Covid-19 and the Socioeconomic Ordeals in Iran

ECONOMYOPINION 01.06.2020
Murat Aslan Deputy Director/Coordinator of Economy
Yasir Rashid Assistant, Economy

Although Rouhani’s recent financial package is noteworthy, without reducing the geopolitical risks and addressing the structural problems in Iran, the package can only buy some time.

The spread of the Corona epidemic has severely affected the global economy in recent months. The pervasive economic conditions first hit the retail sector and also struck the labor markets in several countries located in the Northern hemisphere, particularly the US and the EU. To slowdown the spread of the outbreak, many countries across the world have implemented different measures with various intensity levels including; closing schools, shutting down universities, closing public spaces like restaurants, coffee houses, sports clubs, sport-games, and administering total lockdown and/or curfew. The mitigation strategy or the stringent measures executed by several countries seem to have led to devastating effects on the global economy this year. Above all, some experts have set forth that they anticipate that the economic crisis may last longer than some may think. For example, according to a recent report by the IMF, the global economy is expected to contract by 3%.

Iran has also suffered greatly from this outbreak. Since the Parliamentary elections, both the number of positive cases and the fatality rates have risen steadily. Although during the initial days of the outbreak the Iranian government enacted tranquil and did not take any measures to mitigate the crisis, particularly after the new years (or Newroz) holiday ended, the Iranian government started to act fast and implemented some forms of preventive measures.

The Root-cause of the Socioeconomic Problems: Unemployment

During the peak of the outbreak in April, the spokesperson of the government, Ali Rabiei, warned millions that they were at risk of facing unemployment and dismissal. According to him, more than 3.3 million official and 4 million unofficial employees are facing wage cuts or dismissal, and 1.5 million workshops have been closed. In an interview, the Deputy Minister of the Ministry of Cooperatives, Labor, and Social Welfare warned that due to a substantial reduction in operations of a large number of companies, more than 4.8 million people are at risk of losing their jobs. Based on the official data, the deputy revealed that the number of firms shutting down their operations during the outbreak have accounted for 20% of the total employment.

According to the results of a survey study, conducted by Imam Sadiq University, in relation to the beginning of the outbreak, 65% of the economic enterprises declared that they cut back their production, while only 4% stated that their activities increased. According to an another survey study by ISPA (Iranian Student Opinion Polling Center) in Tehran, about 70% of the respondents said that their household incomes had declined, due to the unfavorable effects of the coronavirus on the economy.

The Financial Package of the Government for COVID-19

 After the Newroz break, the Rouhani government initiated extraordinary measures to protect workers from being unemployed, rescue firms from financial hardship and bankruptcy, and dilute socio-economic tensions which have escalated since May 2018.

The Rouhani government allocated about 100 billion tomans to ease the adverse effects of the outbreak. About 25% of the package is directly issued towards the treatment of the outbreak, which includes additional payments to health workers, medicine supplies, and medical equipment.

For the sake of alleviating the harmful effects of the corona outbreak on the labor market, the government has prompted to bolster up the unemployment insurance scheme that was introduced in 1990. The government deposited an additional fund, amounting to 12,6 billion tomans (about 360 million US$ with the official exchange rate) to the Unemployment Insurance Fund. As of mid-May 2020, close to 821,000 people have filed for unemployment and according to official statistics, about 700,000 of them were found eligible for the benefits. The unemployment insurance system offers multiple payment systems. For those individuals with unemployment insurance, the amount of payment for a particular beneficiary is determined by conventional factors, such as: each individual’s level of salary before being unemployed, the number of years he/she had contributed to the unemployment insurance before being laid off, the number of years he/she was employed for, and etc. For those individuals without unemployment insurance, the scheme distinguishes a four-tier payment system ranging from 200,000 to 600,000 tomans. A specific tier that a beneficiary falls into is determined by the number of persons in his/her household.

The second part of the package is the “transfer payments and loans”, compromising of a total fund of 75,000 billion tomans. The “transfer payments and loan” package targets two actors: (1) the general public and poor households (23,000 billion tomans), and (2) businesses that suffer the most from the outbreak (52,000 billion tomans).

After the onset of the economic sanctions, the Iranian economy has deteriorated and the outbreak has further worsened the situation at hand. The economic hardship has a significant potential to cause social unrest in the country. The overwhelming effects of the sanctions have caused substantial pressure to build-up in the Iranian society. The protests in November, 2019 ignited from the 200% rise in petroleum prices was interpreted as a serious signal for the political and state elites. The outbreak may further intensify the socio-economic tensions. Iran is stuck in triple pressures, which stems from; the sanctions, the outbreak, and the oil price shock and still there are almost no positive signals that give hope to the Iranian people. The elites in the upper echelon are well aware of the security risks stemming from the socioeconomic hardships. Because of these risks, the Majlis Research Center warned the Rouhani government about “the delay” in supporting low-income groups and also pointed out that these risks may harm the social cohesion and peace. In addition to the unemployment scheme, the Rouhani government granted large funds amounting from 23 billion tomans to the general public and to the subsidy recipients (poor families).

The second part of this sub-package targets the sectors that have been hit the hardest by the outbreak. The package enumerates 10 sectors: (1) Food production and distribution, (2) the tourism industry, (3) public transport (intra-city and suburban), (4) clothing, (5) bags, (6) shoes, (7) confectionery, (8) sports, (9) cultural and media, and (10) handcrafts. According to the package, the firms operating in these sectors will be provided a low-interest loan with 12% yearly interest rate.

In addition, the government provided a one million tomans loan in the form of Qardh al-hasan (benevolent lending / interest-free loan) for all subsidy recipients, regardless of employment or unemployment. The repayment period of this loan is 30 months (about 35 thousand tomans per month). This loan is designed for 23 million citizens.

The Iranian economy has been in a dire condition for the last two years. 2020 is a bad year for many countries, including Iran. Iran puts forth a fight in several interrelated fields, including in: the sanctions, the outbreak, the oil-prices, and the geopolitical tensions with the US and some Gulf countries. The current outbreak has caused overwhelming disturbance in Iran, which was already surrounded by mountainous problems. As in other countries, negative implications of the outbreak are enormous and to ease the economic and socioeconomic consequences of the outbreak the Rouhani government promoted a financial package with the size of 100 billion tomans. The scope and size of the package is remarkable, but we believe that without reducing the geopolitical risks and structural problems in Iran, the financial package may buy some time for Iran, but the negative course we have observed in both the economic and the societal fields will not be reversed.

COVID-19, financial package, unemployment, economy, Iran

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