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It's no secret Iran has gone through dramatic political turmoil since last year's disputed presidential election. Less well-known is that Iran's economy is in trouble. Unemployment and inflation are high. The currency is shaky and so is the whole banking system.

Now, Iran faces a U.S.-led effort at the U.N. Security Council to impose a new round of economic sanctions.

NPR's Mike Shuster reports.

MIKE SHUSTER: Like much of the information coming from Iran, economic data is 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 revenue.

These problems are linked to Iran's extensive use of subsidies, billions of dollars a year to keep basic needs 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.

Professor HOSSEIN ASKARI (International Business Department, The 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 in order to get political support.

SHUSTER: 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.

Professor DJAVAD SALEHI-ISFAHANI (Department of Economics, Virginia Tech): Without giving money to the poorer people, it would be impossible to implement the price increase and have peace in large cities.

SHUSTER: The president and the parliament have not yet found common ground, so subsidy reduction is on hold for the moment. Also greatly affected by politics in Iran is the troubled banking system, says Hossein Askari.

Professor ASKARI: 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. So, yes, Iran's banking system is a mess.

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

Professor SALEHI-ISFAHANI: 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. And at the other end, the money they have lent out they are not able to recoup.

SHUSTER: 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 U.S. over the last 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 just recently, 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. Hossein Askari has his doubts.

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

SHUSTER: These measures are just one component of a web of sanctions that the U.S. and the U.N. imposed on Iran over the years. How effective the sanctions are is not really clear. Djavad Salehi-Isfahani believes most of Iran's economic problems are self-inflicted.

Professor SALEHI-ISFAHANI: I would give a much higher proportion to policy-induced problems inside Iran.

SHUSTER: Nevertheless, the Obama administration is pushing hard now for additional sanctions at the U.N. Security Council, coming soon, according to remarks the president made last week at the White House.

President BARACK OBAMA: I'm not interested in waiting months for a sanctions regime to be in place. I'm interested in seeing that regime in place in weeks.

SHUSTER: 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 President Obama will have a chance to buttonhole China's President Hu Jintao when he comes to Washington in mid-April.

Mike Shuster, NPR News.

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