CESD Paper: Iran’s Economy- On the Light of the New Sanctions

CESD Paper: Iran’s Economy- On the Light of the New Sanctions 

CESD has produced new paper on Iranian economy on the background of the new sanctions. The paper looks current situation of Iranian economy, potential impacts of new sanctions, Iranian relations with West, neighbors as well as with Azerbaijan. The paper also focuses on social and economic impacts of new sanctions not only on Iranian economy but also Iranian population.

Iran strives to trench sanctions with assistance from Russia and China. These two countries are considered to be the caretakers of Iran in the international arena. It is of no coincidence that China and Russia have repeatedly voted against sanctions on Iran.  The sanctions caused both the decline of Iran’s national currency and inflation. On the other hand, as a result of sanctions, trade has become one of the most affected sectors. Thus, many of Iran’s companies that participated in the import and export trade have closed their offices in Dubai. In addition, one of the biggest difficulties is the lack of foreign currency. This doesn’t allow Iran to import goods from its trade partners. For instance, currently Iran is not capable of paying its debt to Ukraine for the imported grain. The sanctions had a negative impact on the sale of crude oil, which is the primary part of Iran’s exports. In this regard, Iran’s oil production has already started to decrease. Sanctions also have a significant impact on Iran’s financial and banking sector. Ordinary citizens are affected too. As a result of price increases due to inflation, 20% of the population lives below the poverty line. However, according to independent sources, 40 % of the population faces extreme poverty.

The reduction of subsidies  for  the energy sector presented by the President has increased the impact of sanctions on the poor population. Because of the insufficient compensations granted in response to the reduced sanctions, the overall quality of life has worsened.   Sanctions  are expected to  have an  impact on Iran’s foreign trade turnover. According to the Intenrational Currency Fund, the energy export  makes up to 78-80% of the total export. This means that due to sanctions, the country may be deprived of large foreign currency inflows. It is estimated that Iran’s income from its energy exports will decrease by some 24 billion USD. Moreover, the International Currency Fund states that due to sanctions, Iran’s non-oil exports may  decrease by some 7 billion USD. Hence, Iran’s total export loss is expected to be about 31 billion USD. Another area that will be most affected by sanctions is the budget income. Due to the fact that two-thirds of the budget income comes from the sale of oil, the state budget is expected to be most affected. According to the International Monetary Fund, tax collections may decrease by 10% due to sanctions; this in turn, may lead to an annual deficit  of 2% of GDP in 2013.

Nevertheless, Iran’s foreign debt does not exceed 9 percent of  its GDP, which  enables Iran to cope with sudden budget deficits.  The weak sides of  Iran’s economy are due to high inflation and a balance of payment. Despite the fact that Iran’s balance of payments profit, it is expected for the balance of payments to be imperfect due to a reduction in income from exports. This may lead to the strengthening of Iran’s inflation.

Due to the reduction of subsidies in energy and food industries, inflation rose to 20% by the end of 2010. However, according to independent experts the real inflation rate is even higher. Admist sanctions, one of Iran’s greatest advantages is its foreign currency reserves. According to the  International Monetary Fund , the foreign currency reserves are expected to reach 104 billion USD in the current fiscal year. However, EU states claim to freeze Iran’s currency resources. According to the World Bank, Iran’s economy will fall by 1% in 2012 due to sanctions. The probability for the sanctions to influence the banking and tax system is very high. Thus, Iran’s banking system has diverged away from the SWIFT system and Iran’s banks experience difficulties in carrying out the functions of foreign banks. In addition to this, unofficial money transfer systems in Iran like the havala system are also the cause for the reduction in bank income. This system based on confidence and trust, and on banks created by different individuals is outside of the transfer system.

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