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U.S. Sanctions and Iran’s Economic Realities

The recent IMF report on Iran’s economy has ruffled feathers in the West by presenting a positive assessment of the economic reforms undertaken by the Iranian government and drawing an optimistic outlook of Iran’s economic growth. The IMF has particularly lauded Iran’s much-fretted subsidy reform, which removed around 100 billion dollars’ worth of mainly energy subsidies late last year, noting “The subsidy reform is expected to increase efficiency and competitiveness of the economy, improve income distribution, reduce poverty, and help Iran unlock its full growth potential”. The report also highlights that “cash transfers, financed out of the revenues arising from the energy price increases, were instrumental in supporting domestic demand, improving income distribution, and reducing poverty”.

It is not the first time that the IMF has presented a moderately positive assessment of Iran’s economic outlook. In previous years, the IMF also positively evaluated structural economic reforms undertaken by the Iranian government in the form of privatization, reducing the role of the government in economic activities and liberalizing the prices of energy and agricultural products. However, the latest IMF report on Iran’s economy has received wide negative reactions from different quarters in the West. Some mainstream American media lambasted the IMF assessment of Iran’s economy for ignoring what they consider to be “the dire reality of Iran’s economy, weighed down by strict international sanctions, mismanagement and inefficiencies”.

While some of these negative characterizations of Iran’s economy are no doubt warranted, as Iran’s economy still suffers from a host of structural problems and lack of political consensus among the elites on certain economic goals and policies, they do not represent the whole reality about Iran’s economy. It can hardly be disputed that Iran has daringly undertaken major economic reforms over the past several years which have the potential to give enormous boost to Iran’s economy in the longer run. These reforms, albeit undertaken out of necessity rather than a principled commitment to market economy principles, have already provided positive stimulus to Iran’s economy and are expected to add more efficiency to it in the longer run.

Massive privatization of state-owned enterprises over the past several years, which had hitherto justified the state sponsorship of major economic activities, have been the hallmark of economic reforms in Iran, which was enabled after the reinterpretation of the relevant provisions of Iran’s constitution and following authorization by the highest political decision-making bodies in Iran. According to the Iran Privatization Organization, over the past five years 589 state-owned companies with nearly 83 billion dollars’ worth of shares have been privatized. Although the process of privatization in Iran has been influenced by factors other than growth and efficiency considerations, such as redistributive justice, and, as the IMF also recognized in 2008, due to “the lack of large private investors, many government-owned entities have been acquired through non-cash or deferred settlements by quasi-public sector institutions”, some of the privatized companies, mainly those in the telecommunication sector, have already recorded positive growth following their privatization.

Iran’s non-oil sector has also increasingly been contributing to the country’s economic growth in recent years. Although Iran’s vast, yet still largely protected, domestic market has historically acted as a disincentive for the expansion of non-oil exports, the privatization of state-owned companies, especially those in the energy and manufactures sectors, seem to have accounted for a boost to Iran’s non-oil exports in recent years. Given that petrochemical products have come to comprise the lion’s share of Iran’s non-oil exports, it seems plausible to attribute the surge in Iran’s non-oil exports in part to the privatization of state-owned enterprises in recent years.

As illustrated in the following chart, in a steady sharp rise over the past six years, Iran’s non-oil exports have more than quadrupled, increasing from 6.4 billion dollars in 2004 to 26.3 billion dollars by the end of 2010.

Iran's Non-Oil ExportsEven though oil exports still account for the large bulk of Iran’s foreign exchange revenues in light of high oil prices in recent years, the share of non-oil products in Iran’s total exports has steadily been increasing over the past several years to the point that it now accounts for close to 30 percent of Iran’s total exports.

Privatization and other economic reforms also seem to have played a role in improving Iran’s chance for attracting foreign direct investment (FDI). Despite a drastic fall in the world’s total FDI inflow in recent years, UNCTAD’s World Investment Reports show that the total FDI inflow to Iran has increased nearly 13 fold over the past six years. As illustrated in the chart below, after two years of no growth in attracting FDI, FDI inflow to Iran has sharply risen again since 2008, thus registering a growth rate of 86 percent in 2009 and a 20-percent growth rate in 2010.

FDI inflows to IranWhile the volume of FDI inflows to Iran is still modest as compared to the volume of FDI inflow to some other developing countries, including some of Iran’s regional competitors such as Saudi Arabia and Turkey, it clearly demonstrates Iran’s improved capacity to attract foreign direct investment.

Notwithstanding the above points, Iran still has a long way to go to reduce its dependence on oil exports and create the necessary conditions for a sustainable economic growth. The current political conflict between Iran and the West over Iran’s nuclear program has driven both sides to highlight certain aspects of Iran’s economic realities at the expense of its other aspects for political purposes. Iranian officials understandably tend to portray Western sanctions against Iran as a blessing in disguise and are thus ironically publicly thankful to the United States and its Western allies for imposing sanctions on it for they have prompted it to implement some of the much-fretted economic reforms. While this narrative has significant elements of truth to it, it ignores the high costs of ongoing adjustments on the Iranian economy resulting from the expanded Western sanctions. The fact that Iran’s supreme leader has named the current Iranian year as ‘the year of economic Jihad’, calling for economic discipline and a more efficient management of Iran’s economy also indicates at least the less than full satisfaction of Iran’s top political leaders with the current status of Iran’s economy and their anticipation of more economic challenges ahead.

On the other hand, the proponents of the current Western confrontational strategy towards Iran also tend to exaggerate the impact of sanctions on Iran’s economy by portraying a gloomy picture of Iran’s economic realities and ignoring its various positive elements. This position makes sense in light of the fact that recognizing the ineffectiveness of sanctions against Iran would mean that all the previous U.S. lobbying efforts with many countries around the world with the aim of intensifying sanctions against Iran have gone to waste and have borne no fruits. The policy implications of such an assessment in the form of legitimizing either reconciliation and political compromise with Iran or riskier and more confrontational approaches towards it, which entail high political risks for the U.S. administration, also provide further incentives for projecting a distorted picture of Iran’s economic realities in the West. What seems to be lost in the midst of this conflict is the fact that developing a sound and realistic strategy towards Iran requires that the reality be seen and projected in its entirety rather than in selective and partial manners by all concerned.


About the Author

Abolghasem Bayyenat

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Abolghasem Bayyenat
Abolghasem Bayyenat is an independent foreign policy analyst covering Iran’s foreign policy developments. His earlier commentaries and articles can also be accessed on his own website, IranDiplomacyWatch.com. 
  • fuster

    actually, feathers really haven’t been ruffled.

    the subsidy reforms are a good idea but fly in the face of many other Iranian actions that see more and more of the economy being placed in the hands of the IRGC.

    it’s also true that inflation in Iran has spiked and taken some of the glow from that IMF report

    http://www.uskowioniran.com/2011/08/irans-inflation-rate-hits-163.html

    and that unemployment in iran is way, way high and way underreported.

  • Reza

    Maybe your features haven’t been ruffled but many have been. You just needed to follow Western mainstream media after the release of the latest IMF report on Iran to notice that. IMF has even been forced to release an official response to some of those criticisms. Iran’s economic record shows both positive and negative features.In many situations, there is a tradeoff between lower inflation and higher growth. While recognizing the flaws, one should also not be blind to many positive features of Iran’s economy. There is too much bluster and fanfare in the mainstream Western media about the impact of sanctions on Iran. Those are clear propaganda.

    • fuster

      There are many in the west who will scant factuality in regard to Iran, but the Iranian media which is strongly guided by the heavy hand of the iranian government’s Press Supervisory Board is far more a source of bullsh1t and propaganda than are the free press sources from the west.

      It’s rather obvious to thinking people that the myriad failures of western media are orders of magnitude different that the out from a press controlled by an authoritarian theocracy that simply closes any publication that proves irksome to the Ayatollah’s government.

      That said, it IS pretty hard to really sink an economy that floats on a sea of oil, particularly when oil is trading for $90/barrel.

      Venezuela has managed to defy the odds and screw its economy to the point of ruin despite all odds, but the Iranians are far more rational and able and have only mismanaged things to the point of making small progress, remaining mired in economic mediocrity when prosperity was easily available.

      The contention that Iran’s larger share of non-oil exports signifies that there is now a varied and flourishing economy is incorrect. The non-oil percentage increased partially because oil exports have decreased and the bulk of the other exports are agricultural and not indicative of economic development.

      • freefallingbomb

        To the poster “Fuster”

        You wrote: “The non-oil percentage increased partially because oil exports have decreased and the bulk of the other exports are agricultural and not indicative of economic development.”

        Oh my God, the mad confusion…
        How is the volume of Iran’s NON-oil exports related in any way to the volume of its oil exports?! That’s the same idiocy as saying that “Iran’s apple exports only rose because its orange exports fell” !
        How could you misunderstand the first, extremely simple graph in this article, that demonstrates that Iran’s NON-oil exports quintupled alone in the last 6 years from ~ 5 billion $ to ~ 25 billion $ , and these are clearly absolute figures, NOT some percentages of non-oil exports in relation to Iran’s overall exports??

  • THE

    Angela Merkel said that she will be coming to visit the Puppets and Traitors in the Serbian Government soon.

    Serbia has a wonderful opportunity to send the German Ambassador packing, and let him go back to his Native Nazi Germany with Angela Merkel.

    Serbia needs to join a European Union that has been cleansed of the Filthy Nazi Fourth German Reich, because that is how all Countries of Continental Europe should define Europe.

    All Countries of the World, especially Continental European Countries need to boycott all German Goods and Services to cleanse Europe of its Nazi German Filth.

  • Neo

    Good work Reza,

    The arguments over sanctions have not changed much in recent years. Both sides stick to their own guns, but it is clear that Iran’s economy is doing fine: export earnings are growing across oil and non-oil sectors; Iran’s financial sector has been shielded from Western banks’ excessive corruption and incompetence by the sanctions; Iran’s foreign exchange reserves are at the highest levels ever; the government has become far more ‘in control’ of the budget with the removal of several blanket subsidies meaning that investments in infrastructure and new projects will increase dramatically; and so there is no reason to expect the country to experience the kind of economic crisis that the West is having.

    On top of all this, Iran has gained 2 important assets: enormous political capital for her resistance; and home-grown technological advances because she has had to in the context of sanctions.

  • Hussain

    The necessity is the mother of all inventions, isn’t it?
    I believe sanctions have helped Iran in an unexpected way because iranians did find themselves obliged to think out of the box to find solutions to Iran’s problems.

    Once Mohammad Mosseddegh (Iran’s prime minister overthrown by CIA and British Intelligence in 1953)said:
    “Iran would be in a better shape economically, if Iran had no oil”!

    30 years ago I was puzzled when I read this. Now I understand what Mossaddegh actually meant.

    Human being becomes more innovative when there are no easy money (petro-dollars)to make them lazy and dormant.

    So the West should know that, even if they impose more sanctions on Iran, they will make smart iranians to become smarter to find solutions!