The Iranian economy facing American sanctions

The U.S. president twitted a new warning on August 7, 2018, to all still trading countries with Iran, after the reinstatement of sanctions against Tehran, threatening that these will not be able to do so with the United States.

The purpose of this contribution is to analyse the situation of the Iranian economy facing American sanctions starting with its socio-economic Situation. Iran holds the fourth largest world oil reserves with more than 160 billion barrels; its OPEC quota is close to 2.7 million barrels a day and produced before the US sanctions up to 5 million. It also has the second largest gas reservoir after Russia and before Qatar, with more than 34 billion cubic meters or more than 16% of the world’s reserves. Iran essential resources being on the planet’s belt of copper reserves benefit from considerable reserves of other minerals, such as iron, aluminium, lead and zinc.

• Agriculture contributes to 9.3% of GDP, employing 17.9% of the working population in 2016.
• The secondary sector accounts for 33.8% of the labour force and contributes to 38.2% of GDP.
• The tertiary sector contributes to 52.4% of GDP and employs 48.3% of assets.
• The mainly imported goods are machinery, iron and steel, electrical and electronic equipment and cereals.
• The Iranian economy remains mostly dominated by the public sector that controls the bulk of the economy with a fragile banking sector.
• The agricultural sector whose main crops are pistachio (the world’s largest producer), wheat, rice, oranges, tea and cotton contribute to 9.3% of GDP and employs 17.9% of the labour force.
• The textile industry is the second most important sector after oil.
• The other major industries are the refining of sugar, the industrial preparation of food, petrochemicals, cement and construction.
• Traditional crafts, such as carpet weaving, ceramics, silk and jewellery, are also vital to the economy.

Structurally, the economy is dependent on oil revenues that account for almost half of the state’s revenue. The Iranian population, with an efficient educational system, has risen from 21 million inhabitants in 1960 to 80.6 million inhabitants in 2017 with an extrapolation of 84 in 2020. The urban population represents about 73%, a life expectancy of 71.15 years. GDP estimated at $412.2 billion in 2016, second in the MENA region, after Saudi Arabia has a rate of growth was 4.6% in 2015, 4.5% in 2016, with a pre-penalty forecast of 4.8% in 2018 and potentially 4.5% in 2019. Recently, in its 2018 report, the World Bank for 2017, Iran’s GDP was estimated at $439.5 billion with a GDP per capita of $6974. So, for the first half of 2017 (from April to September, depending on the Iranian calendar), GDP growth at factor cost was 4.5% (annual slip). After the lifting of the sanctions, the non-oil sector mostly boosted overall growth over this period, contributing to the growth of the economy to the tune of 3.2 %. With the announced sanctions, this will have an impact on the rate of Unemployment that was 12.20% in 2012, 10.60% in 2014, 11.67% in 2015, 11.3% in 2016 , 11.4% in 2017 and 12.1% in March 2018, according to the official, indeed undervalued, mainly affecting young people (under 25 years of age represent 32% of the population) and in particular young women graduates. For 2016/2017, The male unemployment rate is 10.1% and 19.1% among women, a sign of the deepening gender inequalities in the labour market, each year, 800 000 people entering the labour market. This is due in large part to the increase in the population’s activity rate, to 40.4% compared to 35.4% in 2014. Let us recall that Iran has embarked on a series of reforms spread over 20 years covering the period 2016-2021, including the recasting of non-targeted generalised subsidies. Thus, the complicated subsidy scheme, which estimated at 27% of GDP in 2007/2008 (approximately $77.2 billion), was replaced by a programme of direct monetary transfers to Iranian households. The second component of subsidy reform, launched in the spring of 2014, provides for a more gradual adjustment of oil prices than previously envisaged and a broader targeting of transfers to low-income households. The removal of nearly 3 million of high-income households from the beneficiaries’ lists would have led to a reduction in the targeted subsidy organisation (TSO) spending of 4.2% of GDP in 2014 to 3.3% in 2017.

The financial situation

According to an Iranian Ministry of Economy announcement dated February 19, 2017, the public debt figure of government and public institutions for the current Iranian fiscal year ending March 20, 2017, reached 700 trillion of Tomans, or $200 billion. However, the external debt is now estimated to approximately $7.116 billion as at December 31, 2016, according to CIA World Factbook. With respect to trade balance in 2016 and compared to the evolution of 2015, we have 37,383,000,000 of export Dollars (plus 29.34%) and 36,041,000,000 of import Dollars (less 5.37%) with as the main supplier being China (24.44%), the United Emirates (15.04%), South Korea (8.14%), Turkey (6.80%) and Germany (5.72%).  France, which has many large companies engaged in the country, has just withdrawn from Iran because these carry out their transactions in Dollars, that according to the French Treasury, “due to the reinforced sanctions imposed on Tehran from 2011 onwards, our trade with Iran has been reduced from a peak of €4.3 billion in 2006 to €515 in 2014”. Started timidly on the rise in 2015 (+22% at €628 million) even before the lifting of the reinforced sanctions, they departed in 2016 (+239% to €2.1 billion) to reach €3.8 billion at the end of the financial year 2017, which was a new level since 2008. However, the budget tensions persist.  According to the IMF, the budget deficit has grown to 2.4% of GDP in 2017, due to a rate of growth in public spending higher than the increase in revenue.  According to the World Bank, in the first nine months of the year 2017, tax revenues grew by only 4.4%, while operating expenditure increased by 16.8% and investment expenditure amounted to 91% after two years of contraction through the lifting of sanctions. Thus, the surplus of the current balance of transactions rose to 4.1% of GDP in 2017, a slight improvement over the 3.9% of 2016, due to the increase in oil prices, while the export volumes remained stable, around 2.4 million barrels per day, production remaining in line with the limitations agreed upon in the OPEC framework. The current balance in 2014 was 3.8% compared to the gross domestic product (GDP), 0.4% in 2015, and less -0.6% in 2016 with a forecast of zero (0%) in 2017, while public debt/GDP was 15.6% in 2014, 17.1% in 2015, 17.5% in 2016 with a forecast of 17.7% in 2017. Following the popular protest movement in Iran from the end of December 2017 to the beginning of January 2018, the exchange rate has deteriorated considerably, volatility has increased, and the gap between the official and the parallel market has between the beginning of December 2017 and the beginning of March 2018, the Iranian Riyal (IRR) depreciated as compared to the Dollar. Thus, the IRR was quoted at 14,777 for a Euro in 2011, 15,643 a Euro in 2012, 24,456 a Euro in 2013, 34,653 a Euro in 2014, 32,188 a Euro in 2015 and 36,335 2017 a Euro. On August 7, 2018, at the reinstatement of sanctions the IRR was at IRR42,105 an official Dollar and IRR50,965 a Euro, thus a very high depreciation of the Iranian currency which influences the rate of inflation. On the black market, according to the Financial Information Market, a reference on currency market fluctuations, the Dollar had exceeded the 50,000 Riyals in April 2018, and since July 2018, more than 65,000  with the risk of going to 90.000/100.000 despite the threats of the authorities to ban possession of more than €10,000 and against all those who practice other rates of “Lawsuits” comparable to those reserved for “Drug traffickers”. According to the IMF, the inflation rate was over 35% between 2012/2013, and due to greater budgetary rigour reduced to 15.6% in 2014, 12.0% in 2015, 8.9% in 2016, 8.0% in 2017 but was back at 13.7% in June 2018 with food inflation reaching more than 20%. Moreover, the raising of the bank interest rate, which is 18% in July 2018, which will only hinder investment. In fact, this rate is much higher per Steve H. Hanke, professor of Applied Economics and co-director of the Institute for Applied Economics and the Study of Business Enterprise at Johns-Hopkins University, considering that the informal sphere aligns typically aligns typically with the free market price.

Iran facing American sanctions

The first wave of American sanctions came into effect on August 7, 2018, at 4:01 GMT. It includes blockages on financial transactions and imports of raw materials, as well as penalising measures on purchases in the automotive and commercial aviation sectors. It will be followed in November by measures affecting the oil and gas sector as well as the central bank (Interview with Professor Abderrahmane Mebtoul In Arabic at the Iranian International agency IRNA on 28 July 2018 “Impact of American sanctions against Iran on the price of oil”. The American president threatens to ban “any country that trades with Iran will not be able to do so with the United States of America”. These American sanctions are likely to have a negative impact, the resumption of foreign trade and Iranian investment as exports of oil had regained their pre-sanctions levels. For proof, the trade volume between Iran and the EU Member States reached 16.6 billion Euros in the first ten months of 2017, an increase of 61.6% compared to the same period of 2016. What about the end of 2018? We are witnessing a gradual withdrawal of major American and European groups. After the 2015 agreement, Total, the French oil and gas group had partnered with the Chinese NCPC to invest €5 billion in the operation of the South Pars gas deposit in the Persian Gulf. A project of which Total, which could not obtain an American derogation, will probably disengage. The Italian rail industry could suffer from these sanctions. The public group of Railways of Italy has In July 2017 signed an agreement for the construction of a high-speed line between Qom and Arak in northern Iran. Italy had become Iran’s first European trading partner, with exports to the country rising by 12.5% in 2017, reaching 1.7 billion Euros. In tourism, British Airways and German Lufthansa, that had resumed direct flights to Tehran, will have to stop if they want to continue to operate transatlantic flights freely. The French Accor Hotels, which opened two hotels at the Tehran airport in 2015, could be penalised, just as the Emirati Rotana Hotels that said they wanted to establish themselves in Iran. The so-called Blocking Law approved by the EU Ministers of Foreign Affairs on July 16, 2018, annulling the effects in the EU of any foreign court decision based on these sanctions, to protect European companies that decide to take risks by remaining in Iran, exposing themselves is meant to circumvent such American sanctions. Will it be useful in the face of American requirements? To global transactions that are mostly in Dollars, the Euro is still an ancillary currency, demonstrating that both political and economic Europe is not autonomous in major economic decisions. What will the threat of Iran blocking the Strait of Hormuz 40 km wide, between Oman and Iran in the Persian Gulf consequences be? As a vital sea corridor, this a crossing passage for more than 30% of the world’s oil trade. On several occasions, the Iranian supreme leader and the guards of the revolution brandished the threat of a blockade if oil exports were to be blocked by American sanctions. The US president was demanding OPEC to increase production to bring down prices while recalling the links between certain cartel members and the United States. However, does this increase in the production of two major producers such as Saudi Arabia and Russia, not risk question the OPEC Vienna Agreement while not forgetting this political will of the US to increase their market share in Europe via the supply of shale gas? What does this recent speech of the American president hide by wanting to meet the Iranian leaders? In the event of effective sanctions, the other OPEC countries, being competitors of Iran, including Russia, that outside the black market that is likely to develop, would leave China’s big energy consumer free to import oil and gas at a competitive price and invest massively in Iran. Is trade between Iran and China that exceeded $45 billion in 2017, compared with $35 billion in 2016 and forecast as expected to increase to between 15 to 20 per cent each year until the end of the sixth five-year programme of development?

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