Iran’s economic resilience is mostly a mirage

After nearly a decade of chronic anemia, the Iranian economy appears to be in recovery. That, at least, is the headline from the latest World Bank report on the Islamic Republic. "After exiting a two-year recession in 2020/21, Iran's economy returned to some growth in 2021/22," say the report's authors, pointing to a 6.2% rebound in last year's spring quarter. The government's own statistical body claims GDP grew 5.9% in the first half. (The Iranian fiscal year runs from March 22 to March 21.)

The regime in Tehran will undoubtedly seize on this as proof its efforts to create a "resistance economy" are bearing fruit. Since being sworn in last summer, President Ebrahim Raisi has faithfully parroted Supreme Leader Ali Khamenei's dictum about insulating Iran from the effects of US sanctions by encouraging domestic production and non-oil trade with neighboring countries.

This narrative is not only for domestic consumption but also for an international audience. It underpins Tehran's claims that it need not make significant concessions to the Biden administration to secure sanctions relief. Iranian officials boast that economic self-reliance has strengthened their hand in nuclear negotiations currently under way in Vienna with the world powers.

This is pure bluff. A closer examination of the World Bank report casts doubt on the regime's "resistance economy" claims. Ordinary Iranians already know this and are growing louder and bolder in expressing their dissatisfaction: Witness the spurt in protests across the country throughout 2021.

This should bolster the negotiating position of the US and other world powers in Vienna. Khamenei and Raisi desperately need to generate the kind of growth that would placate their restive population, and that is impossible without sanctions relief. The Biden administration should use this as leverage to force Iran to back down from its nuclear brinkmanship.

The most salient point in the World Bank report is that the GDP growth was made possible, in large part, by "more favorable oil sector conditions," which is hardly a barometer of self-reliance. With President Biden lifting some sanctions imposed by his predecessor and easing up on the Trump administration's "maximum pressure" campaign against Iran, the regime in Tehran has been able to eke out more revenue from oil exports, especially to China.

But what Biden giveth, he can also take away. The administration has recently begun to tighten the enforcement screws, warning companies in the United Arab Emirates that act as intermediaries in Iran's sanctions-evading oil exports. Along with stricter sanctions policing, Tehran will also be mindful of the predicted slowing of the global economy — and especially the Chinese economy.

The other point worth teasing out of the World Bank report is that the growth has been jobless, which is unsurprising since much of it comes from the capital-intensive oil sector. One of the regime's most pressing problems is to provide employment for a youthful population. Although official unemployment is less than 10% (the figure is closer to 17% for youth unemployment), this doesn't capture the true scope of the crisis because Iran has one of the world's lowest labor-force participation rates. Long-term economic sclerosis has kept millions of Iranians from entering the job market.  

Add rampant inflation and currency devaluation to unemployment and you begin to appreciate the depth of the anger among ordinary Iranians. The report notes that household welfare has declined, "especially among the bottom-income deciles who were also disproportionately impacted by the pandemic." Inflation is running at around 40% and even higher for food products. The rial crashed to historic lows last month, crossing 300,000 to the dollar in the open market. The official rate is 42,000 to the dollar, but the government is signaling this may no longer be sustainable.

Obliged to end subsidies on food imports in the new fiscal year starting in late March, the government is promising cash handouts and coupons.

These interlocking problems are being compounded by climate change, which brings political challenges in addition to causing economic damage. A water crisis late last year set off massive protests, especially in the historic city of Isfahan. The government responded as it always does, with brute force. But as such events multiply, sustaining that level of repression will become harder — and more expensive. (This may explain why Raisi is proposing to double the budget of the Islamic Revolutionary Guard Corps, the paramilitary force created to protect the regime.)

However hard Tehran tries to spin the World Bank report as a sign of economic tenacity, then, ordinary Iranians already know how tenuous things really are. The Biden administration and the other world powers gathered in Vienna should not be fooled.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement