Iran's Economic Troubles Mount As Sanctions Loom

A woman and a man gas up their vehicles at a station in Tehran in 2007. i i

hide captionAn woman and a man gas up their vehicles at a station in Tehran in 2007. Iran's economic problems are linked to its extensive use of subsidies — billions of dollars a year — to keep basic necessities such as gasoline below their true market value.

Vahid Salemi/AP
A woman and a man gas up their vehicles at a station in Tehran in 2007.

An woman and a man gas up their vehicles at a station in Tehran in 2007. Iran's economic problems are linked to its extensive use of subsidies — billions of dollars a year — to keep basic necessities such as gasoline below their true market value.

Vahid Salemi/AP

The dramatic political turmoil in Iran since last year's disputed presidential election has been well publicized. But less well known are the country's economy troubles.

Like much of the information coming from Iran, economic data are hard to trust. But it appears Iran's unemployment rate has reached about 20 percent. Actual inflation is probably running higher than that and has been above 20 percent for years.

Iran's currency, the rial, is weak, its value propped up by government use of oil revenues. The country's banking system is also shaky.

And now, Iran is facing a U.S.-led effort at the United Nations Security Council to impose more economic sanctions.

A Struggle With Subsidies

Iran's economic problems are linked to its extensive use of subsidies — billions of dollars a year — to keep basic necessities such as electricity, gasoline, bread and other food staples far below their true market value.

Experts say subsidies could eventually bankrupt the Iranian government, and so this year, a great debate has emerged over subsidies, says Hossein Askari, an expert on Iran's economy at George Washington University.

"Iran has realized that subsidies are very costly, not the way to develop an economy; but they have, I think, used subsidies because they have seen this as the best mechanism, depending on who is in power, in order to get political support," he says.

Earlier this year, President Mahmoud Ahmadinejad proposed reducing government subsidies. But ever the populist, Ahmadinejad asked the Parliament to let him use billions of dollars of revenue from reduced subsidies to distribute to poor people at his own discretion.

This has been Ahmadinejad's approach since he was first elected president in 2005, says Djavad Salehi-Isfahani, an Iran expert at Virginia Tech.

"Without giving money to the poorer people, it would be impossible to implement the price increase and have peace in large cities," Salehi-Isfahani says.

The president and the Parliament have not yet found common ground, so subsidy reduction is on hold for the moment, analysts say.

Political Interference

The troubled banking system also has been affected by Iranian politics, Askari says.

"In a system like Iran's, there's a great deal of pressure on the political side for the banks to do what they're told to do, and not what they should do as good bankers," he says. "So, yes, Iran's banking system is a mess."

Ahmadinejad has forced the banks to lend money at artificially low rates of interest. At the same time, says Salehi-Isfahani, state-owned enterprises, which dominate the economy, insist that banks provide them with more rials when they cannot pay their workers.

"So the banks on the one hand are unable to attract depositors because they can't pay interest enough to match at least the inflation rate," he says. "And at the other end, the money they have lent out they are not able to recoup."

What keeps Iran's economy afloat are the billions of dollars it makes exporting oil, but even that is in trouble. Sanctions imposed by the United States over the past 14 years have discouraged foreign oil companies from investing in Iran's oil sector and helping to modernize it.

Iranian oil exports are far less today than they were in the 1970s, before the Islamic Revolution ousted the shah.

Under U.S. pressure, the Russian oil company Lukoil recently pulled out of a deal with Iran — as have European and Asian oil companies.

Iranian officials have made the claim for years that Chinese oil companies have supported Iran's energy industry with billions in new deals. But Askari has his doubts.

"The Iranians love to publicize this, you know, a lot of bravado. But there really is no substance to it," Askari says. "There is absolutely no doubt that the Chinese do not have the technology that the Western oil companies have."

Push For Sanctions

But it is not clear just how effective the U.S. and U.N. sanctions imposed on Iran over the years have been.

Salehi-Isfahani believes most of Iran's economic problems are self-inflicted.

"I would give a much higher proportion to policy-induced problems inside Iran," he says.

Nevertheless, the Obama administration is pushing hard now for additional sanctions at the Security Council.

"I'm not interested in waiting months for a sanctions regime to be in place," President Obama said last week. "I'm interested in seeing that regime in place in weeks."

China, a veto-wielding member of the Security Council, is proving the key player in the sanctions debate. A senior Iranian official was in Beijing just a few days ago, and Obama will have a chance to buttonhole China's president, Hu Jintao, when he comes to Washington in mid-April.

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