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Breaking the Back of Iranian Economy

The Atrocious Mismanagement Achieved

What Trump’s “Maximum Pressure” didn’t!

H. Mansoor, Ph.D. Econ.

 

Any economist who treats Iranian economic data at face value, does so at own peril. The reason is simple: Administratively determined multiple exchange rates replace the market value and officials resort to “selected” rates depending on what they wish to say; the same bias distorts official index numbers when they use subsidized prices applying only to a part of the economy instead of market prices prevailing for the whole economy; and add to this the disparities among –at least three-different institutions producing statistics.

Let us get the point straight:

We need to find a solid base for our comparisons and therefore we go back to the date the bias started. i.e. year 1977, the last “normal” year before the revolution of 1979:

Iranian GDP equalled $84 Billion when the exchange rate between the $US and Iranian currency, Rial (R) was an average of R70 for a Dollar in the Exchange Markets. Thus the Per Capita GDP for 33 million Iranian population was $2,545, freely convertible both within Iran and the world markets. Thus Iranian GDP in local currency was R 5,880 billion and per/capita GDP in local currency equalled R 178,180.

This situation was preceded by a decade of 10-11% growth at an average inflation rate of about 5%. During the two penultimate years of the revolution, however, a stagflation was installed, which raised the inflation figures to 16.6% (1978) and 25.1% (1979) according to the Central Bank Statistics. This justifies our assumption that the exchange rate for 1979 should have gone up to R100 per Dollar in 1979 in terms of purchase power, even if the paralysed market stayed ossified at R70 per Dollar and facilitated the capital flight caused by the revolutionary upheaval.

By the end of current Iranian year 1399 (21st March 2021), the GDP is calculated at R32,058,800 billion and the per capita GDP for ca 84 million people would equal R382.

To make sense of this local currency GDP figure we need to resort to the Official Consumer Price Index (CPI) produced by the Central Bank:

 

Consumer Price Index

Central Bank Statistics

For Selected Years: (Base Year 1395 = 2016)

1977 1979 1985 1990 2000 2005 2010 2016 2019 End 2020
0.101 0.137 0.379 0.984 8.463 16.048 33.188 100 203.150 288*

*Calculation based on 2019 figure incorporating a 42% inflation rate for the year 2020.

Accordingly, 2851 units of 2020 currency has the Purchase Power of ONE unit of 1977 currency and therefore the GDP of R 32,162,000 billion for 2020 equals R 11,281 billion of 1977, i.e. 1.92 times that of 1977.

Thus GDP 2020 compared to the GDP of 1977 of R 5880 billion, is just below a doubling however, in view of the population growth from 33 to 85 million (2.57 times), it implies a reduction in per/capita GDP by at least 36% (national impoverishment)!

Parallel to this demise of national currency Purchase power, we turn to two other sets of data:

 

Liquidity Data

Central Bank figures in Iranian Rials (billions)

Selected years

1979 1981 1986 1991 1996 2001 2006 2011 2016 2020
2,590 5,110 10,720 28,630 116,550 320,980 1,284,200 4,610,000 12,533,900 30,550,000

 

We read in this data that creation of liquidity accelerated year after year since 1979: It doubled from 1979 to 1981; grew four folds in 1986, 11 folds in 1991; 45 folds in 1996; 124 folds in 2001, 496 folds in 2006; 1780 folds in 2011; 4840 folds in 2016 and 10609 folds in 2020 (all on the basis of 1979) in the face of Real GDP growth of 1.92 times!

Parallel to the full vigour of the printing machine which eroded the purchasing power of the national currency and melted down the living standards of a majority population to a subsistence-level and below, the exchange rate plummeted. Here are some selected data:

 

Exchange Rate

Iranian Rial to $US

Selected Years from Statistical Centre of Iran

1979 1985 1990 1995 2000 2005 2010 2015 2020
70 615 1,413 4,078 8,190 9,032 10,442 36,000 270,000*

*It has fluctuated between R 250,000 and R 320,000 during the year up to now.

 

GDP in Foreign currency and Multiple Rates.

How should the GDP be expressed in terms of Foreign Exchange epitomised by $US?

The rate given by Iranian authorities to the World Institutions like the IMF and the World Bank is R42000 equal to one $US. However, multiple rates operate within the economy: varying from R 42,000 to R270,000 per $US, for different allocations.

This creates bizarre situations, for example: GDP $456 US billion (of 2018) given by the EIU, having suffered 11% of contraction during two years due to a variety of causes including Trump’s infamous maximum-pressure, becomes $628 billion in the World Bank figure of 2020 (instead of $406 US), thanks to domestic inflation rates of 41% (2019) and 42% (2020) combined with a FIXED administrative exchange rate!

However, it is not for nothing that the administrative rates are preserved, nay, the so called BASIC RATE has its powerful institutionalized beneficiaries who received $35 billion Dollars during 2020 at this rate to import basic goods but sold them at the market rate causing hike in food staples of above 60% for the current year! And this goes, of course, undetected and unhampered!

Another cause of confusion for scholars is the fact that the authority responsible for producing of statistics of the country is the Statistical Centre of Iran! However, the Central Bank of Iran also produces parallel sets of data which stand at ODDS with the Statistical Centre data. For example see the comparison below:

 

Economic Growth Statistics

For 2015

Economic Indices Central Bank % Statistical Centre

%

Disparity

%

Econ Growth with oil in six months 1.3 -1.9 3.2
Econ growth without oil in six months 1.4 -1.3 2.7
Econ growth for the 1st quarter with oil -2.9 -4.1 1.2
Econ growth for the 1st quarter without -0.6 -4.3 1.8
Econ growth for 2nd quarter with oil 5.1 0.2 4.9

 

In such a situation when scholars unacquainted with the prevailing complexity produce an analysis, they are prone to sliding into numerous pitfalls. Examples are numerous, in IMF and WB publications and some respectable media outlets such as WSJ and New York Times. To give only one: In an the article “Battered by U.S. Sanctions, Iran Finds a Lifeline in Domestic Economy” the authors Aresu Eqbali and Sune Engel Ramssusen, 26th December 2020 provide a rosy picture of the growth of Private Sector and its overtaking of foreign brands:

“Iran’s non-oil revenues have grown 83% in the past couple of years overtaking the sanctions-battered energy sectors”- No mention of the fact that a dominating bulk of this NON-oil exports consists of petrochemicals and condensates.

“Iran’s unemployment over the past decade has decreased to 9.5% from 12.3% according to government statistic”. The authors draw on the Statistical Centre of Iran as source, while the “The Research Centre of Majlis”, the research arm of the parliament, writes on the validity of the same statistics that “the Statistical Centre has ignored the fall in Participation Rate: Correcting this error the unemployment rate would be 2.5 times the Centre’s reports, i.e. 24%”

On Subsistence the authors write: “The share of people living under $5.50% a day, the World Bank poverty-line for upper-middle income economies rose to 13% in 2019 from 8% in 2011 according to World Bank”. Compare it to the figures given by the Budget Bill 2021 which considers 60 million of 85 million people of the country, 70.5% of population in need of “Subsistence Packets”!

Scholars analysing Iranian Official data should be wary of their reputation in taking them at face value.

 

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