In the Tehran currency market on Wednesday, September 23, 2020, for every US dollar traded, an amount of 28,000 tomans was handed over to the buyer. Demand in the market has increased and supply is low. There has been no sign of the petrodollars used for trade between oil-producing countries and countries buying oil. Iranian government-issued dollars appear to have run out. Due to sanctions and the coronavirus pandemic, the volume of Iran's non-oil exports has dropped significantly. No one is willing to supply foreign currency to the market, not even government exporters. As soon as the dollar is converted into rials, its value disappears.
At the same time, the demand for converting the Iranian rial, the official currency, into foreign currency is high. Regardless of investment incentives, the demand for foreign exchange to import necessary commodities has increased. These include commodities such as animal feed, which has recently been in short supply. Hence, the food market in Iran has been given a boost.
So why does a country that is, due to natural and geographical constraints, dependent on imports to feed livestock and poultry insist on political and military intervention in the region, picking fights with the United States, and speaking with such confidence about the so-called "resistance economy,” which is little more than an illusion?
On September 23, the United States dollar cost almost four times higher in the Tehran market than it had on May 8, 2018, the day the United States announced it was leaving the nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA). The price rise in the foreign exchange market had started the winter before.
Nationwide protests in January 2018 came as a surprise to the government. Hassan Rouhani's government, which had wrongly assumed it had kept people happy by curbing inflation and keeping the price of dollar stable, was unable to detect signs of public dissatisfaction or predict the unrest.
The social crisis posed a real threat to the government, and officials were unable to see this. But the government also miscalculated when it complied with the Supreme Leader’s request to print money and pay damages to financial and credit institutions, causing inflation in the foreign exchange market in winter 2018. Although damaging, this inflation was minimal when compared with the situation in March 2018. Every move US President Donald Trump made resulted in a violent shake-up of the Tehran market, so much so that the price of the dollar in the open market doubled between March 21 and the day the US officially announced it was leaving the JCPOA less than two months later. From then on, it continued rising.
Life After the JCPOA, Life Under Sanctions
It is now exactly two years, four months and 16 days since the United States withdrew from the JCPOA. During this period, Iran's economy has undergone a terrible and unprecedented crisis, a crisis that for many seems even deeper and more damaging than the eight-year Iran-Iraq war.
Early on, many people underestimated the impact of the US withdrawal from the JCPOA, saying that a country that had endured four years (from 2011 to 2015) of comprehensive United Nations sanctions would easily overcome US unilateral sanctions. However, what has been imposed on Iran during these two years of sanctions has been far more severe and harmful than the comprehensive UN sanctions.
At the height of those sanctions, in 2013 and 2014, Iran's oil exports never fell below one million barrels per day. Its production was never less than 2.7 million barrels per day.
OPEC data archive shows that the lowest recorded oil production was in November 2012. For months now, Iran's oil production has fallen below two million barrels a day; its oil exports are less than 100,000 barrels per day.
This is a catastrophe for the Iranian economy, a quarter of which is directly dependent on oil and a large portion of which is indirectly affected by oil.
According to estimates by the International Monetary Fund, Iran's economic growth over the last three years has been negative 5.4 percent, negative 7.6 percent and negative 6 percent (this being the forecast for the current year).
Therefore, Iran's three-year economic growth will be lower than negative 18 percent. In other words, Iran's economy has shrunk by a fifth in the two years since the US sanctions returned.
Inflation Out of Control
The loss of oil revenues has exacerbated Iran’s budget deficit crisis. This means the government does not have enough money to cover its expenses. Some may say this does not matter, but what does matter is that a large part of the budget is taken up to pay salaries for employees and retirees and to pay for utilities. If this money is not provided, further human catastrophe will ensue.
When the government does not have oil revenues, it will not have much in tax revenue. Where will the money to pay the salaries of employees and retired people come from? Suggestions that the government print more money will only result in the rate of inflation increasing well beyond the value of that printed money.
The budget deficit, even under normal circumstances, has been one of the main causes of inflation in Iran, let alone in the present situation, which has spun out of control.
The government has tried to make up for the budget deficit by selling its financial and capital assets. But the current state of financial markets and capital is so volatile that there is no guarantee that this solution will work.
The latest report by the Statistics Center of Iran, published on September 22, states that the inflation rate in the country has accelerated once again. The average monthly inflation rate over the first six months of this year was higher than the average monthly inflation rate over the last quarter of a century. The monthly inflation rate in September 2020 was 3.6 percent and the average monthly inflation rate in the first six months this year was 3.4 percent. In comparison, the average monthly inflation rate in 2018 was 3.3 percent and at the peak of inflation in 2012, it was less than 3 percent (2.7 percent to be exact).
This shows the wave of inflation that has continued to rise in the last six months, especially in the summer, has been larger and more destructive than inflation waves of recent years. It will inflict irreparable damage on the Iranian economy and its foundation, and on society.
Official statistics confirm that between May 2018, when the United States withdrew from the JCPOA, and September of the current year, the general level of prices has more than doubled on average. The price of the dollar has quadrupled, the size of Iran's total economy has shrunk by a fifth, and the economic power of every Iranian citizen has shrunk by a quarter.
Strange and unprecedented chaos reigns in all sectors of the Iranian economy. There are no prospects for the future. Everything is in shambles. Such a situation is unprecedented over the 40-year history of the Islamic Republic, even compared to the dramatic first days that followed the revolution and the long years of the war with Iraq.