If economic sanctions are extended, they would increase the probability of creating famine and food shortage in Iran

Iran’s Customs Department has recently published data on country’s foreign trade from 1981to September- 2011. What is missing here is Iran’s export of crude oil in these years, but otherwise, it offers a depressing picture of the economy. I have argued elsewhere that ever since the late 19th century, there seems to have been a gap between production and consumption in Iran. The only exception to this rule was Dr Mossadeq’s government. It was removed in a CIA-sponsored coup in August 1953. This gap between production and consumption was filled by imports and since the discovery of oil; financing imports have been a little easier. We now know that this gap in 1998 was a little over $11 billion but in 2010, it grew to nearly $38 billion and for the first nine months of 2011, it stood at nearly $21 billion.

Thus, in recent years, this gap increased. Overall, in the last 14 years, Iran imported $491468 million worth of goods and in return, its total non-oil exports stood at $159938 million: $331530 million worth of goods that were consumed in Iran were produced elsewhere in the world. The first point I would like to make is consuming such a vast quantity of goods produced no productive job in the country. It goes without saying a small number of middlemen and traders have benefitted. The annual average of trade deficit for the past 14 years stands at $23681 million.

For a while, imagine that the government in Iran eventually comes to its senses and says enough is enough and decides to follow policies encouraging domestic production in order to substitute some of the imports. Let us be modest and suppose that the government aims to reduce the annual deficits to $18945 million, i.e. a fall of 20%.  By doing that 670961 jobs could be created and each could be paid about 1 million tomans a month which is higher than what most teachers receive in Iran today. Why they do not do this is a mystery to me.

On the other hand, just consider that something happens to Iran’s petro dollars and it is no longer able to finance the trade deficit. In return for an annual trade deficit of nearly $24 billion, what can we export except goat’s wool and oxen hide?

In the last 14 years, Iran elected two presidents: for the first seven years, reformist Khatami was at the helm and for the remainder Ahmadinejad has been the boss. During 1998-2004 Iran imported $141958 worth of goods [an annual average of $20280 million] while under Ahmadinejad , total imports stand at $349510 million [annual average of $49930 million]. In short, annual average imports into Iran increased by 146% under Mr Ahmadinejad.

Some pro-globalisation commentators claimed that Iran’s relations with the rest of the world increased, hence, being reflected in its international trade. I do not share this view.

If there was a historical gap between these periods, the rise in imports could be explained by structural factors. But this gap does not exist and the overall period is too short to have caused too much structural changes in the economy. During these years, Iran’s population has increased but not significantly. Hence, this again could not be explained by demography either.

My view on this is a little simpler. I think it is an indication of mismanagement of the economy at a massive scale. In my view, this massive rise in imports is a cause and at the same times a symptom of stagnation in the real sector in Iran. In short, Iranian producers of various descriptions lost the competitive game to their foreign rivals. For instance, look at the textile and shoe making industries in Iran. At the same time, as an evidence of this stagnation, look at various bubbles that emerged in Iran in the last few years. The most recent one is the dollar-and-gold-coins bubble still raging in Tehran at the time of writing. I will not absolve the Central Bank of the Islamic Republic of its responsibility in this latest bubble, but still believe that the fundamental cause is stagnation in the real sector. Let me also remind the readers that in the past seven years, liquidity in the economy enjoyed a frightening rate of annual growth: on average between 30% to 40% per year. In the absence of profitable investment opportunities in the real sector, there has been no outlet other than speculation of different descriptions. Until a few years ago, it was housing bubble, and following its collapse, we witnessed a speculative bubble in Tehran Stock Exchange. Now a days we hear about speculative bubble in the foreign currency and gold coin markets in Tehran.

Under Khatami, the average annual trade deficit- a monetary expression of the gap between production and consumption- was $14309 million. But under Ahmadinejad, this gap increased to $33053 million. In short, despite the fact that non-oil exports from Iran have increased under Ahmadinejad- compared with Khatami years- that annual average gap has widened too by 131%.

Iran suffered the largest trade deficit in 2010 in the last 14 years despite the fact that its non-oil exports in 2010 was highest in terms of value and weight. In 2010, Iran exported 60198 thousand tons of non-oil goods valued at $26551 million and in return imported 45346 thousand tons valued at $64450 million. To put it differently, Iran imported 25% less than its non-oil exports but had to pay $37899 million more out of it petro dollars. The gap between production and consumption was, therefore, nearly $38 billion. The fundamental question that is not very often discussed among many Iranians is: if petro dollars were to disappear from the equation, what will happen? Another worrying aspect of economy in Iran is a reverse industrialisation that seems to be taking place. What I mean by this term is that Iran seems to be exporting more and more but its value added appears to be declining. For instance, in 2020, for every ton of imports, Iran had to export 3.32 tons of non-oil goods. In short, the volume of Iran’s non-oil exports was 33% more than its imports but its value was 59% less.

Let me conclude:

* In contrast to what some pro-economic sanctions commentators who argue that Iran’s dependence on oil is not much, it is very serious and has increased in recent years. In a BBC Persian Service programme, one such commentator claimed that Iran’s dependence was only 10% hence; an extension of sanctions would not have a serious impact on the average man or women in Iran. Following this false claim, he argued for sanctions as it would only harm the regime. On the basis of data revealed in this short note, I argue that if economic sanctions are extended, they would increase the probability of creating famine and food shortage in Iran.

* I am not aware how much petro dollars Iran earned in the last 14 years but it is clear that more than $331.5 billion of this income were used to finance imports into Iran and to fill the gap that exists between production and consumption in the country. In my view, this is a serious structural weakness that should be addressed sooner rather than later.

* Last but not least, if economic sanctions cover oil and Central Bank of the Islamic Republic and it they lead to a serious shortfall in foreign currency earnings of Iran- which is most likely, it is not clear to me how this gap will be financed. In addition to this historical weakness, the gap between production and consumption in Iran, this gap has increased in recent years. In my view, the potential result of the extension of economic sanctions is more likely to be the emergence of famine and food scarcity in Iran. Whatever the intention of those imposing sanctions, history teaches us the real costs of famine and food scarcity will be paid by its working classes.

* This said, I still hope that I am wrong and nothing of this type will happen to my beloved homeland.