January 29, 2020

Iran’s Grim Economy Limits Its Willingness to Confront the U.S.

Conflict could threaten a run on domestic banks by sending more companies into distress. Iranian companies have been spared from collapse by surges of credit from banks. The government controls about 70 percent of banking assets, according to a paper by Adnan Mazarei, a former I.M.F. deputy director and now a senior fellow at the Peterson Institute for International Economics in Washington. Roughly half of all bank loans are in arrears, Iran’s Parliament has estimated.

Many Iranian companies depend on imported goods to make and sell products, from machinery to steel to grain. If Iran’s currency declines further, those companies would have to pay more for such goods. Banks would either have to extend more loans, or businesses would collapse, adding to the ranks of the jobless.

The central bank has been financing government spending, filling holes in a tattered budget to limit public ire over cuts. That entails printing Iranian money, adding to the strains on the currency. A war could prompt wealthier Iranians to yank assets out of the country, threatening a further decline in the currency and producing runaway inflation.

In sum, this is the unpalatable choice confronting the Iranian leadership: It can keep the economy going by continuing to steer credit to banks and industry, adding to the risks of an eventual banking disaster and hyperinflation. Or it can opt for austerity that would cause immediate public suffering, threatening more street demonstrations.

“That is the specter hanging over the Iranian economy,” Mr. Mazarei said. “The current economic situation is not sustainable.”

Though such realities appear to be limiting Iran’s appetite for escalation, some experts suggest that the regime’s hard-liners may eventually come to embrace hostilities with the United States as a means of stimulating the anemic economy.

Article source: https://www.nytimes.com/2020/01/13/business/economy/iran-economy.html?emc=rss&partner=rss

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