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Public anger is once again spilling onto the streets of Iran as rising living costs, a collapsing currency and soaring inflation deepen the country’s economic crisis. Inflation has surged beyond 40%, with some months running at an annual rate of over 70%, according to official data.
Djavad Salehi-Isfahani, professor of economics at Virginia Tech and a leading expert on Iran’s economy, explains why the government is struggling to stabilize prices. He says U.S. sanctions limiting Iran’s oil exports, reduced foreign trade, capital flight, and the economic fallout from the June war with Israel have severely weakened the economy.
Salehi-Isfahani also warns that rising taxes, increased military spending and shrinking government revenues are fueling public frustration — leaving authorities with few options to ease the crisis as protests spread nationwide.
#IranProtests
#IranEconomy
#DjavadSalehiIsfahani
Djavad Salehi-Isfahani, professor of economics at Virginia Tech and a leading expert on Iran’s economy, explains why the government is struggling to stabilize prices. He says U.S. sanctions limiting Iran’s oil exports, reduced foreign trade, capital flight, and the economic fallout from the June war with Israel have severely weakened the economy.
Salehi-Isfahani also warns that rising taxes, increased military spending and shrinking government revenues are fueling public frustration — leaving authorities with few options to ease the crisis as protests spread nationwide.
#IranProtests
#IranEconomy
#DjavadSalehiIsfahani
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NewsTranscript
00:00To talk us through this, I'm joined by Javad Salehi Isfahani. He's a professor at Virginia
00:04Tech and an expert on the Iranian economy. Welcome, Javad. It's great to talk to you again.
00:11Inflation in Iran surged to more than 43 percent last year. Sanctions are wreaking
00:16havoc on the economy. What options does the Iranian government have to resolve this crisis quickly?
00:22Not many, I must say, because what the demonstrators are demanding,
00:32the government has been struggling with them and they're not really under the control of the
00:38government. They have been trying to lower inflation rates. Instead, we saw this past few months,
00:45inflation increased maybe by 50 percent. So the inflation in November ran at an annual rate of
00:5572 percent. So I don't know if there is the economic means to stabilize prices,
01:06stabilize the exchange rate. Iranians are unable to export oil, you mentioned that,
01:12but they're also unable to export anything else. So usually when you don't export oil and your
01:19currency drops, your other products become cheaper internationally and then you can substitute
01:26non-oil exports for oil exports. That route is also close to Iran. So it's a very, very difficult
01:34situation. And unless the sanctions are somehow eased, Iran or some other countries like China come to
01:43the rescue of Iran and defy the United States, they have to do that because U.S. secondary sanctions
01:50constrain Chinese trade with Iran as well.
01:54So it's a bit of a grim picture for the government right now. How would you characterize this? I mean,
02:01you've obviously been following this very closely for years and over the years. And is this the most
02:08serious we've seen it? I mean, is this, you know, we mentioned maybe earlier talking about historic
02:12proportions. Would you see this as a very serious challenge?
02:16Without doubt, it's the most serious challenge. And it is serious because the government's not able
02:27to meet the demands. You know, when they disputed elections, the young people in 2009, government
02:35had options to promise new elections. They didn't compromise, but at least they seemed in control
02:43because they had the cards in their hands. Most recently, the largest protests came as a result
02:51of the women fighting the forced compulsory hijab in Iran, the Mahsa Amini uprisings. Even there,
03:04the government had the cards in its hands. The protests were about arresting women in the streets and
03:09pulling them into vans and taking them to re-education centers. And the government could just stop that.
03:15And it did. So when you looked at, from the vantage point of those protests, as they were going on,
03:24you could see that the government could pull back and the protests might subside. And indeed, that's exactly
03:31what happened. Luckily, at the time, the war hadn't taken place with Israel. So Iran's economy was not as
03:38battered. Investment was not so scarce. You know, the threat of another attack by Israel and perhaps by
03:50the United States has scared away investment and has encouraged capital flights. So people are putting
03:57their money in dollars, in gold, and those prices surge. All that is part of an economic crisis
04:06that did not exist in 2022 when the Mahsa Amini protests raged, but now exist. And on top of all that,
04:15it's not clear if the government is in a position to address the demands of the demonstrators credibly.
04:25They've put into bank accounts quite a bit of money, I would say, in terms of the purchasing power,
04:324 million two months per month per person is a considerable amount, and it definitely staves off hunger and so on.
04:42But that's not all that the demonstrators are looking for. There's so many other demands, like for jobs, for young people,
04:50people, you know, having a more rational distribution of the government revenues for domestic versus external reasons.
04:58All those things are very hard to address under the circumstances amidst the crisis.
05:05And if we break it down a little bit, there's this draft budget for the next fiscal year,
05:13which starts in March, and that foresees huge spending increases on security,
05:18with a disproportionate chunk of oil export revenues going to the Islamic Revolutionary Guard Corps.
05:23How do we read such a big spend on security and military institutions?
05:27I would say the increase in military expenditures was inevitable, because Iran was battered in a 12-day war.
05:43Many of its institutions were damaged physically by bombs.
05:48And specifically, there were military targets, defensive targets that made Iran weaker.
05:58So in order to be able to withstand or scare off or discourage future attacks by Israel,
06:07Iran had to beef up its defensive forces. So I think that kind of substitution, taking money away from other uses of putting it into the military,
06:16which may very well have been one of the reasons why the exchange rate was tumbling,
06:24seemed kind of a policy any government under the circumstances being under attack would take.
06:34And looking at this document as well, the government is sort of increasingly reliant on tax revenues.
06:41What impact could this have on getting the economy working again? It seems almost counterintuitive.
06:46Well, that's a very important point that you just pointed to, because
06:54the budget was kind of revealed about a month ahead of these protests.
07:03And it had a very chilling effect on the public perception of what lies ahead.
07:08I mean, they thought, they knew perhaps that things were not going to be that good.
07:12But when you raise taxes from 40%, about 40% of total expenditures to 57% of expenditures,
07:24that is big. Value added taxes that are, in fact, kind of regressive,
07:29because they affect, they're based on consumption. So they raise a larger amount of money from the poor
07:38than the middle and higher income groups.
07:42The income taxes have become recently more progressive. Iran has never been good at collecting income taxes,
07:54because it obviously depended on oil income. But now it is moving towards taxes. And naturally,
08:02that's very unpopular, because if you don't have a taxation system to which people and businesses are used to,
08:10we don't have this self-declaration system that the United States has. And people have gotten used to it.
08:17So you go to the businesses and you start looking at the books and you're trying to collect taxes,
08:24it becomes a tug of war between the tax collector and the business owner. And oftentimes, they are trying
08:33to extract more revenues. So disputes arise. That is a point of tension with businesses. A bit like
08:42the points of tension that the Iranian governments have always had with businesses. But those have been
08:48overpriced. You know, under the Shah, government employees or government agents used to walk around
08:56the stores and force sellers, grocery stores to lower their prices. Price gouging is a kind of a usual
09:07accusation that governments make against the private sector, against the business owners,
09:15which economists would tell you they're rarely the reason for inflation. Inflation is
09:20because the government brings more money. So I would say the tax pressure, or increasing the tax
09:28pressure on the population at this time, with hindsight, it would seem unwise. And the worst part of the
09:35budget was to predict inflation rates of over 50%, governments own forecasts. And we observed inflation
09:50over 50% in this past few months. And then right in the budget, the salaries would increase by 20% maximum.
09:58You know, that's not serious budget making. Of course, the parliament rejected that budget. And in the new
10:04budget, they allowed the lower incomes to rise by 43%. So that was better. But the damage had been done in
10:12terms of people saying we've had it, you're obviously unable to find a solution. And you know, we can talk about
10:20what other solutions exist. The demand from the public has been, both from politicians and ordinary people, why can't we
10:29compromise with the United States? The public perception was that they weren't getting a whole
10:37lot out of the nuclear program. And if it were up to them, I suppose they would have frozen enrichment to
10:43zero, as maybe costly it is in terms of national pride, to have a foreign government order you what to do.
10:51And to do to not do something that the international community recognizes as your right to enrich peacefully. But those are
11:01all in the past. And I think what we have a situation now is that the government is unable to deal with the economic
11:08conditions under the circumstances defined by sanctions, and by the threat of war.
11:14So you mentioned the payments there and the currency crisis, we've got inflation. How does this translate
11:24into the ordinary Iranian citizen on the ground? How are they, is there genuine hardship? And is that what's
11:32driving these protests? Is it similar to say Venezuela in some ways like that where there seem to be real
11:38hardships? Or is Iran a different situation?
11:44Well, I think the comparison with Venezuela is actually interesting. And Iran is very different from Venezuela.
11:50A lot of the migrants from Venezuela to Colombia, for example, are leaving because they can't make ends meet
11:58inside Venezuela. A lot of Iranians who leave seem to be more educated people who are seeking more social freedoms, better
12:10jobs and higher incomes. Iran is unique in the sense that this economic crisis has been met with a very flexible cash
12:24transfer program for the past 15 years. And because bread and some other items, food items are subsidized, the cash enables
12:37people at least to buy enough bread to get the calories they want. So there is no real threat of hunger at the moment.
12:46Going forward, we don't know because now the economy is disrupted. But I would say Iran was running its economy a lot better than Venezuela.
12:56We didn't have the kind of inflation and hyperinflation. And the reason was, I think that in Iran, there's a more serious government structure with a history of how to control the budget.
13:11They were not prepared for the severity of the sanctions. They underestimated what the United States could do in terms of limiting oil sales and other
13:24Iran's foreign trade. So they have been struggling in the last few years to get around the sanctions, not all that successfully.
13:32So they didn't pay attention to finding other solutions to the economy. They kept thinking, and this is my understanding, that one of these days, we will find a way to defeat
13:45the sanctions and get away from having to compromise with the United States. And somehow that hasn't arrived in time.
13:52And according to the Iran Central Bank, the country earned nearly $66 billion from exports of oil, petroleum products and gas in the last fiscal year.
14:06What impact would falling oil revenues have on the economy?
14:11Well, it's huge, because there are two kinds of exports Iran has. One are the exports from oil, which go directly to the government coffers.
14:24It enables the government to bring in the imports it wants, the prices it wants. Of course, that now is being phased out.
14:35But when the government has dollars, it can sell it to people who import the things it wants imported. So it has a lot of control over the expenditure part.
14:47And it can also control the exchange rate to some extent, although that doesn't work in the long run, but throwing money at the people who are bidding the exchange rate in the free market to go higher and higher.
15:01The other exports Iran has are petrochemicals, a big chunk, sometimes they're bigger in terms of dollar earnings than the oil.
15:10And the government has a role in that because it subsidizes the feed to these petrochemical plants, which is mostly natural gas, also owned and delivered by the government.
15:22Unfortunately, these companies are very large conglomerates that manage the petrochemical industry, do not always bring the dollars back.
15:34They partly need the dollars to run their own operations.
15:39So they divert the dollars that they earn to the free market and they earn a lot more, sometimes 50%, sometimes 100% more than they would get if they sold them to the government.
15:54Again, that is now being phased out so that the petrochemical owners, exporters could may well bring in more dollars back to Iran as opposed to investing it abroad.
16:07You know, the capital flood has been a big problem in Iran.
16:10So falling oil prices will affect government's own revenues, but it wouldn't affect the petrochemical exports.
16:22Accepting more tightening of sanctions, seizing of ships on high seas and so on by the United States is always possible,
16:30now that they have more excuses in terms of the losses of life and human rights violations taking place inside Iran.
16:40So, in short, the impact of falling oil revenues is not that great on Iran.
16:47One, because Iran is kind of used to lower oil revenues, as we just mentioned, tax revenues have increased more than 50% of the revenues.
16:58And the other is that there are non-oil exports that are quite significant.
17:03And they are, of course, increasing coming under sanctions.
17:08You know, there's no reason why the United States cannot itemize all these petrochemicals and tell the Chinese or whoever else is buying it that you can't buy these either.
17:19So they become like oil, subject to a seizure under high seas and so on.
17:26And if that happens, it becomes harder to pull out of this crisis in a sort of using economics.
17:37And the government may be forced if it insists in further suppression of the protests.
17:43The stakes will become higher in terms of loss of life and so on.
17:50I think if we look at what happened in Venezuela recently, it's kind of it's been a bit of a game changer in terms of oil producing countries and how they deal with China.
18:00You mentioned earlier that maybe China will come to the rescue of Iran.
18:06Do you think that countries like China are looking to Iran to meet a shortfall in oil needs following Venezuela?
18:14And given that Iran is so much more in China's strategic area than Venezuela, Venezuela is still very far away and a much smaller producer.
18:25How do you see the situation with China developing?
18:30That's an excellent question.
18:32Iran has very close economic ties with China, but as far as I'm aware, there are no political ties like treaties that would tie Chinese behavior politically on the global stage to what's going on in Iran.
18:51One of the casualties of these demonstrations of the uprising is that the Chinese step back and they want to watch to see what's happening.
19:04They wouldn't like to sacrifice their standing with the United States, the ability to export globally if the government seems to be losing ground.
19:16So that's one of the things that I would point to in terms of the future.
19:23China is probably more interested in its own economic trades, global trade than it is on relationship with Iran.
19:35China can buy the oily ones, even though Venezuela is kind of gone from the global market.
19:42I think few people recognize that there is an actual market where you can buy things.
19:47What may happen is that the price goes higher.
19:50You can't get concessions from Venezuela to have deliveries, you know, a few dollars below the market rate.
19:58But I don't think China is tied to Iran or any particular country to buy its oil.
20:05That's something that international relations people, people who emphasize geopolitics and want to bring oil constantly emphasize that having political relationships with a country assures your supply.
20:21But I think luckily for the world, the oil market has become a real competitive market and people are searching for buyers.
20:30If Chinese have a trillion dollars or more in reserves, they are in a very good place to bid up the oil from other people.
20:40So I would say Chinese don't really need Iran that much.
20:43They need them if they want to have a club.
20:47China has invested in the BRICS, this group of countries that are more like non-aligned nations of decades ago.
20:59And Iran is an important part of that.
21:02So that's, I think, the extent of Chinese diplomatic interest in Iran.
21:09They do find BRICS very useful in withstanding U.S. pressure.
21:15And their claim to a multipolar world is partly based on having this alliance with rising nations, of which Iran is one,
21:27although at this moment is a very weak part of that BRICS.
21:32But I think China is definitely interested in preserving Iran as a member of BRICS in its orbit, however informally.
21:45But it's not willing to go to war for it.
21:48You know, I don't know how much they have sent military hardware to Iran.
21:57People speculate about that.
21:59I don't have any information.
22:01But it's quite likely that they have been using the rail network to Iran to supply them with hardware that would beef up Iran's support.
22:16So that's, I think, the way Chinese would see Iran going forward.
22:23If it's going to get pulled out of this, it's a very valuable asset to have as a country that is leaning towards China rather than the United States.
22:35Finally, then, maybe just to wrap things up, how do you see things unfolding in the next couple of days?
22:42I mean, I'm not asking you to look in the crystal ball, obviously, but based on the way events have been developing, how do you see things proceeding?
22:50There's not going to be any change in the economy.
22:53There's not going to be any change in the economy.
22:54I think all the cards have been played.
22:56What has to happen is or what might happen is a diplomatic opening.
23:02Iran apparently has contacted the United States.
23:07That's what President Trump has said.
23:09And maybe they will find a way for United States to make a deal without resorting to what he said a year ago about surrender.
23:25I mean, that's a way of preventing a relatively peaceful resolution to the current crisis.
23:34And I don't know how President Trump is looking at that.
23:37Another big player is the Israeli Prime Minister Netanyahu.
23:41He is not interested in any lifeline for the Iranian government because he's always wanted these other Middle Eastern countries to be weaker, smaller, so that Israel has genuine security, like long term security, as opposed to having more of a democratic government in Iran, but still might be like Turkey and lean against Israel.
24:09I am not very optimistic that that could happen.
24:14But I think short of more repression to send people back home, two other avenues I can imagine.
24:29One in which some domestic reforms are announced in a hurry.
24:34I realized that when governments are under pressure, announcing reforms may sound like weakness.
24:40And there may be this lesson they learned from the Shah that you don't concede anything when people are in the streets.
24:47And the second is, which is more likely, is to see what deal they can make with the United States that will reduce sanctions pressure on Iran without making Iran look like it has surrendered to the United States.
25:08Thank you very much.
25:09Thank you very much, Javad.
25:12That was very interesting.
25:14Thanks, as always, for your insights today.
25:16That was Javad Salehi Isfahani speaking to us from Virginia today.
25:21Thank you for having me.
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