Rules, Regulations and Policies
Iran government is undergoing a transition in its economic rule, regulations and policies like elimination of subsidies, less state control on the economy, increasing foreign direct investment, reducing inflation, expanding non-oil sectors and job creation. However, the five year plan to manage the economy has all failed. Since the change of the administration, there have been substantial shake ups in the economy of the state as a result of political stands of its leaders (Amezegar, 2006). The leader of the government made an impact through change in regulation of lending rate to below the inflation rate, while adjusting minimum wages to the annual increase in capital intensive projects over those in labor to ease the accessibility of credit top its citizen. However, the major culprit of unemployment was not addressed by the policy. Iranian policy bid to continue in its implementation of nuclear power programs has been greatly challenged by the international community, countries like the USA and countries friendly to the USA has imposed an economic sanctions on all the trade transactions with Iran (Hossein, 2009). A result many trade partners of Iran have broken ties with the Republic hence the exchange rate problem, since the US dollar is the most commonly used currency in international trade the depreciation of Iran currency has risen to an exchange rate of 10500 rial per US dollar.
The trade embargo has created more harm than good in the country with exports going down and revenues are suffering and vital resources are drying up. Despite the ailing currency, the recent policy of the government, to announce the ending of the long standing subsidies on basic goods has also led to the rippling of the already struggling economy. For stability of the Iran economy in its implementation of its policy, it must show unprecedented resourcefulness and can rapidly reform its policies. (Bakhtiar, 2010)
Political Factors
International Security
Iran has not yet fully recovered from the post war effects of the Historic Gulf war. The stand of Iran on the war, the United Nations and the US government imposed economic sanctions on Iran. Barry, 2010 noted “…the sanctions prohibited Iran from exporting petroleum products to the US and the European Union Countries.” This was a step to frustrate Iran’s participation in international trade to prompt Iran to withdraw its nuclear plan. Other EU countries also complied with the UN sanctions and introduced the sanctions against Iran. In the Middle East, Iran is among the most influential countries defining the world peace and security situation. The government’s constantly demonstrates its determination to defend its policies on nuclear war (Gheissari, 2009)). Iran competes with North Korea in nuclear armament, but the nuclear plan is an exorbitant venture to its finances. Despite the massive exports, their impact on Iran’s GDP, the corresponding amount spent on nuclear installation negatively affects the resultant earnings.
Democracy and Constitution Reforms
Iran was for a long time a single party theocratic government until after constitution reforms, which allowed multiparty representations. Political the political fraternities, which arose in opposition to the government, include the People’s Fedayeen, Mojahedin-e-Khalq, and the Kurdish Democratic Party. The new expanded, government structure is more expensive to maintain, apart from the cost of election and constitutional reforms (Roger, 2007), (Jblili &Balien, 2007). This increases the national budget, which has a direct negative effect on the inflation rate and the effects even escalate in cases of disputed elections. Of course, the increase in inflation rates manifests in the increase in Iranian Rial against the US Dollar.
Economic issues
Privatization of Foreign Exchange
Foreign exchange was for a longtime state-owned until after elections when President Ahmedinejad introduced privatization plan aimed at decentralizing foreign exchange. This declined Tehran Stock Exchange performance, and encouraged private owners to operate unofficial black market businesses using uncontrolled rates. Along with the black market, money laundering also thrived uncontrolled (January, 2008). The black market exponentially escalated the exchange rate and augmented the inflation. The uncontrolled exchange rates caused an increase in importation expenses since businesses preferred the black markets for exchange, thus reducing the stock of US Dollar reserves in formal financial institutions (Esfahani and Pesaran, 2008). Financial institutions sold US Dollars at higher rates due to High demand and low supply. Exports also declined since the financial institutions used standard rates, which were lower than the contemporary black market sales rates. This negatively influenced the Gross Domestic Product as well as the government financial strength after having sold 80% of Tehran Stock Exchange stock to private investors. Money laundering held a significant amount of money out of control such that the taxation system could not accurately account government revenue.
Dependence on Oil and Gas Export
Iran entirely depends on oil and gas products for exports, which exposes the country’s economy to the volatility resulting from the vacillating nature of international oil prices. The country therefore, leans on the illusive hypothesis based on the economic forecast that the oil prices can never fall in any near future. Iran’s economy has not been successful in diversification of economic activities. The government has unsuccessful attempted to introduce the manufacturing of non-gas products and agriculture. The government requires over US$ 30 Billion to enable it invest in other products other than gas and oil. The only thriving manufacturing industries are oil refineries and natural gas production Firms (Jason, 2012). This in essence is detrimental to sustainability of Iran’s economy should any sanction be imposed on its exports again, or should the oil prices drop. This would imply total paralysis for Iran’s economy, both for the private sectors and the state revenue generation. Over reliance on oil exports perhaps is the reason for high unemployment rates in Iran. Over 11.80 % of its population is currently unemployed and the inflation rate is already 21.5%.
In the attempt to resolve the unemployment and economic difficulties, the government introduced subsidies on vital commodities in 2010 as one of its economic reform. Later on, this proved to be expensive for the government and it opted to replace the subsidies with direct financial support through monthly payment (Gladstone, 2012). Consequently, the economy has been facing enormous pressure in the implementation of the new policy leading to high inflation and resulting into increased rates of exchange. This worsens with the involvement of Iran in the installation of Nuclear reactors to generate alternative energy. The combination of these factors cripples Iran’s import and export power. The gap between export and import capacity is currently extremely narrow. For example, in 2010 Iran exports totaled to US$ 76.5 while the exports were US$ 61.3 leaving a narrow gap to account for net purchasing power. Back in the 1980s, way before the US delivered economic sanctions against Iran, US$1 exchanged for 175 Iranian Rials (Valadkhani, 2001). Nevertheless, Iranian Rial began to depreciate tremendously. For instance, in 1993, US$1 exchanged at 1750 Iranian Rials (2001). Notwithstanding the government attempts to restore its position, Iranian Rial continued to depreciate even further. In 2001, US$ 1 exchanged at 7970 Iranian Rials (2001).
References
Amezegar, J. (2006) Iran Economy in Turmoil.
Bakhtiar, A. (2010) Iran and its Economy.
Barry, P. (2010) Iranians Economy Biggest Vulnerability.
Esfahani, S. H., & Pesaran, H. M. (2008). Iranian Economy in the Twentieth Century: A Global Perspective. U.S: University of Illinois at Urbana-Champaign.
Gheissari, A. (2009) Contemporary Iran: Economy society and politics.
Gladstone, R. (2012). Iran’s Currency at Low vs. Dollar. New York: The New York Times Company.
Hossein, A. (2009) Iran’s economy self mutilation.
January, B. (2008). The Iranian Revolution. Minneapolis: Lerner Publishing Group, Inc.
Jason, P. (2012) Tales of Tehran’s Currency Ripple in Iran’s Struggling Economy.
Jblili, A., & Balien, J.(2007) Managing the Transition to A Market Economy.
Roger, S. (2007) The Iranian petroleum crisis and United States national security.
Valadkhani, A. (2001). An Analysis of Iran’s Third Five-Year Development Plan in the Post-Revolution Era (2000-2005). Wollongong, Australia: Department of Economics, Center of Full Employment and Equity, University of Wollongong.