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Iran's Large and Growing Financial Gap

Deficits and deviations from normal conditions for sustainable growth and gross foreign reserves
Sep 19 2019

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In the News, Publications, Research

By Dr. Pooya Azadi and Matin Mirramezani

The Iranian economy is experiencing a severe bout of instability which, in terms of scope and depth, has no historical precedence since the end of the Iran-Iraq war three decades ago. Iran’s current economic crisis can be attributed to decades of poor governance whose ramifications are now exacerbated by pressure from new sanctions unilaterally imposed by the U.S.

For a prolonged period of time, the real per-capita GDP in Iran has stayed flat and inequality has been on the rise. Erosion of state legitimacy and social capital along with entrenchment of corruption, particularly in the form of powerful interest groups within the state, have gradually hampered the state capacity for embarking on economic reforms, even in the most obvious cases such as fuel subsidies. Also, natural resource reserveswhich directly constitute about a quarter of the value added in the economywere unsustainably extracted for decades without being replaced with durable assets to ensure income generation in the future. Moreover, the country’s catastrophic privatization process is coming to an end while it neither boosted productivity and innovation nor reduced the financial burden of many loss-making stateowned enterprises on the government.

Instead of financing its expenditure by expanding the tax base, the government has filled the budget deficit by seigniorage, withdrawals from the National Development Funds, and directed lending from banks which, in essence, has turned into a massive Ponzi scheme.

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