Many have congratulated Iran that its recent crisis has come to an end and some even traveled to Tehran to congratulate officials face to face. However, the crisis has not ended and it’s actually very complicated.
According to some media reports, increased prices of poultry and poultry products sparked the protests. The Iranian authorities claim that egg prices increased by 40% due to bird flu. Egg prices increased by 30% in last November while the price of the Iranian rial in the black market decreased to 42,000 rials per one dollar from 39,000 rial. This led to significant increase in the overall inflation rate - – but not overly high – which is now 11%.
The increase in egg prices is inconvenient but it does not make hundreds of thousands of people take to the streets. Before the authorities blocked social media networks, Radio Farda published on January 2 a video that shows protestors burning a police station in Qahderijan which is 24 kilometers away from Isfahan. Qahderijan is very small and no one thinks about it. Its villagers have felt injustice as the river of Zayanderud which irrigates Isfahan dries before it reaches their village. This is due to Iran’s mismanagement of dwindling water resources.
Qahderijan protests began a while ago. Two years ago, Isa Kalantari, the Iranian environment ministry’s advisor, warned that 50 million Iranians will have no water because 70% of underground water has been exhausted and river streams have been misused to compensate for decreased amounts of water.
A source told me that agriculture in Iran consumes 92% of water. Not maintaining sources of water pushed farmers to go to cities which already suffer from 30% of unemployment.
Former President Mahmoud Ahmedinejad realized that climate change and mismanagement of water resources are destroying farms so he provided financial aid to families who are trying hard to provide food for their children. When current President Hassan Rouhani hinted that he will decrease these benefits, protests erupted.
Although unrest in the past few weeks were due to increased egg prices and decreasing aid, one of the major economic challenges is actually due to the severe drought which began in the late 1990’s.
Iran is subject to climate change and that the entire Gulf region will witness higher temperatures by 2070. This is according to a study published in 2015 by MIT. Last summer, Iran recorded one of the highest temperatures on earth, 53.72 degrees Celsius.
In the past years, the Iranian government acknowledged that climate change poses a serious threat.
Imminent economic crisis
Last year, a number of observers warned of an imminent economic crisis.
Meanwhile, the Iranian military expenditure estimates in Syria range between $6 billion to $15 and $20 billion a year. This includes $4 billion of direct expenses in addition to supporting Hezbollah in Lebanon and other armed groups which Iran established.
“Let’s assume that the lesser estimates are closer to the real numbers. The cost of the Syrian war on the Iranian regime is almost equal to the total deficit in the country’s budget which reaches $9.3 billion a year,” a source said.
Iran suffers from several crises. Managing water is only one thing of many other issues which have accumulated since the 1979 revolutionHuda al-Husseini
He added that the Iranian regime is willing to sacrifice what the economy desperately needs in favor of its ambitions in Syria. According to the Central Bank, Iran decreased expenditure on development to one-third while the state’s revenues fell short of expectations during the last three quarters which ended in December.
Iran suffers from several crises. Managing water is only one thing of many other issues which have accumulated since the 1979 revolution. For example, pension funds face bankruptcy in the short term. There are also the government’s annual arrears to the social security which suffers from lack of funds. Given the number of Iranians who reached old age, we can tell that Iran is a country that’s getting older before it gets rich, and this will affect pension payments resulting in a crisis that will be much worse than any other crisis.
Pressure on banks
Iran’s banking system, the source said is facing difficulties due to economic pressures and due to internal funds granted to investors who are affiliated with the regime.
“The cost of the financial saving plan may reach 50% of the local GDP,” he said.
He said that according to a report by Donia Economy daily, the non-productive assets in banks represent 40% to 50% of total bank assets in the country. This is according to official data. Around 15% of these assets are immovable assets like land and buildings, while the rest are debt. There are no official data on the bank’s fixed assets.
According to another daily, the total value of immovable property owned by 31 banks and financial institutions was estimated at $13.8 billion.
There are many banks in Iran which provide an interest as high as 30% on deposits. In 2017, the regime decided that the interest must be 15% but few adhered to the decision. The government responded by letting private credit institutions collapse. Deposits worth tens of millions for small depositors thus evaporated, while many unauthorized lending companies, which spread during Ahmedinejad’s term and provided loans when construction boomed, collapsed.
A financial source said reorganizing the Iranian banking system which is worth $700 billion will cost between $180 and $200 billion, i.e. 50% of Iran’s GDP. Iran cannot bear this as its GDP is $428 billion.
Youth unemployment high
Iran has many talented people who are not employed. Unemployment among youth is around 20%. This is in addition to the unemployment which 4.7 million students suffer from. Iran has plenty of higher engineering schools but the majority of graduates look forward to immigrate. According to Tehran’s chamber of commerce, there are 3.5 million Iranians preparing to leave the country.
If we add the cost of returning banks’ capitals and the cost of saving pension funds and fixing the water resources, the total will exceed the GDP. Although the government’s direct debt is little, the Iranian regime is drowning in unfunded liabilities.
It’s not clear how the current Iranian regime or any future regime will resolve these intertwining crises. Iran needs a tough program to fight corruption like the one which Chinese President Xi Jinping submitted, the source suggested. Iran cannot continue pursuing these foreign military adventures and its ambitious ballistic missiles’ program.
Regime unable to cope
The current regime is not capable of carrying out this costly and complicated transformation and it does not even have a clear vision on how to begin handling these problems which have been accumulating for 39 years. Protests confirmed that the regime has lost its credibility and this will make it harder for the regime to maneuver.
My source added: “To confront such problems, third world countries usually decrease their commitments by decreasing the value of the currency and inflation. Pensions and liabilities are the people’s right but the government makes money in hard currency, and decreasing the value of the currency and inflation means transferring the fortune from people to the regime,” the source said.
“The expected result is a long phase of instability which includes sporadic violent protests and further economic deterioration.”
This article is also available in Arabic.
Huda al-Husseini is a political writer who focuses on Middle East geopolitics.