Iran 40 years on: Not much to cheer
Tehran has squandered its resources and failed its own people, leading to a situation where there is not much hope for the beleaguered nation. And if it offers a forlorn future to its own people, no one should expect that it may give happiness to others
At the lobby of the largest hotel in Tehran, Espinas Palace Hotel, the receptionist apologised to me: “I’m sorry sir, but we cannot accept any of your credit cards.” That was years ago. Sensing the bewilderment on my face, he continued: “In Iran, we only pay in cash, because our country is not linked to the international credit card network.” I looked at him, sympathetically, and thought: “There’s a difference between deciding not to be linked to the network, and being forbidden to join it.” However, I opted to stay silent, seeing that the employee was embarrassed for something he had no control over. It is also wiser not to express such views when you are in Tehran.
My hardship continued, because the ATMs did not work and I was unable to withdraw money from my bank account, for the same reason that Iran is not linked to banks abroad. When you travel to Iran, you have to bring foreign currency along. This is the current reality of Iran, based on my experience.
Many others like me are perhaps wondering what is Iran waiting for, and what does the future look like for the country? It is not a question of whether the regime stays or leaves. The pressing question is what are the outcomes of Iran’s policy on its economy and its components, such as unemployment, inflation, corruption, growth, investment opportunities and others?
Will foreign investors come to Iran, knowing the magnitude of associated risks? Is investment and access to the Iranianmarketprofitableandworththerisk?
Following Iran’s dismissal from the global financial system, the answer to these questions can be extracted from two sources. The first are credit rating reports of countries from global ratings firms — P+S, Moody’s and Fitch — based on credit capacity and financial strength. Surprisingly, Iran is not included in the list. It is actually considered the most dangerous place to invest due to the absence of legislations and laws that protect foreign capital.
The second source is a report on countries and risks, issued by the reputable Economist. It points out that the United States’ withdrawal from the nuclear agreement between Iran and the P5+1 (US, Britain, France, Russia, China plus Germany) is expected to lead to a collapse in investments and total decline in Iran’s oil exports. It will also result in difficulties in receiving financing, leading to the government not being able to pay off its foreign debts. The banking sector is the one that suffers the most due to a government deficit. Assets of Iranian banks weaken the rate of unsecured debts and the intervention of influential politicians will hinder the banks’ capabilities to give out loans. When banks are unable to provide loans, they will be unable to contribute to economic growth or adopt any commercial opportunities.
Who will buy Iranian oil?
In order to avoid using the US dollar, the deals signed between Iran and China or India might be based on a barter deal. This means that the Chinese or Indians can purchase Iranian oil and export other Chinese and Indian products that can be equivalent to the oil’s cost.
Another question that presents itself here is: Who will buy Iranian oil? Iran’s average production is 2.5 million barrels per day. Right after the US announced its withdrawal from the nuclear agreement, the demand for Iranian oil dropped to 600,000 barrels — the share of the European Union (EU). After all, the EU has alternatives when it comes to importing oil.
Japan and South Korea are two of the biggest importers of Iranian oil, and they have also reduced their dependence on Iran as a source. South Korea’s oil imports from Iran dropped by 40 per cent in July this year. Meanwhile, China and India import 1.3 million oil barrels per day from Iran, more than half of Iran’s daily production. Those are deals that Iran relies on for survival. The report pointed out that India is currently negotiating with the US as it considers to cut its current oil imports from Iran by 50 per cent.
In response, Iran lowered its prices to attract buyers, offering a 95-cent discount for every barrel. Experts note that a majority of insurance companies avoid insuring the transportation of Iranian oil, regardless of its destination. This means more risks, and therefore a further decline in demand.
As for Iranian President Hassan Rouhani, the report states that his position is weakening due to his failure to bring in foreign investments or implement private projects that he had announced. He was also not able to curtail the role of the Revolutionary Guards or minimise their influence.
The failures of Rouhani’s economic plan did not start recently, but rather a year ago when the Iranian government, influenced by angry Iranian protesters, backed away from implementing plans to cut fuel subsidies by 50 per cent. Another failed experiment was the government backing away from the implementation of new taxes in the wake of the deteriorating economy and expected shrinkage of the Iranian national income, according to the same report.
Pertinently, the Rouhani government finds itself in an unenviable position, and most indicators show that the Iranian economy will continue to contract. The government will not be able to convince foreign investors to invest in Iran, or even keep investors that it signed deals with.
Notably, inflation and exchange rate are the two other economic factors that constitute the biggest drivers in society. In July this year, the inflation rate in Iran reached 18 per cent. The Economist expects the average inflation rate will average 16.41 per cent in 2019 and 2020.
Shrinking purchasing power
Even if we expect that the Iranian market will increase its efficiency, trying to reach self-sufficiency depending on local Iranian products, the purchasing power of individuals will shrink considerably under these projected inflation rates. The report notes there is a big gap in the exchange rate of the Iranian rial in the market and the official rate claimed by the Tehran government. This poses a direct threat that may lead to the collapse of the Iranian currency, and there are several historical testaments. The collapse of the currency would force rich Iranians to replace their Iranian money with another currency. No one will be able to calculate his or her wealth in Iranian rials. Whenever a state loses control over its currency, it loses a significant part of its sovereignty. The collapse of the Iranian currency may erode trust in the currency, because Iranian citizens will see their assets and savings vanishing due to no fault of theirs. Perhaps their only fault is to believe in their government.
The truth is that Tehran does not have the fundamentals for economic stability, and the government’s policy does not provide a decent life for its people. As statistics speak louder than words, 40 per cent of Iran’s population now lives below the poverty line, while the unemployment rate among Iranian youth has reached 30 per cent.
According to international statistics, the world’s largest percentage of drug addicts is in Iran. This is the reality of a country that holds the fourth-largest crude oil reserves in the world.
Logically, if Tehran offers a forlorn future to its own people, no one should expect that it may give happiness to others. In 2019, the Iranian regime will celebrate the 40th anniversary of its so-called Islamic revolution. In reality, there is not much to cheer.