The macroeconomic costs of Iran’s nuclear program

As the new government of Iranian President Rouhani celebrates the temporary Geneva nuclear deal, an extremely dim picture is emerging of the drastic costs to Iran from pursuing a nuclear program under the cloud of domestic economic mismanagement and international sanctions. The IMF just released its final economic and financial statistics for 2013 and the Iranian numbers are appalling and extremely worrying for the stability of the current government.

Iran (with 80 million people) has been relegated to the third-place position among the economic powers of the Middle East–North Africa region (MENA), behind Saudi Arabia (with 30 million people), and more alarmingly, behind the United Arab Emirates (with 9 million people, of which only about 1 million are nationals). IMF estimates Iran’s 2013 GDP at current prices will come in at about $390 billion, or about $150 billion less than in 2012. In comparison, Saudi Arabia’s economy, by far the largest in the MENA region, will come in at about $720 billion.

Due to tightening sanctions on Iran’s petroleum exports, Tehran’s oil revenues have decreased over 50%, making Iran’s traditional position within OPEC as the number-two power unsustainable. Iraqi exports are now larger than Iran’s pre-sanctions exports and the gap is increasing. Short of an extraordinary turnaround in the years to come and about $50 billion in investments in the country’s upstream production capabilities, Iran has permanently ceded its position in OPEC to Iraq. The UAE and Kuwait are exporting more than Iran was in pre-sanctions years, as is Saudi Arabia, which traditionally pumps 2.5 times more oil than Iran but is now exporting nearly 4 times more than during pre-sanctions years.

The magnitude of the problem is put into perspective when Iran, with a population that is nearly three times larger than Saudi Arabia’s, has an economy that is nearly twice as small. Iran’s inflation rate is among the highest in the region, averaging over 40% for 2013, while it’s per capita income has decreased and is among the bottom third in the MENA region. For the first time, Iraq’s per capita income is higher than Iran’s, while IMF predictions for the next few years show the gap widening.

The most alarming situation that President Rouhani inherited from the Ahmadinejad administration is the widespread poverty among Iran’s population. The rate clearly increased during Ahmadinejad’s tenure and is now affecting nearly 60% of the country’s total population. The average poverty line for urban dwellers is about $170 per month, or $5.60 per day, and over 50% of Iran’s urban population lives under that poverty line. In the rural areas the situation is even more grim. 

As the country’s major cities increasingly become oceans of poverty, Rouhani’s priorities will have to shift from the nuclear program to getting the economy jump-started. Short of an economic and financial miracle over the next couple of years, Iran could easily witness a repeat of the mass demonstrations that occurred in 2009, with unintended consequences. The current dire domestic situation is simply unsustainable.