Iran’s Government Heavily Borrowing From Banks Amid Crisis

Iran International has obtained information that the security organs have advised the government to delay the implementation of its plan to decrease the fuel quota for diesel-powered vehicles until after the death anniversary of Mahsa Amini, who was beaten to death by the hijab police in September 2022. The tragic event ignited months of protests that became the boldest uprising against the regime since its establishment in 1979.

Informed sources told us that the administration of Ebrahim Raisi planned to introduce a tight rationing system aimed at reducing diesel consumption by 25 percent, adding that security officials deemed the possible protests and strikes by truck drivers "dangerous" in the current situation. 

Truckers, who do the heavy lifting of transporting goods mainly to and from Iran’s border areas and ports across the country, have already held several rounds of weeks-long strikes that brought the flow of goods and the supply chain to a grinding halt. Prices of fuel and equipment are already among their numerous grievances amid high inflation, and the regime seems unable to cope with new rounds of union action that can take place. 

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Reza Gheibi, an economic journalist, told Iran International Tuesday that the Raisi administration’s plan to remove subsidies for essential goods last year has already taken its toll on the consumer market, with food prices recording the highest rate of inflation. Earlier in the day, the price of bread in Iran’s northeastern Razavi Khorasan province increased by 40 percent, triggering concerns that a similar price hike will be implemented across the country. 

The regime, which has one of the world's largest oil and gas reserves, sells gasoline and diesel at extremely low, subsidized prices, charging less than 10 US cents for gasoline per gallon, or less than 3 cents per liter, while that of diesel is even 50 percent lower. Second only to Venezuela, Iran has the world’s cheapest gasoline price. 

For years there has been talk of adjusting prices, but since 2018 Iran’s currency has dropped 12-fold and any increase needs to be huge to be meaningful in US dollars. However, fuel price hikes risk fanning the flames of further unrest. Before the regime dares to raise the prices in line with international market rates, it is inching towards decreasing its expenditures on fuel subsidies via curbing consumption, thus the policy of stricter rationing. 

According to Gheibi, changes in the prices or quotas of diesel are even more sensitive than gasoline because of its consequences for the country’s transportation fleet.

The managing director of the National Iranian Oil Refining and Distribution Company said earlier in July that a total of 220 million liters of liquid fuel (gasoline and diesel) are used by the transportation fleet per day in Iran. Jalil Salari added that “If only this consumption volume were to be reduced by 10%, it could be spent on replacing the aging transportation fleet and infrastructure as well as in the oil industry.”

Amid reports of imminent fuel price rises and stricter rationing, the regime has put an unknown number of fuel stations on security alert and is conducting security drills in the middle of the night. 

In November 2019, a government decision to increase fuel prices by 50–200 percent triggered a cycle of protests and unrest across the country that lasted for over two weeks. During this time, at least 1,500 civilians were killed by security forces.

Earlier this year, it started piloting a new plan in a number of small cities according to which citizens are still allowed to buy 60 liters (15.8 US gallons) of gasoline per month at the cheap price of 15,000 rials per liter, or less than 3 US cents. The new plan reportedly caps the premium gasoline at 150 liters (40 gallons) per individual per month. ‌

In addition to extremely low prices that do not encourage saving fuel, Iran also faces gasoline and diesel shortages due to a lack of refining capacity. The low prices also lead to millions of liters of fuel being smuggled out of Iran daily, part of a large-scale global smuggling network. Iran’s heavy subsidies for fuel and electricity cost the country at least $50 billion a year, while the government struggles to secure foreign currencies amid US economic sanctions.

While the country is hugely dependent on revenues from crude oil exports, due to sanctions and mismanagement, it has failed to modernize the energy sector in general, with power shortages most of the year. Systemic corruption also further cripples the weak system.

The situation has been grave in recent years but since the administration of Ebrahim Raisi assumed office in 2021, the entire energy management system is going haywire even faster, drawing backlash from not only the public but even regime officials.

The governors of the province took the decision to increase the prices suddenly leaving locals struggling to make ends meet for their basic provisions. For example, a subsidized traditional bread called Barbari weighing nearly 400 grams, which was previously sold at 8,500 rials or 1.7 USD cents, is now priced at 12,000 rials or 2.4 USD cents per piece.

Ahmad Reza Keshtgar, President of the Bakers' Union in the provincial capital of Mashhad, expressed concerns about the hike, stating that production costs are now too high for the industry to profit.

"While the 40% increase in prices has reduced production costs, bread production is still not profitable,” he said.

He added that even providing bakers with free flour would not render bread production profitable under current circumstances. As sales decline due to higher prices, the industry faces reduced revenue, potentially leading to job losses in bakeries.

The bread industry has been grappling with challenges since last year when the government withdrew subsidies for imported wheat, flour, and other essential items. The higher cost of flour is affecting a wide range of baked goods, including children's snacks, fast food like hamburgers and sandwiches, and traditional noodles.

Keshtgar revealed that the decision to raise bread prices is set to be gradually applied nationwide. There is further concern that this potentially spark another round of anti-regime protests across the country.

Abdolreza Farajirad told Entekhab news website in Tehran that the United States and Iran are exchanging messages through Oman and Qatar and this shows they are discussing deals.

Farajirad referred to US Secretary of State Antony Blinken's July 23 statements about Iran where he said, "it was a terrible mistake for the Trump administration to pull out of the nuclear deal reached with Iran in 2015," and commented that "I did not see any threats in that statement, although Blinken had also made it clear that "US officials are currently not talking about an agreement with their counterparts in Tehran."

The former Iranian diplomat argued that "What he said means that the US side is prepared for negotiations with Iran on the condition that Tehran does not threaten US interests and security in the Middle east."

He continued: "Blinken's remarks were positive. If Qatar and Oman also carry positive messages, this will mean that perhaps we are getting closer to a solution."

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Entekhab wrote that other observers believe there might be a threat hidden in Blinken's statement. In effect, if US concerns about Iranian intentions to build nuclear weapons are not addressed, Washington might toughen its position. 

Faraji Rad however argued that it was a positive point that Blinken was not focused on the nuclear issue in his remarks, although the United States naturally pursues its national interests. 

Meanwhile, in reviewing signals Tehran and Washington have been sending to each other, proreform website Farau wrote: "Governments in Iran, regardless of their political affiliation, find out about the perils of sanctions after holding the presidential office for a few years. That is when rationality becomes prevalent."

The website was referring to hardliners currently controlling all branches of Iran’s government, who were staunchly opposed to the 2015 JCPOA nuclear accord, but now, facing harsh economic realities, realize that they have to find a way to have US sanctions lifted.

According to Fararu, the announcement by the State Department about transferring part of Iran's frozen assets in Iraq to Oman and renewed talks about US prisoners in Iran are positive developments, although some observers assess the removal of pro-Iran Robert Malley from the post of US special envoy for Iran could be a negative development for Tehran. 

Fararu quoted former diplomat Fereydoun Majlesi who disagreed saying that regardless of recent developments, "there is no positive change under way!" Majlesi continued: "No positive change is likely for at least seven to 10 years. What is going on currently, will only increase the pressures on both sides. 

Majlesi added that no positive change of attitude has been observed in Tehran or Washington during the past months to improve relations between the two sides although there have been opportunities for rapprochement."

Another observer, Omid Dabiri-Mehr also told Fararu that the Joint Comprehensive Plan of Action (JCPOA) is no longer on the agendas of the United States and Iran. There is no prospect for a rapprochement although a tendency is visible in Tehran to reduce the tensions with the United States. 

He explained that economic problems including budget deficit and inflation and the destructive role of sanctions have finally made Iran aware of the cost of being at loggerheads with the United States.

Edmundo Novillo Aguilar said that Iranian high-tech drones are capable of monitoring mountainous regions and providing real-time imagery which would greatly aid the Latin American country’s armed forces.

The announcement came amidst rising security concerns in Latin America, triggered by an agreement reached between Iran and Bolivia last week, which has drawn scrutiny from neighboring countries, notably Argentina.

However, Novillio dismissed the Argentinian concerns saying that they are exaggerated and that they might be politically motivated. "The concerns raised by a certain Argentine lawmaker, whom I understand has Israeli origins, are unfounded and appear to be a political show, possibly related to the upcoming elections in Argentina,” he said.

Responding to opposition lawmakers' requests for information on an alleged defense and security memorandum of understanding with Iran during his visit to Tehran, Novillo claimed that no formal memorandum was signed. The minister also refrained from specifying whether the drones would be purchased or provided as a donation.

According to the Institute for the Study of War (ISW) in Washington, Iran has been keen on expanding the number of countries using its drone technology. Venezuela had earlier acknowledged collaborating with Iran in developing drones.

Iran's defense partnerships in the region raise concerns due to its opaque international behavior. Fears include exporting radical ideologies and unconventional arms, potentially interfering in South American affairs, and troubling the US.

Currently the official annual inflation rate is 47.5 percent – the highest rate in Iran for more than 30 years -- but prices for foodstuff are most affected, with the price of cooking oil rising by more than three times annual inflation at 145 percent, and the price of meat also rising by 78 percent over a one year period (point-to-point).

Economist Peyman Molavi told Iranian news website Rouydad24 on Tuesday that if the current status quo persists, the country will face an exponential rise in inflation rates and millions will be affected.

“If the economic growth rate in Iran approaches zero and the money supply (also known as market liquidity) increases more than 36%, the inflation rate will be between 55 to 60 percent,” he said.

He also warned that “if the money supply grows by more than 40 percent per month, and the economic growth is around one to two percent, we may witness an inflation rate of 70 percent.” However, the World Bank estimated Iran’s annual growth rate at 2.7 percent in 2022, mostly based on information it receives from official Iranian sources..

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Such a high rate will have crippling effects on regular citizens. According to a report published by ILNA website in Tehran in January, one-third of the country’s population is now living in extreme poverty, with the number almost doubling from 2020 to 2021. However, it is believed that the real number could be far higher. According to official figures released by Interior Ministry, around 60 percent of Iranians live under the relative poverty line.

"If we fail to address and tackle this situation seriously as part of the Seventh Development Plan, we will soon face a grave crisis in the social well-being of our society," Iranian lawmaker Mohsen Pirhadi said on Monday.

Since the 1940s, Iran has launched 12 plans to build infrastructure, establish key industries, expand public services and education. Five plans were launched under the monarchy until 1979, and seven during the Islamic Republic. Nevertheless, Iran is still considered a developing country, because it economic growth rate has averaged only 2.5 percent during the Islamic Republic.

Pirhadi added that the number of people living below the poverty line in the country has reached nearly 28 million.

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The "poverty line" is a level of income that covers the minimum essential needs of a household, and incomes below the line are referred to as "absolute poverty”. According to Mohammad Bagheri Banai, a lawmaker and member of the parliament’s economic committee, the poverty line for residents of Tehran, is approximately 300,000,000 rials (approx $600) per month, which is three times as much as the minimum wage in Iran.

A leading economist said in May that at least half of Iran lives below the poverty line as the government fails to solve the economic crisis, and a report by the parliament’s research center released in July said the population below the absolute poverty line increased by 30.4% in 2021.

Pirhadi, the deputy head of the parliamentary committee for Iran’s Seventh National Development Plan, stated that the economic decline in the past decade has led to social decline and a rise in financial corruption, drug abuse, and increased migration to large cities.

Over the past decades, there have been several factors hindering Iran's economic development. The revolutionary chaos of the early 1980s, and the Iran-Iraq war that caused hundreds of thousands of casualties, derailed Iran from its modernization trajectory. The Islamic government, built on an anti-Western ideology that engaged in hostage taking and supporting militant groups left the country isolated. And in addition, the inefficiency of successive clerical governments and many years of international sanctions crippled the country's economy.

The remarks by Pirhadi came a few days before the latest report by Iran's Statistics Center -- whose director was sacked by the president earlier in July. Although Iran's Statistics Center is administered and funded by the government and operates under the umbrella of the Planning and Budget Organization, it maintained a veneer of credibility as one of the very scarce sources of both economic and social data. 

The Islamic Republic's authorities are trying to use new definitions and indices for the inflation so that the official figures do not increase to numbers that can create panic in the market. The country’s economy has proven especially vulnerable to sociopolitical developments, such as rumors about a possible revival of the nuclear deal or large labor strikes.