AFP, Tehran :
Iran’s government faces acute economic challenges as it announces its annual budget, expected on Tuesday, and not all of its problems are the result of US sanctions.
The rial has lost around half its value against the dollar since US President Donald Trump announced he was withdrawing from the 2015 nuclear deal in May and reimposing sanctions.
That has driven up prices and blocked much of the foreign investment President Hassan Rouhani had hoped to attract, with the International Monetary Fund now predicting the economy will shrink by 3.6 percent next year.
But analysts say many of the country’s woes pre-date Trump and the sanctions.
Iran-based economist Mohammad Mahidashti says the banking system is the “biggest problem – riddled with fictitious assets and non-performing loans”.
Banks issued huge loans under Rouhani’s predecessor Mahmoud Ahmadinejad with little apparent care for whether they would be repaid.
Parliament’s economic commission said in March that half of all these loans – worth around $27 billion at the time – turned sour.
Desperately short of funds, banks have tried to attract fresh deposits with interest rates of 30 percent or more.
While providing a much-needed source of liquidity initially, the interest on these deposits has only added to banks’ instability.
Rouhani said recently that “unhealthy” banks were being kept afloat by continuously borrowing from the central bank, and the debts of private lenders have doubled in the year to September.
Banks are also saddled with unsellable properties after pumping cash into a construction boom that ran out of steam around 2013.
“We have close to two million empty houses in Iran. There is simply no demand out there,” said Narges Darvish, an economics lecturer at Tehran’s Alzahra University.
But the government is loath to let banks fail, fearing a public backlash – especially after the collapse of dodgy credit agencies helped fuel widespread protests a year ago.
The US withdrawal from the nuclear deal fuelled a run on the Iranian rial, but was not the only factor behind the currency’s weakness.
In September, central bank governor Abdolnasser Hemmati instead blamed “horrific growth in money supply”.
Its data shows that the amount of cash flowing around the Iranian economy has increased 24 percent annually for the past four years.
Given that Iran’s economy offers few profitable and secure investment opportunities, citizens had already long sought to change rial savings into dollars.
And when rising expectations that the US would re-impose sanctions pressured the rial in earnest in early 2018, the government’s reaction was a mess, according to economist Mousa Ghaninezhad.
“They claim they believe in the free market but they have no coherent strategy,” he told AFP.
At one point, in April, the government forcibly shut down exchange houses and tried to fix the rate at 42,000 rials per dollar – which only fuelled panic and drove speculators into the black market.
Recognising its mistake, the government reopened exchange shops and sacked the central bank governor a few months later.
Iran’s government faces acute economic challenges as it announces its annual budget, expected on Tuesday, and not all of its problems are the result of US sanctions.
The rial has lost around half its value against the dollar since US President Donald Trump announced he was withdrawing from the 2015 nuclear deal in May and reimposing sanctions.
That has driven up prices and blocked much of the foreign investment President Hassan Rouhani had hoped to attract, with the International Monetary Fund now predicting the economy will shrink by 3.6 percent next year.
But analysts say many of the country’s woes pre-date Trump and the sanctions.
Iran-based economist Mohammad Mahidashti says the banking system is the “biggest problem – riddled with fictitious assets and non-performing loans”.
Banks issued huge loans under Rouhani’s predecessor Mahmoud Ahmadinejad with little apparent care for whether they would be repaid.
Parliament’s economic commission said in March that half of all these loans – worth around $27 billion at the time – turned sour.
Desperately short of funds, banks have tried to attract fresh deposits with interest rates of 30 percent or more.
While providing a much-needed source of liquidity initially, the interest on these deposits has only added to banks’ instability.
Rouhani said recently that “unhealthy” banks were being kept afloat by continuously borrowing from the central bank, and the debts of private lenders have doubled in the year to September.
Banks are also saddled with unsellable properties after pumping cash into a construction boom that ran out of steam around 2013.
“We have close to two million empty houses in Iran. There is simply no demand out there,” said Narges Darvish, an economics lecturer at Tehran’s Alzahra University.
But the government is loath to let banks fail, fearing a public backlash – especially after the collapse of dodgy credit agencies helped fuel widespread protests a year ago.
The US withdrawal from the nuclear deal fuelled a run on the Iranian rial, but was not the only factor behind the currency’s weakness.
In September, central bank governor Abdolnasser Hemmati instead blamed “horrific growth in money supply”.
Its data shows that the amount of cash flowing around the Iranian economy has increased 24 percent annually for the past four years.
Given that Iran’s economy offers few profitable and secure investment opportunities, citizens had already long sought to change rial savings into dollars.
And when rising expectations that the US would re-impose sanctions pressured the rial in earnest in early 2018, the government’s reaction was a mess, according to economist Mousa Ghaninezhad.
“They claim they believe in the free market but they have no coherent strategy,” he told AFP.
At one point, in April, the government forcibly shut down exchange houses and tried to fix the rate at 42,000 rials per dollar – which only fuelled panic and drove speculators into the black market.
Recognising its mistake, the government reopened exchange shops and sacked the central bank governor a few months later.
