As traders in central Tehran and the historic Grand Bazaar shut their stores last month to protest against high prices, Iranian President Masoud Pezeshkian outlined the depth of his dilemma in managing the Islamic republic’s economic malaise.
“I am told salaries are low; that is true. I am told taxes are high; that is also true. But then I am told to raise salaries,” Pezeshkian told parliament. “Can someone tell me where the money is supposed to come from? We are struggling to secure foreign currency to cover people’s livelihoods, livestock feed and basic commodities.”
In the weeks since, protests over economic grievances have spiralled into nationwide civil unrest that poses the biggest threat to the Islamic republic in years. Activist groups say hundreds of people have been killed and thousands detained as the regime has intensified its crackdown.
The crisis underscores how the theocratic regime has been worn down by a toxic combination of decades of swingeing US sanctions, internal mismanagement and corruption, analysts say.
“It’s inevitable that this protest would continue to grow and mount, translating to this moment — protests are just baked in because of the economic stagnation and the political deadlock,” said Sanam Vakil, Middle East director at Chatham House. “It didn’t need to be this revolutionary. It’s been made worse by their unwillingness to make concessions and their unwillingness to reform, economically and politically.”
Pezeshkian is not the first Iranian president to face such a crisis. Iran’s economy has been strangled by ever-tightening western sanctions since 2012 when then-US president Barack Obama stepped up the pressure on Tehran over its nuclear programme and convinced the EU to follow suit.
That year, Iran was cut off from the Swift global payments system. The rial devalued, inflation soared, investment declined and Iranians felt worse off — the same ailments that have helped ignite the past two weeks of protests.
Esfandyar Batmanghelidj, chief executive of the Bourse & Bazaar Foundation think-tank, said 2012 was the year that pushed Iran, a country of 90mn people, into its first significant contraction since the early 1990s. Since then, “the growth has been essentially half the rate it was up until that point”.
Between 2000 and 2012, the economy on average grew 4.4 per cent each year. In the years since, average growth slowed to just 1.9 per cent, he said.
The current fight for civil liberties and political change would have been “very different” if the country had followed its pre-sanctions economic trajectory, Batmanghelidj said.
There was brief respite after Iran signed a nuclear deal with the Obama administration and other world powers in 2015, which secured widespread sanctions relief in return for tight restrictions on nuclear activity.
With promises of US and European investments in the country and the end of restrictions on oil exports — the key source of foreign currency — growth rebounded and inflation plummeted to just under 7 per cent, the lowest rate for decades.
Oil exports rose to a peak of 2.8mn barrels per day in May 2018.
But the relief was fleeting. US President Donald Trump, then in his first term, that month withdrew from the nuclear deal and began imposing hundreds of new sanctions on Iran.
With the threat of secondary sanctions, international business pulled out, Iran was once more cut off from Swift and its oil exports dropped as low as 300,000 b/d in 2019.
Growth sharply contracted, the rial nosedived and inflation once more soared towards 40 per cent. Trump also froze tens of billions of Iran’s oil money held in central banks overseas, cutting off a vital source of foreign currency.
The country has fallen into an “almost permanent state” of “economic pessimism”, Batmanghelidj says, characterised by a “negative perception about the current conditions, and almost more importantly, a deep negative view of the future”.
Even when the nuclear deal was holding, there was barely “any movement on negative perception on the economy”, he said.
“That pessimism then feeds into the political frustration because people alternately have the impression the government is unable to protect or improve their welfare.”
Frustration exploded into street protests in 2017 and again in 2019 after the government of Hassan Rouhani, an architect of the nuclear deal, increased subsidised petrol prices by 50 per cent.
Djavad Salehi-Isfahani, an Iran-born economist at Virginia Tech, said the collapse of the nuclear deal and its economic impact “destroyed the momentum inside Iran for rapprochement” with the west.
“Iranians started thinking they could sell a lot of stuff around the globe, not just across the borders,” he said. “So there was a lot of hope. Dashing that hope had a big effect.”
Successive governments, accused of mismanaging the economy, had been “way too reactive” in trying to address the economic pressure, said Salehi-Isfahani. They are also stymied by powerful interest groups resisting reforms, analysts say.
In addition, there are competing power centres within the regime, with the ultimate decision maker being Ayatollah Ali Khamenei, the 86-year-old supreme leader who has led the republic since 1989.
“They are responding and trying to adjust economic policy when things reach a crisis point,” Salehi-Isfahani said. The central bank had often delayed action until “it’s very hard to defend the currency and it’s prone to devalue very sharply”.
The government’s tools for boosting growth and revenue include increasing oil exports and exporting non-oil goods, but both are shackled by sanctions. Oil exports hit 1.9mn b/d in December, according to the International Energy Agency, with production steady at 3.5mn b/d, but Iran has to sell at a discount due to US restrictions.
“Iran’s economy is very much diversified. It resembles the Turkish economy with one difference,” said Salehi-Isfahani. “The Turks can use the labour and human capital to produce things and sell abroad. Iranians cannot.”
Yet throughout the years of sanctions, Iranians have not suffered from a domestic shortage of goods, aside from some specialist medicines such as cancer treatments — which Tehran blames on US restrictions — even as the cost-of-living crisis has intensified.
“Most Iranians continue to make ends meet, it’s very difficult for them to do that, but we are not in a country like Venezuela or Syria where there’s a full-on economic collapse,” said Batmanghelidj. “The main issue has been affordability, not availability.”
While some households “have slipped below the poverty line and are facing more food insecurity, for the vast majority of Iranians, it’s about their relative welfare, where they feel they should be versus where they are today”, he added.
For Iran’s large young urban population, the huge gap between their aspirations and daily life under the oppressive regime is fuelling disillusionment and anger, analysts say.
In the seven months since Israel launched its 12-day war against Iran in June, the rial has lost 40 per cent of its value, according to Salehi-Isfahani.
Annual inflation hit 42 per cent in December, while food inflation soared to 72 per cent, with the price of bread rising 113 per cent. The price increases have a far more severe impact in poorer provincial areas where the unrest spread.
As the protests began, Pezeshkian was presenting his budget for the year beginning in late March, under which state employees would face a large real-terms pay cut and overall spending would increase below inflation.
He also moved to overhaul a much-criticised subsidy, ending a long-standing policy of providing cheap foreign currency to importers — widely blamed for corruption and distorting markets.
Instead, he expanded an existing scheme of cash transfers to households, providing 88mn Iranians with a monthly transfer of 10mn rials per person, equivalent to $7, or $40 adjusted for local prices, according to Salehi-Isfahani.
Prices kept rising.
Salehi-Isfahani said one of the government’s failures was to effectively tackle its huge fuel subsidy bill, which creates an opportunity cost of about $70bn.
The currency and inflation tumult was “a bit like a car that’s moving towards a wall and eventually hits it”, he said. “If you look at the way inflation was progressing it had to get into a kind of a crisis like this.”
He partly blamed the impact of Israel’s war, but suspected it could also be caused by Tehran spending money on re-arming under the threat of fresh Israeli or US strikes.
“Increasingly, they think they will have to pay for what they call mismanagement, to pay for the damages of the war, or to prevent the threat of another attack,” Salehi-Isfahani said. “They saw correctly that their real incomes were in jeopardy. These are real incomes that were for generations expected to go up and have been stagnant for 15 years.”
Additional reporting by Malcolm Moore