Iran's economy, hit hard by sanctions

Iran's economy is collapsing after years of US sanctions, and Tehran insists that Washington must lift those restrictions before the two sides can return to nuclear talks. Both countries have expressed interest in returning to the negotiating table, but neither the US nor Iran wants to give in to the other's demands. Iran signed a nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA), with the US, China, France, Russia, the UK and Germany in 2015. But former US president Donald Trump withdrew from the deal in 2018 and imposed sanctions under a policy of "maximum pressure" to force the regime back into negotiations.

Iran's economy is estimated to have contracted by 4.99% in 2020, declining without any recovery since 2017. By comparison, the Islamic Republic enjoyed strong economic growth of 12.5% in 2016 after the signing of the nuclear deal. However, that reprieve was short-lived.

"It's impossible to know precisely what the numbers would be if there had been no sanctions," said Abrams, a former US special representative for Iran during the Trump administration who is now a senior fellow for Middle East studies at the Council on Foreign Relations (CFR). "But I think it's pretty clear that the sanctions have had an impact on the Iranian economy and the government budget." The International Monetary Fund forecasts that Iran's gross domestic product will grow by 3 per cent in 2021.

Sanctions also reduced Iran's ability to sell oil and prevented them from repatriating money from energy sales, Abrams said. "There are billions of dollars in banks in Iraq, China and South Korea ... that Iran can't get its hands on because of sanctions," he said.

According to IMF estimates, the Islamic Republic's oil exports are expected to fall further in 2021. Both exports and imports fell sharply after sanctions were re-imposed. In addition to oil, Iran's industrial metals, a major source of the country's export revenue, were also sanctioned.

IMF estimates suggest that Iran fell into a trade deficit of $3.45 billion in 2020. The country had a trade surplus of $6.11 billion in 2019, according to the IMF. Exports and imports fell sharply after sanctions were re-imposed, oil, Iran's industrial metals, a major source of the country's export revenue, were also sanctioned.

Iran's currency has fallen steadily since early 2018, but Matthew Bey, senior global analyst at Stratfor, said the rial has "stabilised a bit". Still, its value on the unofficial market is more than 250,000 rials to the dollar, which is far from the central bank's official rate of 42,000 rials to the dollar used for most imported goods. A weaker currency makes imports more expensive for locals, and high inflation means the cost of living is rising at a time when people are already struggling with a weak economy and labour market.

High unemployment rates are expected to rise further given Iran's economic struggles. It is estimated that 12.4 per cent of the population will be out of work by 2021, according to IMF projections. This is on top of the fact that Iran's government is spending beyond its means and has experienced a widening fiscal deficit. While this is not always a bad thing, it could restrict the country's ability to improve economic activity and recover from the COVID-19 pandemic.

Experts claim that the national budget is of some interest (to Iran's supreme leader, Ayatollah Ali Khamenei) because he would want money for the Revolutionary Guard, for Hezbollah, for Shi'a militias in Iraq and for various other adjunct expenditures. However, they point out that the usual concerns of a civilian government, such as national income, median household income, the inflation rate or the unemployment rate, may not be important to religious leaders.

A US-Iran deal that relaxes sanctions is not impossible, but only if each side softens its current stance. The US would have to accept that sanctions relief is a necessary step to bring Iran into compliance with the JCPOA. On the other hand, Iran has to recognise that, without "substantial steps", the Biden administration cannot suspend sanctions altogether. Abrams, on the other hand, said there is a "very significant problem" with the Biden Administration's Iran policy, which is to revive the nuclear deal before negotiating a broader agreement that includes Iran's missile programme and its support for militias in the region. "But once you've gone back to the JCPOA, you've lifted most of the major economic sanctions," he said. "So he's removed most of his leverage to get Iran to agree to these additional things that he doesn't want to ... accept and I don't see why he would agree at that point," he added. Bey from Stratfor noted that Tehran has insisted that sanctions be lifted before talks begin. "Iran seems to have calculated that it can withstand the economic pressure that builds up as it takes a tougher stance against the Biden administration," Bey said.