Iran's economic struggle

Middle East Forum:

For years, the Islamic Republic of Iran has struggled with mounting crises—from economic decline and energy shortages to severe air pollution, corruption, eroding public legitimacy, and repression of the media and political dissent. Yet the situation has deteriorated dramatically in the weeks following its brief war with Israel.

Ironically, Israel’s 12-day campaign did not target Iran’s economic, commercial, or energy infrastructure. But the psychological and political shock of the strikes has shaken public confidence in the government’s ability to manage the country, accelerating existing structural problems. Moreover, Iran faces the restoration of United Nations sanctions if there is no nuclear agreement soon.

The Tehran Stock Exchange has been one of the first visible casualties. Since the start of the war, it has lost nearly a fifth of its overall value, with the main index dropping 12 percent. Individual investors have withdrawn an estimated $300 million over the past two weeks, and the market’s total capitalization has fallen from around $140 billion to roughly $110 billion. The government injected about $700 million into the stock market in an attempt to stabilize prices and slow the sell-off, but the exodus of retail investors has continued. Despite strict security measures, angry shareholders and those who lost their savings staged protests outside the Tehran Stock Exchange in recent days leading to clashes with security forces.

For an economy valued at around $340 billion, such financial volatility is troubling. More alarming is that the withdrawn capital has not flowed into other domestic markets such as housing or gold, both of which remain stagnant. This suggests that much of the money is leaving the country. Iran already has grappled with massive capital flight; over the past two years, an estimated $20 billion has left the country annually—six times the level recorded in 2018, when U.S. sanctions were reimposed.

Trade figures point to further economic distress. Customs data show that last month non-oil exports fell by 12 percent and imports plunged by 34 percent compared to June last year. Oil exports have dropped 16 percent, to 1.36 million barrels per day. Coupled with a 14 percent decline in global oil prices, Iran’s oil revenues effectively have fallen by about 30 percent.

Because three-quarters of Iran’s imports consist of essential household goods, the drop in imports has triggered a surge in food prices. Domestic media report that prices for staple food items have risen by 25 to 30 percent since the war began. In a country where more than half of the population already lives below the poverty line, such a monthly spike is catastrophic.
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The Islamists seem bent on proving they are not up to managing the economy of a once-prosperous country.  The Iranian war with Israel was a serious mistake that exposed the weakness of the Islamist regime.