After US President Donald Trump’s withdrawal from the 2015 nuclear agreement, there has been much talk about the future of Iran’s economy. Some have speculated that the negative effect of Trump’s decision on the oil markets may put the survival of Iran’s economy in doubt.
However, in order to make a realistic prediction about “what will happen” after the death of the deal, one would first need to examine “what happened” since its birth. The reality is that Iran gained almost nothing from the Joint Comprehensive Plan of Action (JCPOA).
The most important sanctions that were supposed to be lifted were financial ones. Not only did the US not lift the sanctions that it had committed to, but it also imposed new ones; from the visa waiver restrictions signed by President Barack Obama to the “Countering America’s Adversaries Through Sanctions Act” which President Trump approved.
In other words, in clear violation of the deal, the US government continuously tried to deprive Iran from the privileges the JCPOA had promised. As a result, Iran’s economy continued to feel the impact of the sanctions and failed to enjoy the expected benefits of the deal over the past two years.
Although Iran sold more oil, access to the petrodollars was very limited even after the deal was implemented.
Iranian President Hassan Rouhani’s economic team believed that if they maximise the profits of Western companies in Iran, they would confront the possible re-imposition of sanctions. So, after the implementation of the JCPOA, they opened Iran’s market to the foreign goods and services, which not only hurt Iranian suppliers and caused stagnation, but also resulted in an increase of 50 percent in the negative trade balance between Iran and its top 20 trade partners from 2016 to 2017.
Capital outflow surpassed inflow and last year Iran had a capital account deficit of $11bn. That balance used to be positive before the deal. These developments resulted in a steep slide in its currency value, something President Rouhani promised to control after the implementation of the JCPOA. Iran’s short-term foreign debt increased from $777m to close to $3.7bn by the end of 2017.
Given these deal-related complications, one can venture to say that with the death of the JCPOA, some of Iran’s macroeconomic problems will be solved.
Trump’s withdrawal from the nuclear deal will unite the political forces inside Iran and encourage them to follow a different path to run the economy and solve its current problems. The demise of the deal and its economic implications proved to Iranians that the US is not worthy of their trust, that it is an enemy to Iran, and that they can never play a win-win game with it. The fate of the deal also showed that integration into the Western economy will not help Iran’s economic development, and may even hinder it.
President Rouhani’s government will now focus on domestic measures to make sanctions ineffective. Some measures to insulate the economy against foreign shocks are already in place and more will be implemented. According to some reports, two-thirds of Iranian imports are goods that are similar to ones that are being produced at home.
Iran spends almost $30bn annually to import these “similar goods” (last year Iran imported $45bn worth of goods in total). Iran’s Supreme Leader, Ayatollah Khamenei, has suggested a ban on such imports, which, if implemented, will lead to a substantial shift in the country’s trade balance. The effects of such a measure will be market expansion for domestic suppliers, decrease in unemployment rate, increase in the value of the Iranian currency, and reduction in oil revenue dependency.
A range of tax measures in pursuit of the objectives outlined by the supreme leader to free the budget from dependence on oil revenues are also under consideration. Masoud Nili, an economic adviser to President Rouhani recently reported that the top 10 percent of Iranian society pay just three percent of all income taxes, while in the US the top 10 percent pay more than 70 percent of the total income taxes. According to Nili, if the share of the top 10 percent in total income taxes should increase.
In addition to the aforementioned trade and tax measures, some financial measures are also needed to make the US sanctions ineffective. The ability of the US to impose financial sanctions results largely from the integration of banking systems, whereby banks depend on a global network to borrow, lend, exchange, invest, and clear funds. The more Iran relies on these integrated systems, the more it will become vulnerable to sanctions and vice versa.
Tehran has already started to walk away from this US-dominated system. Iran formally signed its first currency swap deal with Turkey last October, and in April 2018 the two countries issued their first local currency letters of credit. Iran’s other main trade partners, such as China, are also ready to sign currency swap agreements which will de-dollar their trade.
Iran is a resource-abundant country and has gone a long way towards development after the victory of the Islamic Revolution in 1979. Of course, development is different from construction. You can have an active construction sector run by foreign companies and funded by petrodollars, but this won’t guarantee development. A home-grown construction sector which meets the infrastructure and housing needs of the population is what indicates real development. And Iran very much has that.
This is what Jack Straw, a former British foreign secretary, observed in Iran when he visited in January 2014, when the country was still under the so-called “crippling sanctions”:
“As the British Parliamentary delegation was driven early last week from Khomeini Airport to our hotel in downtown Tehran, I was struck by the amount of infrastructure building there had been in the nine years since I’d last visited, with new motorways and new metro lines under construction. Sanctions notwithstanding, Tehran looks and feels these days more like Madrid or Athens than it does, say, Mumbai or Cairo.”
Iran has proven that it has the physical and human resources to cope on its own, with and despite a hostile US.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.