taxes at a time when businesses are struggling to meet their payrolls is not the way to stimulate investment. Development expenditures, which have historically been the main driver of private investment and economic growth in Iran, are staying put at 22% of total expenditures (in Ahmadinejad’s last budget, they were 15%).

The Political Challenge

Despite the lack of apparent public enthusiasm at the time of the lifting of sanctions, few Iranians doubt the significance of Iran’s return to the global economy. Without the nuclear deal, there would have been little chance of getting out of the economic mess any time soon. The challenge for President Rouhani is to not let the weak short-term economic results of the deal undermine the good economic prospects in the longer run. That could happen if a parliament hostile to reform is elected next month.

To push his reform agenda, embedded in the newly drafted Sixth Development Plan, Rouhani needs a parliament that can turn those reforms into law. Politically, he seems to be in a strong position having won the tacit support of the powerful speaker of the current parliament, Ali Larijani, who is a central figure in the conservative Principlist movement.

This week, as the good news of the lifting of one sanction after another arrived, the conservative Guardian Council let it be known that it plans to use its vetting tool to prevent an outright election victory for the moderate and reformist camps. The conservatives that now hold the key levers of power are sending a message to the would-be architects of a globalized Iran that re-integration into the world economy has to be on their terms and not on the terms dictated by markets. From global competition and foreign investment to travel and tourism, they want to make sure that globalization neither disrupts the existing balance of power nor serves as a Trojan horse for what they call a “cultural invasion.”

The nature of the political compromise, or lack thereof, that would allow economic reform to proceed in this environment will determine the extent to which Iran will benefit from the implementation of the nuclear deal.

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.



  1. I just had to look up the history of those devastating sanctions to see what the reasons for them were in the first place. The way the issue is written up by Wikipedia isn’t entirely clear. Were the sanctions punishment for Iranians revolting against a US-sponsored dictator in favour of running their own country their own way? Or were they punishment for letting Iraq wage war against them? Or for Ahmadinejad having a personality too much like George W. Bush’s? Or were they for building a non-existent bomb? Or maybe for exercising their right as signatory to the NPA to enrich uranium?

    Or was this long succession of punitive and often cruel sanctions just a substitute for a violent regime change that the US didn’t have a good enough excuse to launch?

    Whatever the reasons, those sanctions have certainly delivered a misery so profound and enduring that not even normally exuberant investors are moved by their lifting.

  2. Very good article Mr. Salehi-Isffahani. I agree with you to certain extent but spending a couple of months in Iran in late 2015 my observations add ons to your description of Iran’s economic challenges:
    1. Iran’s economy is not managed by the government as it was intended. Thus the reason president Rouhani has many problems that he can not, may be he’s not allowed, deal with when it comes to economy
    2. The economy of Iran has been hijacked by the Pasdaran forces and the civilians and mullahs fearing a coup if they begin to push the Passdarans to the sideline. As it was very evident after Rouhani’s speech following his election! The passdaran basically told him not to get involved in economy of the country and he’s only allowed to mange the domestic and international political matters! Khameneie also stayed silent on their their dispute!
    3. As you mentioned, the dualist ion of Rial or better say Tooman (10 Rials) has been 500%over the past 36 years! Specifically Rial devaluated by 300% during Ahmadinejad’s disastrous presidency!
    4. Robbers in the name of the new banks inviting people in with their deposits promising them high interest rate and then will announce bankruptcy after a few months! The new bank owners are cronies of the system and they do melt away amongst people until they can set up other phony banks!
    5. Phony banks deposits (cash) is not invested into the country and of course it is loaned to the un-named borrowers within the system in billions of toomans! The borrowers haven’t returned even one Tooman of their loan or return to these cash deposits which belongs to the average people! This issue has caused distrusting of the banking system in Iran by the people totally.
    6. Of course every person is affected by the high rate of inflation which is officially claimed to be in the order of 12-15%. But unofficially the inflation rate is running around 30% in the bazaar across the country as I observed it during my short staying and traveling around the country

  3. @delia ruhe, you may find the answer to your questions in “”

  4. This from the U.S. Department of the Treasury on Jan. 17, 2017:

    “Iran’s ballistic missile program poses a significant threat to regional and global security, and it will continue to be subject to international sanctions,” said Adam J. Szubin, acting Under Secretary for Terrorism and Financial Intelligence. “We have consistently made clear that the United States will vigorously press sanctions against Iranian activities outside of the Joint Comprehensive Plan of Action – including those related to Iran’s support for terrorism, regional destabilization, human rights abuses, and ballistic missile program.”

    Adam Szubin is the Under Secretary for Terrorism and Financial Intelligence; he replaced Stuart Levy who replaced David Cohen (now Deputy Director of the CIA for which Mossad must be breaking out the champaign). Apparently, a critical requirement for the position is to be a Zionist agent of Israel.

    U.S. intelligence agencies have repeatedly stated that Iran stopped their nuclear weapons program in 2003 and has not revived it, Mossad concurs with this assessment. So why does the U.S. have ANY sanctions on Iran? Just look at the fifth column that infests high levels of U.S. government for the answer.

  5. @Chet Roman, it is true! However, corruption is usually to the detriment of the nation that allows it to happen! As corruption has caused destruction of several dynasties and empires such as Persian empires, Roman emipires …. on and on throughout the history of mankind! It makes me sad that the mankind hasn’t learned anything from his/her past history and keeps repeating himself/herself hoping to obtain different results!

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