Note: What Future Awaits Iran’s Economy?
Iran’s economy, which has faced high uncertainty and risk in commercial, economic, and political spheres not only during the sanctions period but even in the post-JCPOA era, will now experience a new shock with America’s withdrawal from the nuclear deal.
America’s withdrawal from the JCPOA—even assuming the European Union remains—will have significant consequences for Iran’s economy. Many European companies have extensive operations and substantial capital in the United States and therefore will be threatened once sanctions are implemented. If current conditions allow international companies’ economic cooperation with Iran, particularly in the banking sector, to be compared to traversing a mined field, then the number of these mines will increase and the risk of explosion will be greater. Such a situation will not only trigger capital flight but will also encourage domestic capital flight. Furthermore, the United States and even its Western allies, given the extensive experience they have gained from the weaknesses of Iran’s economy over the past years, have acquired greater capability to damage Iran’s economy.
Therefore, if new sanctions are implemented, the fragility of Iran’s economy—despite being called “resistant”—will be greater than in previous years. This is because the sanctions will be smarter this time. For this reason, Iran’s exogenous, mono-product, introverted, dependent, and rentier economy has high vulnerability to international sanctions. Since with the reduction of technology imports and raw materials and semi-finished products, economic units ranging from the oil and automotive sectors to dependent industries cannot operate at full capacity and the opportunity to increase their productivity is lost.
The banking sector is the essential infrastructure for the transfer of liquidity, currency, and capital. Therefore, every type of economic activity—whether short and long-term investment, production, or distribution—is more or less dependent on this infrastructure. With the siege of Iran’s banking sector, this infrastructure will be disrupted. If the scenario of expanding sanctions is under consideration by the Trump administration, it appears that Iran’s banking sector—which is already isolated in current conditions—will be the first sector subject to sanctions expansion, and the oil export sector will subsequently be targeted. In recent years, particularly during the sanctions period, capital investment, especially in the oil industry, has declined sharply. For this reason, production capacity in this sector of Iran’s economy has not grown alongside regional and international competitors. With renewed sanctions on this sector, it is natural that Iran’s crude oil export markets will fall into the hands of competitors. Current Iranian customers are unwilling to cooperate with a country that carries high risk. Consequently, Iran’s ability to utilize foreign exchange reserves will diminish and current revenues from oil exports will also be threatened. In this manner, the flow of foreign currency liquidity—which is like blood for Iran’s economic body—will be halted. The expansion of the shock resulting from America’s withdrawal from the JCPOA will have various consequences over short, medium, and long-term periods.
Short, Medium, and Long-Term Consequences of New Sanctions
Capital flight, depreciation of the rial against hard currencies, reduction of short-term investment, decline in economic growth, and reduction in job creation will be the short-term consequences of America’s withdrawal from the JCPOA. Short-term consequences are indeed dynamic and dependent on the continuation of reduced activities by companies and economic units. In the medium term, however, as oil revenues decline, the government budget deficit will increase, and the balance of payments will become more negative than before. These two factors, combined with other elements, will sustain the depreciation of the rial. Reduced investment and allocation of resources to current expenditures will be among other consequences of sanctions. If sanctions expand in the long term, Iran’s domestic production capacity will decline from its current level, and Iran’s economy will become increasingly import-dependent. The reduction in job opportunities will be a consequence of Iran’s economy becoming import-dependent. Such a situation will cause Iran’s economy to become even more exogenous and vulnerable to global economic shocks.
Source: Radio Farda
