Tyranny of numbers

Is Iran’s economic slide bottoming out?

Posted in General by Djavad on June 26, 2019

Last year, Iran’s economy was hit hard by sanctions.  The US withdrawal from the nuclear deal and the return of unilateral US sanctions turned 10 quarters of economic growth into (so far) four quarters of negative growth (see graph below).  During the year that ended on March 20, 2019, the economy shrank by nearly 5%, and further contraction is very likely this year.  The 5% decline was led by manufacturing, which fell by 12% in the last quarter of 1397 (winter 2019) relative to the same quarter a year ago.  Non-oil GDP fell by less since agriculture and services, which account for 3/4 of the GDP are less dependent on trade (services actually grew slightly).

Figure.  Growth rate of GDP, quarter on the same quarter a year ago.
gdp_quarterly_2012-2018
Source: Statistical Center of Iran.

Will the downward trend end sometime soon?  The IMF has predicted a 6 percent decline for 2019, but its prediction may turn out to be too pessimistic.  There are a few signs that the economy is adjusting to a new lower equilibrium, from which it may start growing by 1-2 percent in 2020.

The high price of foreign currencies is the main reason why we should expect local production to start recovering soon.  Donyaye Eghtesad sees a “resurgence of production” in an increase in the Managers’ Purchasing Index (PMI) collected by Iran’s Chamber of Commerce. This is consistent with recent data for non-oil exports.  For the first two months of the current Iranian year (roughly, April and May 2019), they increased by 8.1% compared to the same period a year ago.

However, both non-oil exports and import competing sectors face two important challenges: sanctions on trade and banking and Iran’s own self-made banking crisis.  Most of Iran’s major banks are insolvent and therefore are in a weak position to support the expansion of local production.

Second, after experiencing the huge shock of the US withdrawal from the nuclear deal, which caused the US dollar and local prices spike, inflation is slowing down.   Consumer prices rose by about 40 percent last year, and as late as March were rising at 60 percent annual rate, in the last two months have declined to 19 and 10 percent annual rates.  As a result, the dollar has stabilized at around 130000 rials per USD, which is 20 percent below its peak a few months ago.  Fears of “Venezuelaization” of the Iranian economy (collapse) have subsided, allowing the government to revive its long neglected public investment program, which could boost employment and production.

 

A note on measuring living standards

Posted in General, Inflation, Living standards, Macroeconomy, Poverty by Djavad on May 22, 2019

A few weeks ago, in this blog and in opinion pieces (here, here and here), I argued that during the three decades since the end of the war with Iraq (1988), Iran’s economic growth exceeded that of Turkey, such that by 2012, when US sanctions intensified, living standards in the two countries were very similar.  My analysis, which surprised some and angered others, is because of the particular data I used to measure GDP per capita (which I also refer to as the living standard).  GDP comparison is not rocket science but most journalists (and even many economists) often get it wrong.  So, in this post I try to explain why it is important that we use data specifically intended for such comparisons.

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Rouhani’s new budget cuts back on expenditures, big time

Posted in General, Inflation, Macroeconomy, Sanctions by Djavad on January 31, 2019

If the government of Hassan Rouhani has a plan for fighting the downward trend in Iran’s economy, the one started with the US withdrawal from the nuclear deal, it is not to be found in its proposed budget for the Iranian year 1398 (March 21, 2019 to March 20, 2020).  The budget, which may be modified by Iran’s parliament in the next few weeks, is proposing serious cuts to expenditures.   Blaming shrinking revenues from oil, the government has decided to deal with the shock of the Trump sanctions and fleeing private investment by reducing its own expenditures.  Not a surprise from a government that has made fighting inflation its top priority and jobs creation the purview of the private sector. This is reasonable logic in normal time, but not when factories are cutting back on production and employment or shutting down altogether.     (more…)

The cost of sanctions for Iran’s economy

Posted in General, Macroeconomy, Sanctions by Djavad on July 23, 2018

There is no easy way to determine the impact of international sanctions on Iran’s economy, but looking at the growth rate of the GDP after 2011, when international sanctions tightened, is a good place to start.  The question has become more than an historical curiosity since Trump decided to pull the US out of the Iran nuclear deal and reimposed sanctions.   (more…)

The return of inflation

Posted in General, Inflation, Macroeconomy, Sanctions by Djavad on July 1, 2018

According to the Central Bank of Iran, last month (Iranian month of Khordad, which ended on June 20, 2018), consumer prices increased by 4.3 percent.  This translates into a whopping annual inflation rate of 67 percent.  The government announcement was much less alarming, using the so-called point-to-point inflation rate (Khordad 2018 over the same month 2017) of 9.4 percent.  As I explained in a recent interview in Tejarat Farda (in Persian), the point-to-point reporting is very misleading when inflation is accelerating, and does not fool anyone (any more than I could fool a police officer whose radar registered my speed at 80 miles per hour by claiming that my average speed since leaving home has been below the speed limit). (more…)

How large is capital flight from Iran?

Posted in General, Macroeconomy by Djavad on April 19, 2018

On April 10, Iran instituted new foreign exchange regulations involving three changes: devaluation of the official rate by about 15 percent, restricting movement of capital out of Iran, and making the possession of foreign currency in excess of 10,000 euros ($12,500) illegal.  This policy was largely to stop the run on the rial, but rumors of capital flight may have also played a role. In particular, a claim by a prominent member of the parliament that, as reported in Al Monitor, “$30 billion of capital had fled Iran in the final months of the last Iranian year.” (more…)

Was the Living Standard of Iranians Higher Before the Revolution?

Posted in General by Djavad on March 21, 2018

It is not surprising to hear Iranians say that life was better before the revolution.  Depending on their social class, they could be thinking of a variety of metrics, social and economic.  But to hear economists speak about how life for the average Iranian was better before the revolution is surprising, at least to those with access to data.

Two and a half years ago, I addressed this subject in this blog, refuting a claim made by an Iranian economist that in 2013 Iran’s GDP per capita was 42% below its 1976 level. Then a week ago, Masoud Nili, the top economic advisor to President Rouhani, made a similar observation, this time with much wider publicity, saying, according to press reports, that, “income per capita now is 70 percent of its value in 1976.”  So, it’s time to repeat the argument of why this comparison is wrong.

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Does economic growth in Iran increase income inequality?

Posted in General, Inequality by Djavad on January 15, 2018

Inclusive growth is what international organizations recommend these days, and it hard to argue otherwise.  Economic growth is better when rich and poor equally benefit.  Better still, is pro-poor growth, the type that lifts poor people’s incomes more than the rest.  The recent unrest in Iranian cities makes this question timely: was Iran’s recent economic growth following the implementation of the nuclear deal unequal, inclusive, or pro-poor?  Clearly, low-income youth who staged the protests believe that growth has not been inclusive.  Can data verify their sentiments? It turns out they do.  More specifically, the economic growth of 2016, which is the main fruit of Rouhani’s international and domestic policies, does not seem to have reached all social classes equally.    (more…)

Poverty and living standards in Iran after the nuclear deal

Posted in General, Poverty, Subsidy reform by Djavad on January 3, 2018

Many observers in the West have been quick to blame the recent unrest in Iran on high and rising poverty, which is in turn seen as a failure of the Iran nuclear deal (also known as the JCPOA), or the squandering of its windfall.  President Hassan Rouhani sold the nuclear deal to voters, who have elected him twice, as the only way he could improve their lives.  The unrest taking place in Iran’s smaller cities suggests that this promise is far from realized.  As I have written before, there is little doubt that the economy rebounded after JCPOA, but did poverty and the living standards of ordinary Iranians also improve with this economic recovery? (more…)

Rouhani’s new budget aims to eliminate cash transfers

Posted in General, Macroeconomy by Djavad on December 31, 2017

This post is in keeping with my past practice of reviewing proposed government budgets, but this year’s review takes greater urgency in view of the recent protests in Iranian cities that have been linked to the budget for 2018/19 sent to the parliament just three weeks ago.  The basic elements of the budget are the same as in previous years — keeping the size of the government in check and assigning a minimalist role to public investment.  But there are big cut to a popular cash transfer program that has been in existence since 2010.

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