Iran’s shrinking economy faces further beating in 2020

Iran’s shrinking economy faces further beating in 2020

President Hassan Rouhani said Iran is going through “one of its hardest years since the 1979 Islamic revolution.” (AFP/File photo)

When it comes to economic growth, 2019 has been one of the worst years for Iran’s ruling mullahs since the establishment of the Islamic Republic in 1979. Last week, even President Hassan Rouhani admitted for the first time that the “situation is not normal” and that the Islamic Republic is going through “one of its hardest years since the 1979 Islamic revolution.”

The US withdrawal from the Iran nuclear deal in May 2018 and its reimposition of draconian sanctions, which had been lifted under the Obama administration, began having a real impact this year. The International Monetary Fund (IMF) last month again adjusted its forecast for Iran’s economy, stating that it is expected to shrink by 9.5 percent, down from 6 percent, by the end of 2019.

One of the reasons for the IMF’s gloomier picture of Iran’s economy is the Trump administration’s decision not to extend its sanctions waivers for Iran’s eight biggest oil buyers: China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea. As a result, instead of showing economic growth in 2019, Iran’s economy will only be about 90 percent of its size compared to two years ago, based on a recent report from the World Bank.

What about 2020? Iran’s economy is not likely to rebound next year — instead it will most likely continue to take a beating due to several factors.

First of all, the Trump administration continues to step up its “maximum pressure” policy against the Iranian regime, and specifically its energy sector. The Islamic Republic depends heavily on oil revenues to fund its spending. Iran has the second-largest natural gas reserves and the fourth-largest proven crude oil reserves in the world, and the sale of these resources accounts for more than 80 percent of its export revenues.

Even though Khamenei boasts about the country’s self-sufficient economy, several Iranian leaders have hinted at Iran’s major dependence on oil exports

Dr. Majid Rafizadeh

Iran’s 2019 budget totaled nearly $41 billion, with the regime expecting to generate approximately $21 billion of this from oil revenues. This means that approximately half of Iran’s income comes from exporting oil to other nations. But the regime’s oil exports continue to plummet. Before the US Treasury Department  leveled secondary sanctions against Iran’s oil and gas sectors in November 2018, Tehran was exporting more than 2 million barrels per day (bpd). In just a year, its oil exports went down to less than 200,000 bpd — a decline of roughly 90 percent.

Even though Supreme Leader Ali Khamenei boasts about the country’s self-sufficient economy, several Iranian leaders have hinted at Iran’s major dependence on oil exports. Rouhani last week admitted: “Although we have some other incomes, the only revenue that can keep the country going is the oil money.” He added: “We have never had so many problems in selling oil. We never had so many problems in keeping our oil tanker fleet sailing… How can we run the affairs of the country when we have problems with selling our oil?”

Iran can partially compensate for its revenue loss by accumulating taxes from all sectors and businesses. Nevertheless, the wealthiest Iranian organizations, which are mainly owned by the Islamic Revolutionary Guard Corps or the Office of the Supreme Leader, such as Astan Quds Razavi and Setad, are deemed exempt from paying any taxes and technically operate outside the formal economy.

Another issue is Iran’s devalued currency, which will likely continue to put extreme strain on the economy in 2020. Iran’s currency, the rial, is now trading at about 105,000 to the dollar.

Third, if Iran continues to step up its violations of the nuclear deal, other countries, particularly the Europeans, might be forced to impose unilateral sanctions on Tehran, as well as reinstate the UN Security Council’s sanctions. After the International Atomic Energy Agency confirmed that it had found uranium particles at an undeclared site in Iran, the EU, France, Germany and the UK last week warned the Islamic Republic to comply with the 2015 nuclear agreement or face action.

Finally, some of the major domestic factors behind the country’s economic crisis will most likely continue to persist in 2020. These include the widespread corruption within the theocratic establishment, the mismanagement of the economy, embezzlement and money laundering within the banking system, and the hemorrhaging of the nation’s wealth on militias, terror groups and proxies across the region. These shortcomings are ingrained in the political and financial institutions that are the country’s backbone. According to Transparency International’s Corruption Perception Index, Iran is ranked 138th out of 180 countries.

Iran’s economy took a major beating in 2019, and it will most likely continue to deteriorate in 2020 due to the US sanctions, declining oil exports, its currency devaluation, financial corruption, economic mismanagement, and the potential reimposition of further sanctions, as Iran continues to breach the nuclear agreement.

* Dr. Majid Rafizadeh is a Harvard-educated Iranian-American political scientist. He is a leading expert on Iran and US foreign policy, a businessman and president of the International American Council. Twitter: @Dr_Rafizadeh

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