Iran's credit crunch

Observations on the marketplace

Ali Abadi looks out across the floor of his shop in the shadow of Tehran’s Motahari Mosque, his view of the bristling piles of dried figs and pistachio nuts unobscured by customers. “Normally,” he
says glumly, “the shop would be full of people.”

When the global financial crisis became apparent last year, Iranian officials touted the immunity of Iran’s “independent economy” – isolated from the international system through sanctions and banking restrictions. President Ahmadinejad even implied that the crisis was due to the west’s moral degeneracy. Now, however, as Iran’s presidential elections loom on 12 June, the country could be on the verge of an idiosyncratic financial crisis.

Mahmoud Ahmadinejad was elected in 2005 on a populist platform of wealth redistribution, and embarked on an ambitious spending programme in his first year that was fuelled by high oil prices. He forced the state-dominated banking sector to lend at interest rates less than half the rate of inflation – essentially giving people free money. But there was no coherent development strategy or supervision behind the cash that poured through the system. “In 2006, liquidity increased by 40 per cent, but economic growth was only 5 per cent,” says Saeed Leylaz, an economic analyst associated with the reform movement. “That’s clearly unsustainable.”

“Numbers are illusions,” scoffs Mohammad Kazem Anbarlouee, editor of Resalat, a newspaper that is pro-Ahmadinejad, echoing the government line. “In the west the numbers showed everything was good, and there was a crisis. Here the numbers show everything as bad, but the reality is different.”

The numbers certainly don’t look good: inflation, which stood at 10 per cent when Ahmadinejad came to power, had shot to nearly 30 per cent by the end of last year. Real-estate prices in Tehran have skyrocketed. “My father has a house in central Tehran which was worth $200,000 two years ago,” says Ali. “Two months ago, it was worth $1.3m. In the US that would cause World War III.”

Rent has become unaffordable for many Iranians. In the Grand Bazaar in Tehran, Mahmoud looks at the gilt mirrors and lighting he is about to pack up, unable to afford the stall he has rented for eight years, and shakes his head. “The economic situation is very bad,” he says.

After four years of cheap money, Iran is experiencing its own version of the credit crunch. Non-performing loans have, according to unofficial figures, increased by 75 per cent in the past three years: there is simply no incentive for people to pay them back at such a low rate of interest. Now that oil revenues have plummeted from $147 to $48 a barrel, the government has no cash to sustain the credit supply. Two governors of the Central Bank of Iran have been forced out of office for opposing the lowering of interest rates, fearing hyperinflation, but Ahmadinejad has reportedly quietly kept in place the credit restrictions introduced last year.

Inflation has since gone down to 25 per cent. But even for small businesses, rental prices remain exorbitantly high, and access to credit, on which many lower-middle-class Iranians have become dependent since Ahmadinejad became president, has been severely reduced.

Like many, Younes, who has his own confectionery business in central Tehran, has been affected by the credit crunch. “Over the past five years I borrowed $10,000 a year for the business, and always paid it back. This year they told me that ‘Ahmadinejad has stopped all loans’,” he says. He has since been promised money, but it has yet to materialise. Like many Iranians, Younes gets by through dipping into savings, borrowing from friends and getting them to cash cheques for him. But these back-up resources will not last indefinitely.

Unemployment, meanwhile, has continued to rise: unofficial figures put it at around 30 per cent. The catch-22 situation is that measures to combat unemployment – increasing public spending and credit supply – will increase inflation, and vice versa. “The government has to choose between controlling inflation or accelerating economic growth,” says Saeed Leylaz.

Although nearly all shopkeepers say that business is bad, the crisis is not evident on the streets, for the moment. But as the opaque dynamics of the presidential election play themselves out, one thing is certain, according to Leylaz: “The next government will have a nightmare planning the economy.”

This article first appeared in the 13 April 2009 issue of the New Statesman, Easter 2009