News Analysis | Can Iran weather the economic storm?

Tehran seeks to strike a balance between protecting the economy, combating the coronavirus and deepening its strategic interests.

May 15, 2020 11:12 pm | Updated May 16, 2020 10:28 am IST

Sanctions and coronavirus: An employee of an Iranian stock brokerage firm in Tehran.

Sanctions and coronavirus: An employee of an Iranian stock brokerage firm in Tehran.

Iran, the hardest hit country by the COVID-19 pandemic in West Asia, is struggling to cope with several challenges at the same time — from the crippling U.S. sanctions and a collapsing economy to falling oil prices and a severe public health crisis . And at a time when the government is scrambling ways to prevent a total economic collapse, the country’s security establishment, in a time-tested strategy, has resorted to a more aggressive foreign policy.

Even before the pandemic struck the country, the Islamic Republic was reeling under a deep economic crisis, mainly due to the sanctions imposed by Washington after President Donald Trump unilaterally pulled the U.S. out of the Iran nuclear deal in May 2018. The sanctions resulted in a sharp fall in Iran’s oil exports — from over 3.5 million barrels a day in May 2018 to less than 500,000 barrels a day now — and economic contraction. Then came the double whammy of the pandemic and the oil price crash.

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Double setbacks

The pandemic crisis “is adding to the existing burdens on the country's economy, which last year saw the GDP shrink by 7.6% as U.S. sanctions cut into its crude exports and trade,” said Naysan Rafati, Senior Iran Analyst at the Brussels-headquartered International Crisis Group.

“The recent drop in oil prices and demand, combined with a slowdown in domestic and regional commerce as a result of the coronavirus, means that Tehran will have to grapple with significant financial challenges at a time when the nuclear agreement is hanging by a thread and regional tensions with the U.S. and its allies remain significant,” Mr. Rafati told The Hindu .

Price of Brent crude, the international benchmark, crashed by 50% in March. Brent crude price was hovering around $20 a barrel on Friday morning in London. The oil shock came at a time when Iran was already struggling hard, with a healthcare system debilitated by years of international and American sanctions, to contain the spread of the novel coronavirus. As of Friday afternoon, the country has seen over 114,500 infections and 6,854 deaths.

“The rapid rise in infections [in Iran] is disrupting the country’s production and trade,” the World Bank said in a brief on April 14 . The crisis is exhausting Iran’s buffers and it will have “to rely on flexible exchange rates to manage the current situation and conduct much needed reforms in private-sector development and broader economic transformation,” stated the Bank.

The International Monetary Fund has forecast that Iran’s economy will contract by 6% this year. Inflation, which hit 41% last year, is expected to be around 34.2% this year. Grappled with hyperinflation, Iran has already introduced a new currency, toman — 1 toman will be worth 10,000 riyals.

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Reduced oil dependency

The Iranian government has acknowledged the crisis, but has said the impact of the oil crisis on Iran would be minimum compared to other oil exporters as the Islamic Republic has reduced its dependence on the petroleum over the years, thanks to U.S. sanctions. “The more countries rely on oil, the greater they suffer. But as our reliance on oil income has decreased, willingly or unwillingly, either by our own will or by the imposition of the enemy, our losses will certainly be less,” President Hassan Rouhani said on April 22.

In 2019, as Iran’s oil exports collapsed amid U.S. sanctions, oil sales made up only 29% government revenues. For Saudi Arabia, Iran’s regional rival and a top oil exporter, the share of the petroleum sector in budget revenues stands at about 87%. In 2020, the Iranian government has accounted for a further fall in the share of oil in revenues to 9%, according to the New York-based Eurasia Group. But achieving even this number is doubtful as the budget for the current year expected Iran to export 1 millions barrels of crude a day at $50 a barrel. Sales have since fallen to less than 500,000 barrels a day, while prices have plunged to just $20 a barrel.

To prevent a total economic collapse, the government decided to ease the virus restrictions on businesses and the public in late April even as infections were spreading fast. “We have to follow all the medical instructions, but work and production are as essential as these precautions,” President Rouhani said at a televised Cabinet meeting, explaining the decision.

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Aggressive foreign policy

The plan, as Iran’s actions suggests, is to strike a balance between the economy and the fight against COVID-19, while at the same time pushing for expanding the country’s strategic interests in the region. And as the Iran economy is used to prolonged crises in the past, mainly due to the international sanctions, its leaders are trying to turn the crisis into an opportunity to mobilise power by attacking their favourite rival—the U.S.

The Iranian government has blamed the U.S. sanctions for the severity of the virus attack on its people. Iran’s proxies in Iraq continued to target U.S. forces, killing two Americans on March 11. In the Gulf, the Revolutionary Guard Corps carried out operations, harassing the American Navy, which prompted Mr. Trump to authorise the Navy to shoot down Iranian boats. Last month, Iran said it launched a military satellite into the orbit.

This fits well into a time-tested strategy of taking a more aggressive foreign policy and whipping up nationalist sentiments whenever the domestic crisis worsens. After the Trump administration reimposed sanctions on Iran as part of its “maximum pressure” strategy, Iran and its proxies had started directly attacking the interests of the U.S. and its allies in the region, instead of giving in to American demands.

“Iran's resilience should not be underestimated,” said K.P. Fabian, a former Indian diplomat, and an expert on West Asia. “Iran cannot be sanctioned further and it hopes to see Trump out,” Mr. Fabian, who was posted in Tehran during the Iranian revolution in 1979, told The Hindu .

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