Sanctioning Iran: Implications and Consequences (part 3)
8 Nov 2012
By Eskandar Sadeghi-Boroujerdi for Oxford Research Group (ORG)
Price Increases and Inflation
Subsidy reforms in concert with sanctions, particularly those which have targeted Iran’s banking sector, have been the cause of dramatic increases in the prices of many basic goods. In order to cushion the impact of the price increases, cash payments of roughly equivalent to $45 per month have been deposited in people’s bank accounts. external page[93] Since last year however, due to inflation this figure has rapidly diminished as the rial’s value continues to decline against the dollar. The cash payments have been of little consequence for the much of the middle class, many even deeming the payments not worth the time of registering for their receipt. That being said, Djavad Salehi-Isfahani, professor of economics at Virginia Tech, has argued that payments have had a positive impact upon the poorest sectors of Iranian society, helping them to escape the international poverty line of $2 per day. external page[94] Salehi-Isfahani has also estimated that the Iranian government spends approximately $70 billion annually on subsidies, a significant proportion of which will be saved as a result of the reforms. external page[95] Even so, many Iranians’ purchasing power has severely deteriorated, and they are as a result trying their utmost to make ends meet by cutting back on “luxuries” and economising. external page[96]
Iran has, for many years, suffered from chronically high levels of inflation, though under Presidents Rafsanjani and Mohammad Khatami the economy was managed with a fraction of the oil revenue windfall the Ahmadinejad administration has enjoyed, and with considerably lower levels of inflation. In the first six years of his presidency alone, Ahmadinejad received $560bn in oil revenues, exceeding by some margin the $433bn received by the previous eight governments of the Islamic Republic combined. external page[97] The high levels of currency which have been injected into the Iranian economy in conjunction with low interest rates and, thus, a disincentive to save, are partially responsible for the rial’s rapid decline. As confidence in the official exchange rate began to dissipate and fears intensified over the CBI’s access to foreign currency, Iranians quickly turned to buying dollars and gold to protect their savings. Another upshot of the currency crisis has been a property boom, as Iranians look for a “safe” investment for their money.
In June of this year, inflation reached an annualised rate of 34%. external page[98] In July, Gholamreza Kateb, spokesman for the Majles’s planning committee, also revealed that real inflation rate is 33.5%. external page[99] Some officials have claimed, including Asadollah Asgarowladi, the Head of the Iran-China Chamber of Commerce, and one of the wealthiest businessmen in Iran, the rate of inflation is as high as 40%. external page[100] The recent decision to stop reporting the inflation rate altogether has only exacerbated the suspicion that the government is hiding something and that its economic pronouncements are to be taken with a heavy dose of scepticism.
Despite the promise by Mehdi Qazanfari, Minister of Industry, Mines and Trade, to control rapidly increasing prices, they have continued to spiral. external page[101] A motion for his impeachment had been circulating the Majles, and it seems that much of the Conservative ruling establishment is restive and quick to cite the government’s economic policies as the chief cause. external page[102] In October 2011, even before the severest Western sanctions had come into effect, a motion to impeach the Minister of Economy, Shamseddin Hosseini, was defeated on the Majles floor. The main criticism at that time, however, was the Minister’s failure to prevent the biggest banking corruption scandal in the Islamic Republic’s history. external page[103] Ali Larijani at that time defended the Hosseini, but since January 2012 fractures in the visage of Principalist unity have turned into fully fledged breaks. The Minister of Economy has been repeatedly summoned to the Majles to explain his chosen policy course. The MPs exclaimed their “dissatisfaction” with the Minister’s answers, gave him a “yellow card”, with Elias Naderan, an MP critical of the government, threatening to pursue his impeachment. external page[104]
More recently, the current Speaker of Parliament, Ali Larijani, has gone as far as to state publicly, and on more than one occasion, that only 20% of Iran’s economic problems are the corollary of sanctions, while the remaining 80% finds their provenance in government mismanagement. external page[105] On a similar note, Deputy Speaker of the Majles, Mohammadreza Bahonar in an interview with the Reformist daily Etemaad bluntly stated that the government’s Principalist critics “would not tolerate another year of the Ahmadinejad government”. external page[106] It should be borne in mind that both Larijani and Bahonar have long been vehement critics of Ahmadinejad; the former openly so since his resignation as Head of the Supreme National Security Council in October 2007. Larijani’s key point was that domestic production must increase, and that the Iranian economy must wean itself off its dependence on foreign imports, external page[107] which undercut domestic production, and were effectively a government splurge funded by the oil windfall enjoyed by the Ahmadinejad government as an easy shortcut to assuage inflationary pressures.
Like the Principalist critics of the Ahmadinejad government, Ali Mazrui, former Deputy Chief of the Sixth Majles’ Commission for Budget and Planning, has claimed that the lion’s share of responsibility for the inflation of the price of basic foodstuffs resides with the government. external page[108] Ahmadinejad’s critics have in particular pointed to his dissolution of the Economic Planning Organisation which used to oversee the manner and method of government spending. Since its dissolution, oversight of government spending has been minimal to non-existent, and many economists allege that this has resulted in much of the economic turbulence witnessed in recent years. external page[109] Critics have pointed to the government’s inadequate management of the huge Maskan-e Mehr housing project, as merely one example of several. external page[110]
Of course an important question, which cannot be properly answered here, is to what extent Ahmadinejad has pursued his agenda with the approval of the Supreme Leader. Since the President’s too bold step of challenging Khamenei for the Intelligence Ministry in April 2011, external page[111] Ahmadinejad, but particularly his entourage, and his elusive Chief of Staff, Esfandiar Rahim Mashaei, have been something of a soft target on which to lay the blame for the consequences of arguably larger strategic decisions, in which the Supreme Leader, and the ruling cabal of the IRGC are implicated.
In the first half of 2012, the response of the government and broader regime to the sanctions and their impact on the economy had often been confused and varied. One party’s respective interpretation of the sorry state of the economy and the chief reasons for its occurrence seems to accord with the particular speaker’s political agenda and priorities. For example, the First Vice President, Mohammadreza Rahimi has blamed price hikes not on sanctions, which he went as far to name “a gift from God”, external page[112] but rather on hoarding. Speculation was also blamed as a key reason for the plummeting value of the rial. Due to fears over sanctions it does appear that hoarding has been taking place, and that the government fears over potential shortages in the future have themselves contributed to this development. external page[113] Ahmadinejad himself ordered the stockpile of 3 months’ worth of basic goods in response to sanctions pressure, which has in turn catalysed hoarding by both businesses and households. external page[114] Fears remain that shortages of wheat still might occur. external page[115]
The Iranian government had in response pledged to send out inspectors into the bazaar and shops across to monitor prices and hoarding, with threats of fines to be meted out to those traders and shopkeepers found responsible for overcharging customers and contributing to the price crisis. external page[116] While, unlike 1979, there is as of yet no serious revolutionary movement waiting in the wings to seize power, such measures are reminiscent of steps taken during the latter years of the Shah’s era in which inspectors of the sole legal party of the time, the Rastakhiz, were sent out to investigate rising prices and alleged hoarding in the bazaar. Despite the public pledge, prices have not stabilised. Rather state media and unions have been warned against reporting on the price hikes affecting the standard of living of Iranians across the country. external page[117]
Basic food stuffs, and particularly meat have dramatically increased in price since even before June and prices have continued to rise through to the present. As damage control, the government has once again been forced to offer quotas of subsidised foods, in particular chicken. The Majles also held a closed session with the various ministers whose portfolios are economically related to try and come up with ways to get a handle on the situation, thus far with little success. external page[118] The situation has become so dire that even high level clerics such as Grand Ayatollah Makarem Shirazi have been forced to come out publicly and proffer a religious veneer for the state of imposed frugality, claiming meat consumption is not desirable or beneficial to one’s health. external page[119] One report from the Green Movement affiliated website, Kalameh, has reported that chicken store in the provincial town of Minab was even raided by armed gunmen. external page[120]
Because of the inability of the CBI and government to tackle inflationary pressures the second phase of subsidy reform has been halted by the Majles, and Ahmadinejad even felt himself compelled to disassociate himself from this year’s budget, contending the Majles had altered it beyond recognition. external page[121] The main critics of the second phase were individuals such as Ali Larijani, who was re-elected as Majles speaker in May 2012 and Ahmad Tavakkoli, former head of the Majles Research Centre, because they insisted the second phase’s implementation would only go to further compound inflation, and add to the pressure under which ordinary people were already struggling to make ends meet.
Moreover, it was alleged Ahmadinejad ultimately sought to use the second phase as a populist stunt and publicity boon, by handing out cash payments with little thought to the resultant negative effects on the economy. There are also probably fears that Ahmadinejad would attempt to use the cash payments to re-energise his own base of support, which has been fading over the last three years, ahead of the 2013 presidential election, and give a boost to his own favoured candidate, by which he would attempt to perpetuate his influence in the political system. And aside from such political power rivalries, there were numerous technical problems and delays in the first phase’s implementation, which critics place at the government’s doorstep.
Representatives of the Green Movement opposition have attempted to capitalise on discontent, claiming there will be resurgent protests ahead of the 2013 presidential elections. external page[122] Despite such claims, protests on a large scale are yet to be seen, which is not to rule out their possibility, if there is an appropriate spark. However, if protests eventually do break out, there is nothing to guarantee they will be politically organised or that the opposition will be able to capitalise on them.
As testament to the fact that economic discontent does not necessarily lend itself to progressive politics or democratisation, a wave of discrimination against Afghans has radically increased over the last several months and plans have even been drawn up to prevent them, including even Afghan-Iranian citizens from entering certain provinces. external page[123] This is in part a response due to the shortage of resources available for Iranians, and compounded by the institutionalised racism and discrimination, which already takes place on a regular basis against Afghans inside Iran.
According to the findings of Professor Salehi-Isfahani, the hardest hit by sanctions are Iran’s youth, who from 1996-2006, accounted for 70% of unemployment, external page[124] and this looks set to be further exacerbated as the impact sanctions worsens. Likewise, the rate of young women’s unemployment, the same young women so often framed as the champions of Iranian democracy, over the last decade has reached levels as high as 50%. external page[125] Besides poor levels of job creation for a steady supply of graduates emerging from the country’s universities, Iranian labour markets are also rigid, with older workers being the recipients of tenured positions, to the detriment of their younger counterparts. external page[126] Obviously economic hardship will only go to exacerbate this trend. Again, thus far there appear to be few indications that high levels of youth unemployment will lead to a serious political challenge to the regime as a whole, while it is certainly feasible that people will lobby their local officials and government in order to air their deepening discontent.