Another Economic Depression in Iran

On December 8, 2019, President Hassan Rouhani presented the proposal for the Iranian state budget for 2020 to the Majlis (parliament) – one of the most meager budgets seen since the Iran-Iraq war in the 1980s. The total budget is $38.8 billion, which demonstrates that the budget has been severely cut in comparison to recent years. The rest of the economic data indicates an even more challenging situation for Iran than during the Iran-Iraq war.

Rouhani referred to the budget as a “budget of resistance and perseverance against sanctions.”

The budget proposal was submitted at a time when Iran’s economy is already suffering from inflation of at least 41 percent. The World Bank has recently estimated that Iran’s economic growth will plummet by 9.5 percent during 2020.¹

Mahmoud Vaezi, Chief of Staff of President Rouhani’s office, said the U.S. sanctions did not allow the government to submit a more robust budget. In fact, the budget only promised to pay the salaries of civil servants and pensioners, as well as a small subsidy to a fraction of citizens, and allocated only meager sums for projects already in their final stages of completion. The new budget proposal did not allocate any money for new projects. According to Vaezi, only returning Iran to a pre-sanctions level of oil sales of 2.8 million to 3 million barrels per day (b/d) can improve the current economic situation.²

Recently, not only have Iran’s oil exports been nearly halted because of the sanctions, but OPEC’s latest oil export report shows a decline of 45,000 b/d in Iranian oil production. This indicates an average oil production of 2.1 million barrels a day, while domestic demand is about 1.8 million barrels a day, leaving only about 300,000 barrels a day for export.³

The new budget proposal is based on the export of about a million barrels of oil and gas per day, but the British Kpler commodity intelligence company, which tracks global oil ship movements, reported that Iran’s oil and gas exports through November stood at only 213,000 b/d.

The budget proposal says that if Iran will not put money into its coffers in the coming year from selling a million b/d, then the government may once again have to resort to dipping into the state’s reserve funds.⁴

The Tasnim News Agency, affiliated with the Revolutionary Guards, reported that the government had asked to pull $8 billion from the state’s reserves for the coming year. The Iranian government even demanded that parliament not allocate any more money to the reserves fund,⁵ even though the fund’s mission explicitly states that Iran must set aside up to 36 percent of annual sales of oil for this fund for future generations.

In addition, the budget proposal for the coming year indicates a thousand percent growth in government debt to the Central Bank in just one year. This reinforces the widespread suspicions among the Iranian people that the Central Bank, with the agreement of the regime’s leadership, is printing money without any backing, and this is causing an alarming increase in currency liquidity. Iranian economists say liquidity has risen 26 percent as compared to the summer of 2018.

As explained by the Atlantic Council last year, “Among the main factors causing liquidity growth in Iran are: oil income rise, the Iranian government’s populist agendas such as the mass housing construction scheme called the Mehr Housing Project, and most importantly, the increasing ratio of quasi money—assets that can be converted into cash—to liquidity.”⁶

The Atlantic Council explained that the liquidity and “quasi money” crisis can be blamed on the mushrooming role played by the “military, religious, and revolutionary foundations in the economy by establishing or controlling private banks and credit and financial institutions.”⁷

The new budget will allocate only about 250,000 billion rials for the creation of jobs next year. The amount shows a 50 percent decrease over the current year in this sector.⁸ The government hopes the budget will allow for the growth of 955,000 jobs while at the same time, more than 60 percent of the millions of young Iranian university graduates remain jobless. As the young become more educated, the more their unemployment rates increase. More than 80 percent of the millions of female university graduates are unemployed. Even these statistics are generous. According to Iranian government data, a person who worked only one hour during an entire week is considered a jobholder and not unemployed.

Non-Oil Exports Drop Too

Tehran’s trading room also indicated, in its latest official figures, a 14 percent reduction of non-oil exports in March through the start of November 2019. In those eight months, Iran exported only $27 billion overseas, compared to $31.5 billion in the same period last year.⁹

In addition, the latest Iranian Ministry of Industry report on the period from March to the end of October 2019 indicates a reduction of more than 50 percent in overseas investments in the Iranian automotive industry. The report notes that in the same period last year until before the U.S. exit from the nuclear agreement with Iran, the Iranian auto industry had attracted $1.884 billion of investments, while this year it plunged to $784 million. Most of the investments were from China, Iraq, and Turkey. The report adds that Iran produced far fewer vehicles this year, compared to the years before the U.S. exit from the nuclear agreement. Iran has produced only 394,000 vehicles in the last seven months, which shows a decline of more than 35 percent over the same period last year.¹⁰

In the process, the value of the Iranian rial has dropped again in the past two weeks and plunged to a new low. A U.S. dollar sells for almost 130,000 Iranian rials. The gloomy forecast for U.S. dollars returning to Iran in the coming year as a result of the sanctions is another reason behind the recent weakening of the value of Iranian money.

In addition, if Iran does not comply with the FATF (The Financial Action Task Force) demands by February 2020, it could face an even more difficult situation. The Iranian regime’s conservative camp has so far blocked the Rouhani government fulfilling FATF’s demands, and the decision on the issue remains stuck in the regime’s Guardian Council. President Rouhani is repeatedly demanding that the conservatives make way for state concurrence with FATF’s demands, but currently, the conservatives have the upper hand. The lack of Iran’s compliance to the FATF charter could further worsen its economic situation in the coming months, and even bank accounts of Iranian citizens abroad may be closed.

Morteza Bakhtiari, Director of the Imam Khomeini Relief Foundation (aid to the poor), said this week that extreme poverty is expanding in dimensions not yet seen in the country. He stated that his organization’s data on the lives of the poor in 32 cities, especially in Kurdish areas, are showing that people are no longer able to buy bread, and it has been years since they could afford clothes. These figures relate to the situation two years ago, the senior official emphasized, and since then, conditions have worsened considerably. His remarks came in response to President Rouhani, who claimed this week that there was no more absolute poverty in Iran.¹¹

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Notes