Iran’s economy is big news. Badly hit by oil and banking sanctions, it is the main reason the Iranians are at the negotiating table in Geneva after almost ten years of diplomatic stonewalling. The state of the Iranian economy has even become shorthand for explaining President Hassan Rouhani’s June election.
Perhaps understanding the gravity of the issue, Rouhani gave a two-hour interview to Iranian state TV to mark the 100th day of his presidency, in which he discussed, in detail, the economy. Sanctions aside, he was clear on the systemic economic problems within the Islamic Republic, brought about—though he refrained from saying it—by more than thirty years of domestic financial mismanagement.
Rouhani’s main concern before taking office was the shortage of essential goods in the country. Just days after the election he discovered that wheat, for example, was only available for another three days in parts of Iran. Yet more worrying was the chaotic state of the annual budget. He should have inherited an annual budget of 210 trillion Tomans (1 toman = 10 rials); to his horror he discovered that only 1.28 trillion was available.
The depth of this problem is clear from a few quick sums. Iran needs 7,500 billion a month just to pay the wages of state employees, but, as Rouhani lamented, the treasury only has 2,870 billion to spend; more than 4,600 billion will now have to be borrowed to fund wages alone.
And if there is one thing Iran cannot afford to do, it is borrow more money. Government debt includes 74 trillion owed to the banks, 60,000 billion to social and pension funds, and 55,000 billion to contractors and the private sector. Debt to the Armed Forces Pension Fund is yet to be determined, but Rouhani claimed that startling figures were being reported to him. The total government debt is well above 200 trillion. Iran is in big trouble—and he knows it.
The scale of staggering financial incompetence can only be adequately understood when remembering that the Ahmadinejad administration—thanks to consistently high oil prices—had the highest foreign exchange earnings Iran had ever received. It was the richest yet most indebted government in Iranian history.
Much of that money was wasted on ambitious social projects that Ahmadinejad instigated to fulfill his election promises to a desperate electorate. Of the 211 trillion pledged for projects during Ahmadinejad’s infamous provincial tours (in which he traveled the country, and with his own particular brand of populist demagoguery, told the people what they wanted to hear), only 32 percent was spent. Gloomily, Rouhani announced that it would take sixteen years to fulfil Ahmadinejad’s pledges, and only if his administration enjoyed the same income as the previous one.
Ahmadinejad’s legacy is one of over-expenditure and money wasted on flawed projects. None more so than the Mehr Housing Plan, which was designed to solve a severe shortage of cheap housing in Iran by building 1.5 million houses in seventeen new cities. Under the plan, real estate developers were offered free parcels of land in return for building cheap residential units for first-time buyers, who would receive 99-year mortgages for the purchase of the land.
Much of the work remains unfinished due to corruption and lethargy. Transport and Urban Development Minister Abbas Akhoundi claims the government has allocated more than 400 million US dollars to complete the semi-finished residential units—but no more will be built after this.
In late August, Ali Tayebnia, the minister of economic affairs and finance, blamed the Mehr Housing Plan for over-expanding money supply and for runaway inflation and serious budget problems. Ignoring the project’s other problems, including poor quality, lack of facilities and transport links, to name but a few, 43 trillion has had to be borrowed from the central bank for its completion.
Iran’s most pressing problem is inflation, with prices for basics such as food spiraling by as much as 200 per cent, which has already sparked demonstrations across the country. The mullahs fear increasing social unrest if the problem is not solved, and the problem is getting worse not better.
If that wasn’t bad enough, Iran has another serious problem. For years, the Islamic Republic has tempered its authoritarianism with cash subsidies to the people, which now cost the government 3,500 billion per month. The revenue for subsidies was supposed to have come from increases in the cost of energy and transport, but this hasn’t happened. So, as Rouhani acknowledged, the system must now be reformed. He stressed that the government would continue to pay the subsidies until March 2014, at which point reforms would be implemented, though he also stressed that before the reforms kicked in, poorer sections of society would receive essential goods packages.
It may be too little, too late. Various economic problems have converged on Iran over the previous years—some longstanding, others sanctions-related—to create a perfect storm. As Rouhani himself said, the economy is in that most serious of states: “inflationary recession.” Meanwhile, the recent nuclear deal has only lifted a few peripheral sanctions while the majority remain in place—if Iran wants more relief it will have to compromise to a degree almost unthinkable for the Supreme Leader Ali Khamenei.
This article was originally published in The Majalla.
All views expressed in this blog post are those of the author and do not necessarily represent the views of, and should not be attributed to, The Majalla magazine or Asharq Al-Awsat newspaper.