Iran Economy NewsIran’s mafia-controlled economy

Iran’s mafia-controlled economy

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From 2019 until the present day, the ‘capital depreciation rate’ has overtaken the ‘capital formation rate’ in the Iranian economy and negative capital stock growth has been reported.

According to the Iranian regime’s economic experts, this is set to become even more concerning because the regime’s weak and crisis-ridden economy is at its worst point in the past four decades. This is a clear indication that even positive progress in favor of the regime during the ongoing nuclear talks will be of no help to rescue it from an economic collapse.

Estimates have shown that between 2005 and 2020, around 171 billion dollars’ worth of capital has left the country. In fact, on average, about $11.4 billion per year, equivalent to about 342 trillion tomans, has left the Iranian economy annually.

On the other hand, the negation of the ‘capital formation rate’ (for the third year in a row) is correlated with the ‘capital flight’ from the Iranian economy.

This has created a hopeless situation for the regime. When the very few remaining foreign investors see the current state of the economy, they estimate the future rate of return on capital and conclude that their investments will have no returns. They will eventually withdraw their capital from the country. The result of this will be a drop in the ‘rate of capital formation.’

When the ‘capital formation rate’ becomes negative, less investment is made in the economy. Thus, considering the depreciation of previous investments, less capital would be available the year after to produce goods and services.

The result is clear: Along with the growth of liquidity, the production of goods and the provision of services will not grow and become negative, meaning inflation will peak. If the decline in the ‘rate of capital formation’ continues, the regime’s economy will gradually go downhill. A gradual death that will blow all the regime’s hopes and dreams away.

Another reason for this situation is that even after four decades, the regime’s economy is still in the category of a single commodity economy.

The regime’s economy is still dependent on the export of oil, steel, petrochemicals, and several mineral exports. Simply put, its economy is not yet diversified, and crude and general classification accounts for almost 80 percent of Iran’s exports. For this reason, the regime’s economy can still be considered a single commodity economy.

One of the characteristics of single commodity economies is the government’s control over the trade of a few products. The government and certain state-affiliated institutions control the production and export of these products. On the one hand, it is much easier to impose sanctions on the country while for example, it exports 50 products instead of 500, and on the other hand internally, 50 exporters will inject dollars into the economy instead of 500 exporters, which is creating a quasi-mafia economy.

At the same time, since the regime is run by a few large institutions, these institutions are in control of the exchange rate in the domestic market. When imports are profitable, they keep the exchange rate low to have the highest sales and when exports are profitable, they raise the exchange rate so that these groups get the highest profit.

Real private sector investors and ordinary people are, in fact, out of the trend and have no stake in this big game. As a result, a certain supply chain takes shape. The result of this chain is that, instead of having multiple players in the market, none of which can have an absolute impact, the country’s economy is given to only a few regime-managed institutions and only a few ‘economic blocs’ are formed.

The regime’s institutions are responsible for catastrophes such as ‘hoarding’, ‘smuggling’, and the like. These institutions usually take the capital out of the economy after they have filled their pockets with the people’s money and invest it in a safe place like the banks of Switzerland, or real estate in Europe and Canada.

What is worse is that the regime’s legal system is enabling this corruption. According to its economic and legal experts, the prosecution of owners of the capital taken out of the country is nearly impossible and the regime has so far prosecuted just a few small players, leaving the large actors untouched.

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