ECONOMY

Iran falls to deep recession as sanctions pummel economy: IFF

People protest against increased gas price, on a highway in Tehran, Iran, November 16, 2019. File photo: (Reuters)

Iran’s economy continues to take a battering as US sanctions take their toll, according to estimates from the Institute of International Finance (IFF), a global trade group of financial institutions.

The IFF estimates that the Iranian economy will contract 7.2 percent for the current fiscal year 2019-2020 (ending March), representing an even deeper contraction than the previous year’s estimated contraction of 4.6 percent.

US sanctions hit the oil sector particularly hard, dried up foreign investment, and disrupted major business deals that were in the pipeline. The sanctions do not allow US companies to trade with Iran, but crucially any international company that uses a US company for transactions would also be in breach of the sanctions. Due to the nature of the global economy it is virtually impossible to conduct trade without exposing money to the US financial sector.

The IFF believes most of the economy’s contraction is due to significant decline in crude oil exports, dropping over 85 percent to 0.4 million barrels per day (bpd) in recent months from highs of 2.8 million bpd in May 2018. It is worth noting, however, that this figure is based on official numbers, which may understate exports as Iranian authorities have repeatedly sought to illegally export oil and avoid sanctions.

Civil unrest

Compounding the economic situation, the country has undergone a period of unrest in recent months, with the government violently cracking down on protesters.

In November, to counteract lost revenue from collapsed oil exports, authorities hiked fuel prices by nearly 50 percent across petrol stations and pumps, claiming that it would use the money to help citizens in need of cash handouts.

This price increase led to an extended unrest with protestors believing that the billions of dollars the regime spends to keep its regional proxies afloat could be better used towards fixing the economic situation at home.

In response, authorities implemented a violent crackdown that left an estimated 1,500 people dead.

Protests renewed this month following the downing of Ukraine International Airlines flight PS752 by an Iranian cruise missile, killing all 176 people on board. Iranian protestors have since accused the regime of trying to institute of a cover up of how the plane was shot down.

The depth of Iran’s civil unrest, with protestors calling for wholesale regime change, further damages any economic aspirations the country may have as business sentiment remains negative, shoppers vanish, and investment evaporates.

Fragile banking

The depth of Iran’s economic crisis has also had significant repercussions for the country’s fragile banking sector. The rate of non-performing loans has rocketed up, exceeding 20 percent of total loans in 2019.

“Continued public payment arrears, connected lending, and poor management of the banking system have weakened bank balance sheets, increasing the need for large capital injections, management restructuring, and governance improvements,” the IFF said.

This has substantial ramifications for local businesses who cannot access finance to grow, create jobs, and support the economy.

“With local banks confronting limited liquidity and maintaining a cautious lending stance, most private businesses still face difficulties in accessing or servicing loans,” the IFF added.

The deal

Iran’s economy will be further hit if it fails to save the 2016 nuclear deal.

The deal has been under threat since the US withdrew from the deal in May 2018 and reinstated sanctions, in protest at Iran’s support for proxy and terrorist organizations, prompting the Iranians to gradually withdraw commitments to the deal.

On Tuesday, European powers announced they had triggered the dispute mechanism in the deal. If the dispute is not solved, then the deal will be effectively dead within a month.

If Iran fails to renegotiate a nuclear deal with the US, the economic effects will be severe, said the IFF.

After two years of deep recession, unemployment will increase to over 20 percent and official reserves would decline to around $20 billion by March 2023 – down from $112 billion in March 2018.

Considering US-Iran tensions are at a recent high and Iranian officials have shown little sign of compromise, the end of the deal – and more economic pain – is likely to follow.

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Last Update: Wednesday, 15 January 2020 KSA 15:49 - GMT 12:49
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