As Bad as War? Trump Steps Seen Deepening Iran's Economic Pain

(Bloomberg) -- In the 40 years of Iran’s Islamic Republic, 2019 is shaping up to be among the worst for an economy that’s weathered wars, sanctions and oil slumps.

Even before the U.S. decided to tighten oil sanctions against Iran last week, the rial currency had lost two thirds of its value against the dollar, and the International Monetary Fund expected gross domestic product to shrink 6 percent.

To put the damage in perspective, the only times the economy suffered from a deeper recession were during the war with Iraq and the oil-price slump in the 1980s, and the height of past U.S. sanctions in 2012.

As Bad as War? Trump Steps Seen Deepening Iran's Economic Pain

Inflation could reach an average of 50 percent, the highest level since 1980, a senior IMF official said Sunday. The grim statistics are on a par with crisis-hit Sudan, and only Venezuela and Zimbabwe -- two countries caught up in political turmoil -- are expected to fare worse, IMF estimates show.

“We are in uncharted territory,” said Cyrus Razzaghi, president of Tehran-based business consultancy Ara Enterprise, which works with foreign investors. “There was revolution, war. There have been previous sanctions, but never before was there so much pressure economically and internationally on the country.”

As Bad as War? Trump Steps Seen Deepening Iran's Economic Pain

The crisis will heap further pressure on Iranian officials locked in a showdown with U.S. President Donald Trump and his allies in the Middle East. While Trump has vowed to roll back what he calls Iran’s destabilizing presence in the region, critics of his policy say it will empower hardliners over the moderate politicians who favored ending the country’s international isolation by forging better ties with the West.

Trump pulled the U.S. out of the 2015 nuclear accord with Iran and reimposed sanctions before the economy could fully recover from punitive measures under the Obama and Bush administrations. While President Hassan Rouhani succeeded in taming inflation, his government struggled to overhaul the country’s banks and create enough jobs.

In its latest move, the U.S. terminated waivers allowing a handful of countries to buy Iranian crude in an effort to reduce Iran’s critical oil exports to zero.

The overall cost to the economy will depend on how far Iran’s exports actually fall, Jihad Azour, head of the Middle East and central Asia department at the IMF, said in an interview. “We need to have more clarity on what zero means,” he said.

China, India and Turkey -- all major buyers of Iranian crude under the waiver system -- have signaled they are protesting the cuts. Iran says eliminating all its crude exports will be impossible.

Food, Medicines

Further turmoil could send domestic prices higher. “It’s clear that the situation is expected to deteriorate,” Azour said. Authorities are distributing subsidized food to protect the poorest citizens, while shortages of medicine have been reported.

Razzaghi said his discussions with senior Iranian officials showed that they had planned for various scenarios, including for the unlikely event of a conflict.

As Bad as War? Trump Steps Seen Deepening Iran's Economic Pain

Forecasts released before the U.S. decision show Iran’s GDP set to contract 6 percent this year from 4 percent in 2018. The oil price Iran needs to balance its budget was forecast to jump to $125.6 a barrel from $113.8 in 2018 and $64.8 the previous year. Brent crude was trading at over $71 on Monday.

Azour said Iran should take steps to alleviate short-term economic pain, including bringing the official exchange rate in line with market forces and addressing weaknesses in the financial system by complying with anti-money laundering and terrorism financing laws.

Authorities also need to “fix or expand their social protection mechanisms to address the additional vulnerabilities” for the poor, he said.

©2019 Bloomberg L.P.