Iran modelling ‘resistive economy’ to counter Western sanctions

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At a time when Iran’s economy is under attack from sanctions and financial “warfare”, Tehran is developing a “resistive economy” which is intended to wean the country of its heavy dependence on oil revenue through fiscal belt tightening, increased industrial output, and the strengthening of science to boost technological innovation, a Western media report said on Sunday.

The initiative comes in response to international sanctions imposed over Iran’s nuclear programme that are designed to hamper Iran’s ability to conduct international trade and strike its economic lifeline – oil exports.

As part of the defence strategy, the Islamic Republic Supreme Leader Ayatollah Ali Khamenei described Iran’s dependence on oil income as a destructive addiction that must be cured in due time.

“We must believe that the country will reach a point some day when it will be able to close its oil wells whenever needed,” Khamenei said in a speech to researchers and innovators on 29 July.

According to Radio Free Europe/Radio Liberty report, Iran’s days of over-reliance on oil will continue for a long while considering the fact that oil accounts for about 80% of country’s foreign income. The report added that experts believe it would take five to 10 years under a comprehensive economic overhaul before the country’s economy is able to withstand such a shutdown.

Quoting London-based economist Mehrdad Emadi, RFE/RL report said that “reaching that capability is highly unlikely, if not completely unattainable due to Iran’s depleted coffers.”

“Iran at the moment is facing a chronic shortage of currency for its industrial projects. These are exactly the projects that could actually help increase the export of manufactured goods,” Emadi told RFE/RL.

“And, probably more importantly, we now are at a crossroad where more than 75% of food bills; that is, imported food products – are directly financed through currencies and via export of oil. So the economy does not have a buffer in terms of (foreign-currency) reserves nor the capacity to export in other areas.”

Counter-attack

US and the European Union already blocked Iranian banks from using the international banking network SWIFT to conduct financial transfers in March. Many countries stopped importing Iranian oil, while many international companies halted supplies of manufactured goods to Iran on fears of non-payment.

“Any economic move we make, any credit line we open, the next day we see a problem has been created from the other side,” Mehdi Ghazanfari, Industry, Mines, and Commerce Minister, said in a speech last week. “They’ve blocked the credit, they’ve prevented money from being transferred. Their moves and actions are taking place each minute against ours.”

The sanctions also appear to have harmed industries and alternative sectors of the economy that Iran would have to depend on to successfully develop its diversification strategy.

According to the London-based economist, Iran, the second-largest holder of gas reserves in the world, should try to quickly expand its natural-gas sector despite the fact that several foreign companies have already scrapped their contracts and left the country to avoid sanctions.

Iran’s automotive industry, which ranks next after the oil and gas sector in terms of revenue generation, is also chalking out plans to endure the difficult times ahead.

Iran-Khodro Company, the country’s leading automaker, this month announced a 45% boom in export sales to its main markets Russia, the Middle East, South America, and Africa. The company also touted the arrival of a new, domestically produced and designed compact car, the Runna. It also has high hopes for its revamped sedan, the Samand, which is exported to Russia via an assembly plant in Belarus and is also produced in Iraq.

The radio report said that the Industry, Mines, and Commerce Ministry in July blamed “lack of money” for the 36% decline in overall domestic auto production in the first quarter of the Iranian year (21 March to 20 June).

Setbacks

The fall could be directly related to the decision by Peugeot Citroen in March, which accounted for 40% of Iran’s domestic production through its partnership with Iran-Khodro, to stop supplying parts and assembly kits to Tehran. The move was believed to be a result of the tightening of sanctions against the Islamic Republic.

Emadi says the effect of sanctions is significant.

“Iran-Khodro, which is the largest car manufacturer in Iran, recently announced that from [September] they’re going to start reducing output [because of] the impact of sanctions,” the London-based economist said.

“They did not itemise how this impact was affecting them, but basically the reason was that they do not have foreign currency to buy spare parts and replacement parts for the equipment to continue the level of output.”

The RFE/RL report said that Iran’s other major car manufacturer, Saipa, is also facing a decline in production.

“It is not good for the economy when manufacturing runs into problems,” parliamentarian Seyyed Moayed Hoseyni-Sadr said in a 27 July interview published by Iran’s Young Journalists Club. “Two-thirds of the country’s manufacturing plants are either shut down or operating at minimum capacity,” he said, estimating unemployment at 17 to 18%.

The Washington-funded radio said in its report that Iranian officials, including Supreme Leader Khamenei, believe that for the “resistive economy” to succeed, the private sector needs to be strengthened.

However, Hossein Askari, Iran professor of International Business and International Affairs at George Washington University, casted his doubts in the RFE/RL report.

“If they were going to have a thriving private sector, why haven’t they done it for 33 years? The reason why they have not done it is because there is a great deal of corruption,” Askari said while adding that reforms beyond the economic sphere are needed for economic success.

“They could not build efficient institutions, and the most important element (to eliminating corruption) is the rule of law — that no one is above the law, including the supreme leader or anyone else. So they have not been able to do that,” the Washington DC-based academic said in the interview.

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