Sanctions threaten weak Iranian economy

Posted on June 27, 2012

For an indication of how international sanctions are affecting ordinary Iranians, the price of chicken is a good place to start.

A delay in feedstock imports, a result of sanctions, has pushed the price of chicken up 30 per cent over the past week alone. Prices for other staples are also soaring, including grains, up 55.8 per cent; fruits, 66.6 per cent and vegetables, 99.5 per cent.

    These figures, compiled by the Iranian Central Bank – itself a target of US sanctions – tell a story known well by average Iranians.

    “Every time I buy food, I pay more than last time,” Zari, a housewife, said. “What kind of country is this becoming? We are really getting miserable.”

    The strain could begin to intensify next week, when EU sanctions on Iran’s oil exports take full effect.

    Public dissent is already growing over the pace of consumer price inflation and high unemployment, which is caused partly by the international crisis over the country’s nuclear programme. But despite these internal pressures, Iranian analysts do not expect the economic woes to make the Islamic regime halt its nuclear programme.

    The sanctions bar the 27-nation members of the EU from buying Iran’s crude or insuring the oil tankers that carry it. US restrictions on transactions with the Iranian Central Bank, which clears most oil revenues, have proved the most biting punishment against the Tehran regime, which is highly dependent on petrodollars. These restrictions, combined with the policies of Mahmoud Ahmadi-Nejad, the president – notably a subsidy reform plan which pays almost every Iranian 455,000 Iranian rials ($37) a month to compensate for cuts in subsidies on basic commodities – have left the country with a grim economic outlook.

    The Central Bank puts the annual inflation rate at 22.2 per cent, while the state-run Iran Census Centre says the unemployment rate among youth aged 15 to 29 stands at 22.5 per cent. Economists say the official figures are vastly underestimated.

    Mohammad-Reza Bahonar, Iran’s deputy parliamentary speaker, said this week that inflation is reaching a “boiling point which is seriously worrisome”.

    Local media reports suggest that the production sector is working at less than half capacity, resulting in an increasing number of medium and small-sized businesses closing because of high, unsubsidised energy bills and expensive imports due to sanctions.

    In what economic analysts deem as an indicator of deteriorating business, about 12.5 per cent of bank cheques bounced back over the past year, according to a Central Bank report which said this “more than anything else shows production and business sectors have been suffering from stagnation”.

    Iran’s currency market also remains agitated over the prospect of tightened economic sanctions and fears of an Israeli military strike. The rial has fallen 30 per cent since December, when western states decided to ratchet up pressure on Iran.

    Mohsen Renani, an economist and university professor, argued that Iran’s economy had entered a premature “ageing” phase because of decades of high inflation and underdevelopment.

    The EU sanctions will surely aggravate the economic situation. But Iran is hopeful to skip sanctions

    – Analyst

    New pressures, such as cuts in subsidies and international sanctions, could have “unpredictable consequences”, he warned, because the impacts of such burdens on an old economy would be “multiplied”.

    Few analysts expect Iran to abandon its nuclear ambitions as a result of the economic pressure. However, growing public frustration at rising prices is believed to be the main reason that Iran’s rulers decided to avoid the risk of social unrest and agree to some concessions during nuclear talks with the world major powers – the US, UK, France, Germany, Russia and China.

    Iran has indicated that it is ready to compromise over enrichment of uranium at 20 per cent concentration – closer to weapons grade – but in return expects recognition of its right under the non-proliferation treaty to continue enrichment at 3.5 per cent and sanctions to be eased.

    But what Iranian observers consider a major retreat by the Islamic regime is not deemed enough by western powers.

    Economists believe the regime in Tehran can survive financially, at least for the immediate future, thanks to high foreign exchange reserves – which are estimated to exceed $100bn – and can resort to barter deals for its oil sales even though a fall in global oil prices has caused new concerns.

    “The EU sanctions will surely aggravate the economic situation,” said one analyst. “But Iran is hopeful to skip sanctions” with the help of China, Russia and India which meet half of the country’s imports.

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