Sanctions and their Toll – How has Iran Fared?
Across the globe, the news has spread – there could soon be a new market in town.
Since agreeing on a framework for the easing of sanctions, world powers have indicated that Iran could soon be open for business. The implications here are myriad – foreign direct investment could spike, competition could go from local to international and Iranian consumers could soon find themselves spoiled for choice at the nearby grocery store. Yet the question of how much damage the sanctions have actually caused still remains, as politicians and economists alike argue the extent to which Iran was affected. Regardless of the debate’s semantics, the numbers paint a fairly clear picture of the sanctions’ toll on the Iranian economy.
The effect on the consumer is readable and more pronounced by the day. Currency woes have stifled purchasing power, dampening growth prospects for several industries. Specifically, between 2009 and 2014, the Iranian Rial has increased in value versus the US Dollar by 162.5%. Furthermore, this ratio is set to further depreciate the currency by 86.7% between 2015 and 2019.
The consumer is further weighed down by inflationary pressures, which have taken hold of the market ever since sanctions had been implemented. Price growth reached deleterious levels between 2009 and 2013, where it averaged 22.2% and peaked at 39.5% in 2014. This rate is projected to average 19.5% in the near term between 2014 and 2019, further contributing to the decrease in Iranian purchasing power.
This reduced spending power has also had its effect on the savings ratio – the weaker the currency and the higher the inflation, the more cash consumers will need to spend, leaving them with generally lower savings. The savings ratio has decreased from 36.5% of disposable income in 2009 to 32.7% of disposable income in 2014, and is set to go down to 28.6% in 2019. Correspondingly, annual disposable incomes have witnessed stagnation in growth prospects. Between 2009 and 2014, annual disposable income has expanded by 204.2%, or a compound annual growth rate of 24.9%. This expansion is set to drop substantially to a compound annual growth rate of 0.98% – economic pressures and the increasingly noxious presence of sanctions have contributed to this decline.
All of these factors have manifested into a heavy weight on the average consumer’s shoulders, in terms of both day-to-day purchases as well as big ticket items. While the economic consequences on the demand side are incontrovertible, market participants on the supply side have also been affected in a number of ways.
Although the weaker currency has made Iranian products more attractive to foreign buyers, trade sanctions have muted the majority of trade activity between Iran and exports. Exports reached a level of US$ 147.2 billion in 2011, but subsequently experienced a steep decline of 37.6% to US$ 91.8 billion by 2013, with crude oil bearing a substantial portion of the drop. Exporters looking to tap into the Iranian market have taken alternative routes, mainly re-exporting their products from trade hubs such as Turkey and the United Arab Emirates. This trend, however, is not enough to offset the significant losses being experienced by the lack of trade activity.
Foreign direct investment has also been inhibited – FDI inflows underwent a contraction of 0.9% between 2012 and 2013. This absence of external capital has impacted numerous industries by nearly paralyzing foreign competition as well as suppressing potential growth prospects for local players. Retailing, for example, without foreign investment, is at a disadvantage both for retailers and consumers alike. The retailing market in Iran is a predominantly traditional one – approximately 99.8% of grocery retail outlets, for example, are of a traditional model. The lack of foreign investment has impeded major hypermarket and supermarket chains from penetrating the market. This is despite the fact that consumers are searching for the convenience factor that these types of outlets offer – primarily a one-stop-shop for a multitude of household items.
The foreign product ban notwithstanding, international brands have still managed to find their way into the Iranian market. These products, however, often come at a significant mark-up via backdoor channels, such as the thriving grey market currently taking place in Iran. In 2012, the Huffington Post reported that it is possible in Iran to “check your emails on an iPhone, sip a Coke and hit the gym in a pair of Nikes.” The availability of these brands highlights their demand in the market, and only bodes well for the future prospects of international manufacturers. Once the sanctions are phased out, this grey market for foreign brands will follow suit, reestablishing the market’s legitimacy.
Regardless of the sanctions’ weight on the economy and the consumer, the Iranian market has thus far proven itself to be more robust than expected. Rather than buckling under the pressure of a financial and economic blockade, a number of key indicators have remained relatively afloat, albeit at a lower growth rate than expected. Once the economy opens up, Iranians are not the only ones poised to benefit – foreign manufacturers, distributors and retailers will all ride this potential wave of growth. For now, however, the world awaits a solution.