Complex Made Simple

Inflation, devaluation and now sanctions: Iran on the brink

We are one day past the November 4 sanctions deadline imposed by the US on Iran. It’s already being called the ‘toughest ever’ sanctions on the country experiencing a volcano of protests erupting on its streets.

There are good reasons for that, and they have nothing to do with Anti-American sentiment.

The Iranian economy is on the brink of collapse, regardless of sanctions, though these will only add fuel to the fire.

First the sanctions   

The Trump administration reinstated all sanctions removed under a 2015 nuclear deal aimed at curbing Iran’s nuclear ambitions., targeting both Iran and states that trade with it, BBC reports.

US President Donald Trump said Iran was already struggling under his administration’s policies.

“The Iran sanctions are very strong. They are the strongest sanctions we’ve ever imposed. And we’ll see what happens with Iran, but they’re not doing very well, I can tell you.”

“More than 700 individuals, entities, vessels, and aircraft are now on the sanctions list, including major banks, oil exporters and shipping companies. (Secretary of State Mike) Pompeo has said that more than 100 big international companies had withdrawn from Iran because of the looming sanctions,” reports BBC.

Read: A blow by blow of Iran’s debacle as the Nov. 5 deadline looms

Brussels-based Swift network for making international payments is expected to cut off links with targeted Iranian institutions, isolating Iran from the international financial system, according to BBC.

The UK, Germany, and France – which are among the five countries still committed to the nuclear pact – have all objected to the sanctions.

The Trump administration has granted exemptions to eight countries to continue importing Iranian oil, without naming them.

They are reported to include US allies Italy, India, Japan, and South Korea, along with Turkey, China, and India.

The countries will deposit Iran’s revenue in an escrow account, reports CNBC.

Opinion: Iranian oil on broil – the slippery slope of rising oil prices

The oil effect

Washington has said it will ensure a well-supplied global oil market, with help from ally Saudi Arabia, as Iran oil is cut back. Front-month Brent crude futures, the international benchmark for oil prices, were at $72.53 per barrel on Monday, according to CNBC.

Observed shipments of crude and condensate dropped to 1.72 million barrels a day in September, down 260,000 barrels a day from the previous month, and 1 million from a high in April of 2.82 million bpd, according to tanker tracking data compiled by Bloomberg.

Iran’s oil exports have to below 1.5 million today, according to the Washington Post.

Saudi Arabia is the only producer with significant spare capacity of around two million bpd that can be tapped into to compensate for the loss of Iranian supplies.

UAE’s ADNOC has announced the discovery of new oil and gas resources, with an eye on full self-sufficiency as US sanctions on Iran go into effect.

State-run ADNOC, based in the oil-rich capital Abu Dhabi, said Sunday it had discovered new gas fields, totaling 15 trillion standard cubic feet, and another billion barrels of oil.

The company also announced plans to boost output to four million barrels per day by 2020 and five million bpd by 2030 — a plan UAE officials said was aimed at making the country entirely self-sufficient.

Read: Sanctions on Iran causing more volatility for oil and global markets

Iran’s economic collapse

Negative Growth

The International Monetary Fund said last Thursday that Iran should implement policies to safeguard its macroeconomic stability in the face of sanctions.

It predicts Iran’s economy will shrink by 3.6% this year.

Fitch predicted Iran’s economy would contract 4.3% next year.

According to the Washington Post, the US administration aims to squeeze Iran’s already-precarious economy, particularly by denying it the oil revenue that makes up 80% of Iran’s tax income.

Iran Rial collapse

The Iranian rial has collapsed since the U.S. withdrawal from the 2015 nuclear deal, driven to a historic low against the dollar.

Iran’s currency has lost more than two-thirds of its value this year, according to the Independent.

“That means the price of a kilogram of chicken has increased five-fold. Clothes, shoes, yogurt, milk, and rice have doubled or tripled in price. Only bread and cooking oil are under price controls,” reports the independent.

Signs of the currency chaos can be seen everywhere in Tehran, where travel agents offer holiday prices only in hard currency and nappies have disappeared from store shelves, according to the Independent which added: “ Exchange shops offer 150,000 rials to the US dollar.”

The conversion rate of Iranian rial (IRR) has lost its value by nearly 70% since April 2018, a month before U.S. president Donald J. Trump reimposed sanctions on Iran, according to American Thinker.

Read: Can anyone stop Iran’s oil chokehold?

Ballooning public debt

According to the Research Center of the Islamic Consultative Assembly, the Iran public debt by the end of June 2017 was 6,250 trillion IRR ($150bn on $IRR = $0.00024).

Country’s Current Account

This includes the total number of trades – such as export, import, debt, etc.  The deficit in the current account is due to the surplus in imports over exports, which is one of the main factors behind the devaluation of the national currency, according to American Thinker.

According to the statistics by the IRR Central Bank, there was a significant depreciation in the country’s account during a five-year period from 2012 to 2017.

Oil revenue dropped from a surplus of $25 billion in 2012 to approximately $14 billion in 2017.

Moreover, the total exports of goods and services in 2012 was $69 billion which decreased to $52 billion in 2017.

Inflation rate

According to Professor Steve Hanke, an American applied economist and a distinguished professor at Johns Hopkins University, Iran’s annual inflation rate on September 20, 2018, was 283%.