Rising Employment Casts Doubt on IMF’s Grim Forecast for Iran’s Economy

This article is republished from the author’s economics blog.

In October, the IMF downgraded its forecast of Iran’s economic growth for 2019 from -6 to -9.5 percent. The adjustment brought the IMF’s assessment of Iran’s economic performance closer to that of the World Bank (-8.7 percent) and is revising opinion regarding the ineffectiveness of sanctions in forcing Iran to renegotiate the 2015 nuclear deal. It has strengthened the hand of Iran foes who argue that sanctions are about to bear fruit and urge the Trump administration to stay the course and ignore appeals from Europeans to ease pressure on Iran.

The Financial Times, quoting an unnamed Iranian economist, added alarm to the downgrading by suggesting that Iran’s situation may be worse than it was during the Iran-Iraq war or the Anglo-Soviet occupation of Iran during World War 2. The idea that life in Iran is anything like the 1940s or the 1980s is nonsense, and the FT reporter who files her reports from Tehran can (but did not) attest to that. It is easy to dismiss this comparison as silly, but the dire predictions of sharp contraction by IMF and the World Bank for the year should be taken seriously. And by seriously I mean to ask why they are at odds with new employment data from Iran.

Surprising Growth in Employment

Earlier this month, the Statistical Center of Iran (SCI) release the latest results of its labor force (LFS) survey, for summer 2019. The summer quarter of 2019 (third quarter of the Gregorian year 2019) recorded the highest number of people employed ever, 24.75 million people, up by 3.3 percent relative to summer 2018, when sanctions first hit, and 1.5 percent relative to spring 2019. More than 795,000 jobs had been created since summer 2018, reducing the number unemployed by 430,000 and the unemployment rate to 10.5 percent.

Significantly, this was not due to lower participation in the labor force, which had actually increased by 1.1 percent, so this was not the case of discouraged workers leaving the labor force.  Also significant to note is the fact that employment grew in all sectors, especially in manufacturing, where employment expanded by 4.6 percent compared to the same quarter in 2018, even though is was the hardest hit by sanctions (except for oil).

A similar pattern existed after the first wave of sanctions in 2012, when the currency crashed and the economy entered negative growth, but employment seemed steady for a while before the effect of Rouhani’s austerity program to bring down inflation in 2013 began to show itself in employment (manufacturing employment, in particular,  was on the upswing till late 2013).

Divergent Narratives

What explains the strong discord between the international forecasts and employment figures in 2019?

Before answering this question I should first discuss an often-heard concern that Iranian data are somehow doctored and therefore unreliable, more so than data from other developing countries which form the basis of our understanding of the rest of the world. Many analysts (including me) have worked with the raw data for the labor force survey of Iran (LFS), which are all available on the SCI’s data portal. The LFS was designed by ILO experts to bring Iran’s employment data into line with the rest of the world. The old employment survey, which stopped more than ten years ago did not conform to international standards. For example, it classified a person as employed if he or she had worked at least two days in the week prior to interview. The new survey follows the ILO guidelines and defines the employed as those who have worked at least one hour in the past week. It is therefore disappointing that some so-called experts, inside and outside Iran, reject the SCI data for this very reason. On a recent BBC Persian panel, an expert questioned the criterion of a minimum of one hour in defining employment.  Responding to this type of criticism, a while back SCI published a report showing that defining employment more strictly increases the unemployment rate by one or two points only. Lack of trust in official data runs deep in Iran, and is at times quite healthy. However, in the case of SCI this is unwarranted because its surveys are publicly available in unit record and have become the workhorse for most economic research on Iran.

Now, to answer the question, there are two explanations for the difference in outlook offered by the employment data and the revised IMF forecast that seem plausible. First, the main reason for the lower revised estimate may be Iran’s falling oil exports. Since most United States waivers for buying Iranian oil have expired oil exports have dropped below half a million barrels per day—how far below I do not know. Arithmetics dictate to lower the growth projection for the year if the original projection assumed higher oil exports. However, the link between oil and the rest of Iran’s economy involves more than arithmetics and does not extend to employment. The oil sector employs less than half a percent of Iran’s workforce, so its contraction does not automatically bring down the rest of the economy. Had the IMF chosen to report growth of the non-oil GDP, as they should since it measures the level of economic activity in Iran much better than GDP including oil, they would have made a more moderate downward adjustment. On 2018/2019, as I noted last month, non-oil GDP fell by less than half the rate of the total GDP.

The second plausible explanation is that the IMF’s forecasting model, about which I know next to nothing, may fail to capture the possibilities for substitution in the Iranian economy.  The rise of the dollar brings a large change to the price structure in Iran, opening substantial opportunities for profitable production in the non-oil sectors that employ the 99 percent of the workforce. These are the sectors which are overwhelmed by cheap imports when oil income lowers their prices.

So, in reverse order, and as economic textbooks read, when oil income drop and prices of imports increase, demand shifts from foreign to home goods, encouraging firms to hire workers and expand production. For example, in the past visits to Iran I might have bought a box of Kellogg’s cereal because it tasted better than the Iranian brand and was only twice as expensive. But this past summer, with devaluation having increased the price ratio to four or five, I decided to buy the Iranian brand. Surprisingly, it tasted better, either because the quality had improved or because prices determine taste for Isfahanis!

The engine of this shift in demand and employment is shown in the chart below, which depicts the dramatic change in the real effective exchange rate (EER) in the past two decades. (EER here is the exchange rate deflated by the difference between the inflation rates of Iran and the OECD). The EER fell by more than half during the oil boom of the 2000s, which saw the oil price rise 8 times. This explains why during this period imports flooded Iran’s markets and employment stagnated. Tellingly, during the five years between the censuses of population 2006 and 2011, the economy produced only 14,000 jobs each year, compared to nearly 800,000 jobs since the return of sanctions over a year ago.

The tightening of sanctions in 2011-2012 lowered oil exports and forced a similar realignment of the rial against foreign currencies in early 2012, which was followed by a modest increase in employment and output, as the graph in this post shows.

Dark Clouds on the Horizon

The World Bank has noted that rial’s depreciation can help with economic recovery, and the Iranian economic press have published stories of how responsive is Iran’s private sector to improved incentives for production. But, I would advise caution in becoming too optimistic.  The biggest improvement in incentives in production has come in producing for export markets (saffron and pistachios prices are pegged to the US dollar), but sanctions limit how far (beyond its neighbors) and how much Iran can export. Even meeting local demand faces limitations as most goods produced in Iran use some foreign-produced inputs. About 45 percent of Iran’s imports are of this type.

Other dark clouds on the horizon that no doubt have influenced the lower forecasts of international organizations include the possibility of the return of UN sanctions and resumption of high inflation in Iran. The return of the UN sanctions would make it harder for Iran’s remaining trade partners to work with it, or at least they would exact a higher price for working with Iran. The current impasse with Europeans over INSTEX does not bode well in this regard.

Even without the return of the UN sanctions, Iran’s narrow window of trade can close if organizations such as FATF downgrade the credibility and security of Iran’s banking system, thus discouraging existing partners from handling money flow in and out of Iran for fear of being penalized elsewhere. Regulations to assure the rest of the world that Iran’s bank are being watched and regulated with respect to money laundering have passed Iran’s parliament but face stiff opposition on their way to become law.

As for inflation, it has been falling in Iran for the past six months, which indicates that, as in the 2012 episode, the economy may be on its way to return to normalcy (meaning below 20 percent!). What threatens this trend is the budget deficit, that the government is running out of ways to pay its workers and for the services it provides (it has given up building anything new). The government appears to have managed well so far, delicately balancing the need to keep its services going and to assure the private sector that inflation is under control. How long it can do this with parliamentary elections approaching and Iran’s polity divided as ever, is anyone’s guess. But, any attempt to increase incomes without producing more goods—i.e., populist money printing—will derail the path to recovery that new employment data seem to promise.

High inflation will destabilize the economy by making the exchange rate volatile and less predictable, which is bad for producers. Equally bad is if the government decided to keep the exchange rate constant in nominal terms, which it to let it depreciate at the rate of inflation, as was done after the currency collapse in 2012 when the EER gradually fell and lost nearly all the gain as a result of the devaluation.

Photo: IRNA

New Iran Metals Sanctions Target Jobs, Not Government Revenue

The Trump administration has announced a new wave of sanctions on Iran’s steel, aluminum and copper industries. A statement from President Trump declares, “Today's action targets Iran's revenue from the export of industrial metals—10 percent of its export economy—and puts other nations on notice that allowing Iranian steel and other metals into your ports will no longer be tolerated.”

It is true that Iran’s metals exports are an important source of foreign exchange revenue. But to put the overall value in perspective, Iran’s finished metals industry accounts for the same share of exports as Iran’s vegetable industry. The largest product group in metals exports, semi-finished iron (USD 503 million), earns Iran less than the largest product group in the food industry, nuts (USD 649 million).

Moreover, it is important to recognize that Iran is already struggling to repatriate foreign exchange revenues due to the severe sanctioned-related constrictions on international banking channels. So the notion that additional sanctions were necessary to constrain this particular source of foreign exchange is dubious at best. Had cutting access to foreign exchange been the specific aim, a waiver system like that formerly in place for oil exports, in which Iran’s earnings would accrue in tightly controlled escrow accounts, would have sufficed.

So why is it so important for the Trump administration to target the metals and mining industry? The answer is that the metals and mining industry is perhaps the single most important employer in Iran’s economy. Metals and mining companies directly employ over 600,000 workers. The country’s automotive sector, the largest consumer of Iranian steel, directly employs a further 1 million workers. Combined, the two sectors account for 6 percent of the country’s total labor force.

The new sanctions will likely hit the earnings of Iran’s major metals companies, such as Mobarakeh Steel or the National Iranian Copper Industries Company. But any impact on government revenues will be secondary. Foremost, a disruption to earnings will further deteriorate the balance sheets of Iran’s heavily indebted metals and mining companies. Even if the government steps in to prevent bankruptcies, the likely disruptions to cash flow will lead to wages going unpaid and the prospect of layoffs. Furthermore, a disruption in steel output—whether through shortages or price increases—could also impact output within Iran’s automotive sector, where production has already fallen nearly 40 percent year-on-year and where layoffs have begun to take effect. Just last week, on the occasion of International Labor Day, President Rouhani told an audience of Iranian blue collar workers that they are on the "on the front line" of an economic war.

In April, Donya-e-Eqtesad, Iran’s leading financial newspaper, ran an in depth report on prospects for Iran’s steel exports. The report observed that already significant disruptions in exports were contributing to “the cessation of production and the unemployment of thousands.”

Creating the conditions for mass unemployment—especially among the blue collar workers employed by state-owned enterprises who form the backbone of Iran’s economy—is the likely aim of the Trump administration’s latest round of sanctions. Last month, Mark Dubowitz, a principal advisor on the Trump administration’s Iran policy, called upon the US to more actively support labor mobilizations in the country, drawing an analogy to the US support for the trade-union led Solidarity movement in Poland. To this end, stoking unrest by creating mass unemployment within the metals industry would be consistent with the Trump administration’s “maximum pressure” aims, especially as administration officials have grown more open to confessing their regime change goals.

Photo: IRNA

For Iran’s Economy, the Price of a Car Matters More Than the Price of Oil

The combination of reimposed sanctions, a slowing economy, and a devalued currency have put Iran’s automotive sector under severe pressure With nearly 1 million jobs linked to the automotive industry, the price of a new car could be even more important than the price of oil for the Iranian economy.

In an interview with Bourse & Bazaar, Saeed Madani, the former CEO of SAIPA, Iran’s second largest automaker, warned that price controls are squeezing state-owned automakers as sanctions effect the overall economy.

State-owned firms Iran Khodro and SAIPA, account for 90 percent of the 1.5 million vehicles manufactured in Iran each year, but are in many respects these firms are least prepared for the bumpy road ahead.

Madani, who led the SAIPA for three years during the height of sanctions from 2012 to 2015, warned that dependence on imported raw materials and parts leaves Iranian automakers vulnerable as the economy slides into a recession.

“With the rial weakening, carmakers’ purchasing power has been slashed. The input costs of auto parts industry have also increased significantly,” Madani explained. The rial has lost 70 percent of its value against the US dollar since the current Iranian fiscal began in March, making manufacturing inputs significantly more expensive.

Automakers Face Pricing Squeeze

These costs cannot always be passed onto the consumer. Presently, Iran’s Competition Council retains the power to set prices for many domestic products, including cars that are categorized as affordable, meaning their sticker price is less than IRR 450 million.

Madani believes that even if the state is reluctant to deregulate the auto market at large, authorities must give a green light to the carmakers to increase prices. “The upgraded prices need to be set for each model depending on the share of imported auto parts in its production,” he said.

The price increases are especially crucial for models assembled from imported completely knocked-down (CKD) kits, as these vehicles have a higher foreign parts content than those designed locally. Madani thinks prices for the vehicles assembled from CKD kits should be “at least doubled.”

SAIPA’s most popular model is the entry-level Pride, based on a design from Korean automaker Kia. The Pride is the cheapest car made in Iran. To manufacture each Pride, “it is necessary to import USD 1,500 worth of parts and raw materials,” Madani explained.

But while earlier this year, automakers were receiving foreign exchange at the subsidized rate of IRR 30,000 per dollar, today their currency is purchased through the NIMA system, established by the Central Bank of Iran to coordinate foreign exchange purchases and to track forex transactions involving banks, exchange houses, importers and exporters in real time. Over the last month, the average NIMA rate was IRR 92,304 per dollar.

In Madani’s estimation, looking just to cost of inputs, and ignoring increased overheads facing SAIPA, the price of the Pride needs to be raised by IRR 90 million (USD 600) to bring its sticker price to IRR 320 million (USD 2200).

The official price of the Pride was last raised in June, bringing it to IRR 227 million (USD 1,500). Today, the Pride is regularly selling for IRR 340 million (USD 2,300) in secondary markets, demonstrating the heavy subsidization enforced by the government.

Failing to readjust prices could have dramatic consequences for the auto industry, warned Madani. “If the government does not let carmakers increase prices, they will go bankrupt. Firms will be forced to shut down many production lines and output rates will nosedive,” he said.

Faced with this dilemma, the government will be tempted to throw the automakers a lifeline by providing financial aid and loans. But Madani considers such aid to be a burden for manufacturers, which will struggle to pay back debts in the future.

Uncertain Government Response

In recent weeks, government figures have repeatedly signaled that they are considering giving carmakers the green light to increase car prices. Financial newspaper Donya-e Eqtesad recently reported that industry stakeholders and officials are well aware that the car prices need to be increased, but are afraid of the political cost of such a decision as it will be seen as placing pressure on Iranian consumers.

On October 31, Iran’s newly appointed industry minister, Reza Rahmani, told IRNA, “Automakers are not permitted to change car prices [on their own]. There is a designated legal mechanism for introducing new car prices. No decision has been made yet about changing car prices.”

In the interview, Rahmani also questioned the credibility of the unaudited financial statements reported by the local media, which suggested that Iran Khodro and SAIPA had made losses amounting to IRR 21 trillion (USD 142 million) and IRR 29 trillion (USD 196 million) respectively in just the last six months.

“Iranian automakers are not loss-making. By producing certain models local carmakers may incur losses. However, this is not an issue which cannot be resolved by better management of resources,” the minister countered.

Rahmani revealed that a “specialized task force” had been established in coordination with industry executives “to study the problems which have hindered auto production over the past few months.”

But time is short. “With every day passing carmakers’ loses will further pile up… Automakers should not be forced to foot the bill for subsidizing car prices in Iran,” Madani said.

His assessment is shared by Maziar Beiglou, a board member of the Iran Auto Parts Makers Association. Beiglou recently stated in an interview that the “The situation has been worsening by the day,” pointing to the rising price of inputs such as iron ingots used by companies that produce automotive steel. In Beiglu’s assessment, more than 300 auto parts makers have been forced to stop production.

Total vehicle production in Iran is down 15.1 percent looking to the first half of the current Iranian fiscal year, which began in March. Already, economic headwinds and slowing production have led to mass layoffs.

Sate-owned companies such as Iran Khodro and SAIPA are unlikely to “resort to laying off workers” given the difficult optics for the Iranian government, Madani predicted. But private sector auto parts companies have already been forced to layoff “100,000 to 150,000” workers because of the deteriorating situation.

Photo Credit: IRNA

Iranian Women Face Uphill Battle Toward Equal Pay

In recent months, longstanding social issues Iran have taken a back seat to major economic challenges such as a sliding national currency, rampant corruption, and the return of sanctions. But social inequality has an economic cost too as proven by the gender pay gap and disparity in work opportunities for men and women in Iran.

According to data compiled by IranSalary, the country's first specialized online platform for remunerations, Iranian women earned 27 percent less on average than their male counterparts in the previous Iranian year (ended March 2018). The wage gap has widened in recent years, rising from an average of 23 percent three years ago. 

World Economic Forum's Global Gender Gap Report put Iran at a dismal rank of 140 in 2017, only ahead of Chad, Pakistan, Syria, and Yemen. Iran ranked 108 in 2006 among 115 nations. Iran's worst-performing index in 2017 was "economic participation and opportunity".

IranTalent, a leading jobs website and parent company of IranSalary, began collecting and publishing detailed data on Iran's employment market five years ago. Its statistical sample was initially around 30,000 people and has since grown to over 130,000 in its latest report.

"The thing that really spread in the press and in other circles from the very first year was the income gap," Aseyeh Hatami, the founder of IranTalent and IranSalary told Bourse & Bazaar. "Before that nobody had really examined this issue and hardly any awareness had been promoted around it".

"There are no written laws in Iran saying men have the right to earn more than women," she pointed out, but added that at the same time there are no laws that actively protect women's right for equal remuneration.

IranSalary's figures offer interesting insights into Iran's work environment. For instance, the wage gap increases with seniority. The few women who manage to climb their way up to a management position in a male-dominated system find that they earn as much as 47 percent less than male managers.

According to Hatami, the private sector is responsible for the majority of the gender pay gap in Iran’s labor market. That is not to say, however, that governments have been champions of equal pay. The reason behind their less significant role in widening the pay gap is that they have simply employed fewer women, especially in the higher echelons.

State-run companies are much less equal in dispersing job opportunities—just 25 percent of employees in state enterprises are women. That rate stands at 34 percent and 38 percent among private sector and foreign firms respectively. 

Another useful indicator in IranSalary numbers was the size of companies. Larger companies in Iran contribute to inequality—only 17 percent of their high-ranking managers are women. These companies are reluctant to admit their failure. "Even in our interviews with the big companies they said [the disparity] is not true and the reason behind the disparity is that men mostly earn more through overtime work since they take it on more than women," Hatami said, stressing that their data clearly signals otherwise.

On the other hand, she said figures show that married people are earning more than single workers, mostly since they employ their negotiating powers more.

On the whole, Iran suffers from a lack of transparent and comprehensive data across all its sectors. The job market is no different. IranTalent has managed to establish its reputation by gathering more than one million profiles from employers and employees.

The firm's CEO says it can help women and all jobskeers, leveraging this data to show them their potential professional trajectory in relation to their educational degree. "One major problem is that people don't even know what they can do in the future with the degree they're holding.”

For example, only 40 percent of people studying law actually become attorneys and legal counselors. Knowing that information will help Iranians—both men and women—carve out a better career path, Hatami hopes.

But what can be done to rectify the situation of the gender pay gap? Hatami does not hold out much hope for a major cultural shift both among officials and private sector employers, at least not in the short term. She points out that some hardliners in Iran still say women should not even be allowed to work.

She has felt the sting herself as well. "Most people are surprised the first time they find out the CEO of IranTalent is a woman." But she says she is sure that as women increasingly enter the work field, they bring positive change with them.

"We must work to create a more open and accepting culture that pays better attention to women's potential. But most importantly, women must start believing in themselves and negotiate for higher salaries when they are applying for a job," Hatami said.

She has not mounted an equality program in her company, but says they have managed parity through holding a simple view when taking on employees. For Hatami, "Talent and capabilities have always been central, not gender.”