Energy shortages force closure of cement factories in Iran

Macroeconomist Morteza Afqah told Tehran’s Khabar Online news website on Wednesday that “If no agreement is reached, the likelihood of reinstating the ‘maximum pressure’ policy against Iran is high.

"Inflation could surpass 40% by the end of the year. Without the lifting of sanctions, the country appears incapable of managing the economy sustainably.”

Iran’s currency, the rial, has depreciated nearly 20-fold since 2018, when President Donald Trump first imposed "maximum pressure" sanctions on the country. Since September alone, the rial has lost an additional 30% of its value.

The current annual inflation rate is unclear, but official figures have hovered around 40% since 2019, with prices for food and other essentials rising at an even faster pace.

The rial was trading at nearly 800,000 per US dollar on Wednesday and over one million per British pound.

Supreme Leader Ali Khamenei’s administrative chief cleric Mohammad Mohammadi Golpaygani conceded on Wednesday that “We are not in a normal situation in the country. For years, we have been burdened by sanctions, facing difficulties in exporting oil.”

However, he added, “In these circumstances, the nation's power comes with its own challenges. After all, being a Muslim nation has its costs and is not something achieved easily.”

Afqah, in turn, expressed deep pessimism about the economy overall, seeing no reason to be optimistic.

"The short- and even medium-term outlook for our country’s economy is not promising. There isn’t much hopeful news or any so-called good news to cling to. Each individual economic and even non-economic factor is structured in a way that leads to rising costs, higher inflation, and a decline in economic growth rates," he said.

The pressure on Iran’s Islamic government is not just economic but also geopolitical, after its key non-state allies, Hamas and Hezbollah were seriously weakened by Israeli blows earlier this year, followed by the fall of President Bashar al-Assad in Syria.

Iran had invested tens of billions of dollars in keeping Assad in power against his domestic opponents, but in a matter of days, the armed opposition swept through the country, capturing Damascus and deposing the long-serving authoritarian president, who fled to Russia.

The incoming Trump administration has signaled that it is inclined to increase the pressure, not just to rein in Tehran’s nuclear program, but more likely to inhibit its power projections throughout the Middle East.

"The government's goal in raising the official exchange rate from 550,000 to approximately 640,000 rials per dollar was to sell the $5 billion it had taken from the National Development Fund at the highest price and, which means earning about 1 quadrillion rials from people's pockets," Hossein Samsami was quoted by Tasnim news agency as saying.

However, the Islamic Republic faces real economic pitfalls that have devastated the currency in the past 45 years. From a high of 70 rials for each US dollar in 1978, the currency was trading close to 800,000 per one dollar on Wednesday in Tehran's free market. In addition to its usual weaknesses, the economy has been hit hard with US sanctions since 2018.

In Iran's heavily state-controlled economy, the government has historically dominated foreign currency supply and import controls. Since 2012, when international sanctions triggered a sharp devaluation of the Iranian rial, the government has struggled to keep essential imports affordable.

To manage this, it implemented a multiple exchange rate system, which has become a breeding ground for corruption. Insiders with government-granted privileges, such as import-export licenses, have profited from the difference between the lower official exchange rate and the higher free market rate.

For example, the exchange rate of the dollar in the free market was nearly 800,000 rials per US dollar on Wednesday but the government-sanctioned rate was about 650,000 rials.

A portion of Iran's imports, such as medicine, is currently done using the government-subsidized rate of around 285,000 rials per US dollar, while other imports, like food, are conducted at different rates such as the "NIMA" system, which was about 500,000 rials per dollar until President Masoud Pezeshkian’s government raised it earlier this month. The move was justified as one step towards a unified rate to curb corruption.

Samsami’s accusation suggests the government is prioritizing short-term revenue generation over long-term economic stability and public welfare. He argued that simply unifying the exchange rate—the stated policy goal—will be ineffective without addressing deeper systemic issues.

"The policy of unifying the exchange rate," he emphasized, "will not be successful without implementing its requirements, such as implementing the law on combating smuggling of goods and currency, combating money laundering, and capital flight."

Samsami also challenged the claim that the exchange rates, designed to subsidize essential goods, are not reaching their intended beneficiaries.

However, he acknowledged the complexities of the system, noting that domestically produced goods, such as chicken, are still vulnerable to price increases.

"Domestically produced chicken, one-third of whose costs are covered by the 285,000-rial exchange rate and two-thirds by the NIMA and free market exchange rates, will see its production costs increase if the Nima and free market exchange rates rise,” Samsami explained.

He concluded with a stark warning about the inflationary consequences of the government's currency policy.

"With the government's jump in the official exchange rate, we will witness a wave of inflation in the next two to three months," he predicted. This prediction aligns with economic principles that link currency devaluation to rising import costs and broader price increases.

New data from the Central Bank of Iran (CBI) reveals that the country's GDP growth has slowed since the beginning of 2024. During the summer, GDP growth stood at 2.7%, which is half of the 2023 growth rate.

The GDP growth rate has fallen across all sectors except agriculture. However, calculations by Iran International indicate that the Central Bank's figures are overly optimistic and, in some cases, manipulated.

For instance, while Iran's Statistical Center and the Research Center of the Parliament reported a 1% decline in the industrial and mining sector's share of the GDP during the summer due to repeated power outages, the Central Bank claims a 1.7% economic growth in this sector during the same period.

The industrial sector is important for Iran’s economy, as part of it is based on or related to oil-related sectors and accounts for around 15% of Iran's GDP and employs around a third of the country's 25 million workers.

Another example is the agriculture sector. According to the Statistical Center of Iran, this sector's output has been in decline since 2021 and the share of employment in the sector declined by 1% this summer, reaching 14.5%.

Yet, despite worsening droughts and widespread power outages, the Central Bank claims a 2.8% growth in agriculture during the summer.

The International Monetary Fund (IMF) previously predicted that Iran's economic growth would decline from this year until 2028, eventually reaching 2%.

Oil: The driving force of economic growth
In the last two years of Donald Trump's presidency (2018-2020), Iran faced negative economic growth due to US sanctions. However, with the Biden administration's policy of appeasement toward the Iranian government, Iran's economic growth turned positive again.

Details from the Central Bank's statistics show that the driving force behind Iran's economic growth over the past 3-4 years has been the oil sector. During this period, Iran's oil exports quintupled, reaching 1.6 million barrels per day in 2024 in average.

Iran exports 40% of its oil and gas condensate output, and the growth in this sector has had a significant impact on boosting the country’s economic growth.

It remains unclear how Iran’s economic growth will fare considering a sharp drop in oil exports this fall and the anticipated start of Donald Trump’s administration, which has promised to revive the "maximum pressure" campaign against Iran. Data from oil tracking companies such as Kpler and Vortexa indicate a 500,000-barrel-per-day decline in Iran's oil exports since October.

At the same time, the head of Iran's Agricultural Guilds Chamber recently reported a 30% reduction in autumn crop planting, and an official mentioned a 20% damage to poultry farms due to power outages in autumn.

This fall, in addition to power cuts, Iran has drastically reduced gas supplies to industries, exacerbating the recession in these sectors.

A Look at key economic indicators for Iran in 2024
The year 2024 has brought significant challenges for Iran, including severe electricity and gas shortages, a sharp depreciation of the rial, two direct confrontations with Israel, weakening of its regional proxy groups and the fall of Bashar al-Assad's regime in Syria as well as the end of Joe Biden's presidency.

This summer, Iran faced a 25% electricity deficit, which has been continuing in autumn due to gas shortage. In fall, the daily gas shortage peaked at 30% of the country's gas demand.This seriously impacts industries, particularly the steel sector, which has witnessed a 46% decline this year.

Since the beginning of 2024, the US dollar's value in Iran has surged by 60%, and inflation, even according to official estimates, has exceeded 32%. Over the past six years, Iran has consistently ranked among the ten countries with the highest inflation rates.

Official statistics show that despite the addition of 5 million people to Iran’s population since 2018, when US sanctions were reintroduced, the number of employed individuals has only increased by 300,000 to 25.1 million.

Poverty rates in Iran have also risen during this period. Even according to the Islamic Republic's official statistics, about 28% of Iran’s population was below the poverty line in 2018. Now, this figure has climbed to 33%, with some parliamentarians, experts, and domestic media outlets claiming the real number exceeds 50%.

One of the few positive aspects of Iran's economy is the increase in oil exports to China. Data from Kpler and Vortexa shows that Iran's average daily oil exports in 2024 stood at approximately 1.6 million barrels in average, 34% higher than in 2023 and almost double the 2022 levels, but the figure plunged to 1.3 mb/d in November.

Iran’s economic vows will worsen if Donald Trump acts upon his threats to reduce Tehran’s oil exports to China, which provided close to $40 billion in revenues until this fall.

The head of the Isfahan Chamber of Commerce, Amir Kashani, told Bourse Press earlier this month that he estimates a total annual loss to the steel industry at around $4 billion.

In an interview with state television last week, an official of Abbas Abad Industrial Compound in the southeast of Tehran said the industries based in the compound are facing power cuts of up to 14 hours a day.

The industrial area is home to dozens of factories producing electronic and household appliances, car parts, plastic, and dairy products.

Mohsen Zabihi, the coordination deputy of TAVANIR, Iran's government-owned energy company, said on December 15 that low winter temperatures and the increase in domestic gas use have caused serious shortages in the supply of fuel to power plants, particularly in the northern areas of the country.

He announced that all industrial units have been informed that they must reduce their electricity consumption by 50 percent from 6am to 5pm, by 90 percent between 5pm to 12am, and by 70 percent until 6am the next day.

The continued disruption to production is putting many workers in danger of losing their jobs. In an unusually candid admission, Chief Justice Gholamhossein Mohseni-Ejei said on Monday that production companies are facing serious issues including cash flow problems and inability to pay the workforce due to power shortages.

Producers say power cuts are damaging their machinery and products, particularly food with poultry farmers reporting extensive deaths of young chickens, and dairy producers' products saying their products are spoiling during power cuts.

With the drastic deterioration of the economy in the past few years, workers’ strikes to protest low wages and long delays in the payment of their salaries have become more common.

If the situation worsens, the risk of protests looks increasingly high, with Mohseni-Ejei briefing security and intelligence officials to ready for such unrest, reminiscent of the nationwide protests of 2019.

Around 80 percent of Iran's electricity is produced from fuel. Officials say the private sector owns around 65 percent of fuel power plants.

However, many companies described as private are owned fully or partially by various state entities such as Bonyad-e Shahid, Bonyad-e Mostazafan, and government-owned banks such as Bank Sepah.

As in most other sectors, there is no transparency in data on electricity production, profits, and losses of fuel power plants but experts say they have been consistently accumulating huge losses since 2018 for various reasons including the government’s strict control of prices and failure to pay its debts to them.

Iran's minister of energy, Abbas Aliabadi, recently told reporters that "a considerable number" of organizations or individuals have been putting strain on the grid due to illegal Bitcoin mining. However, this includes state bodies such as the Revolutionary Guards (IRGC), the burden only adding to existing issues such as the dilapidation of power plants and the government's failure to store enough fuel for running them in the winter.

On Monday, the head of Iran’s judiciary instructed the Attorney General and provincial prosecutors to coordinate with intelligence, security, and law enforcement agencies to prevent unrest, sensing widespread public dissatisfaction over power and gas outages.

Speaking during a meeting of the Supreme Judicial Council, Gholam-Hossein Mohseni Ejei stated, “The Attorney General and prosecutors across the country, in direct cooperation with the intelligence, security, and law enforcement agencies, should take all appropriate measures and arrangements to stabilize and strengthen the security of the people and citizens, and, as in the past, and even with greater firmness, take the relevant measures so that the enemy's conspiracy to create insecurity…is neutralized."

Ejei, widely recognized as one of Iran’s most prominent human rights violators, warned President Masoud Pezeshkian's administration that the recent wave of nationwide shutdowns caused by air pollution and the government’s failure to meet energy demands could spell unrest. People are struggling to heat their homes in the bitter cold while the cost of living is soaring amid the worst economic recession in the Islamic Republic's history.

The government is bracing itself for action reminiscent of the 2019 and 2022 protests in which hundreds of Iranians were killed by security forces and tens of thousands were arrested.

Facing a 30% shortfall in natural gas supplies from its Persian Gulf fields, the Iranian government has turned to burning the highly polluting heavy oil mazut, shrouding Tehran and other cities in dense smog.

Years of under-investment in the energy sector, exasperated by technology sanctions by the West, has pushed Iran into a downward spiral in natural gas production.

Gas pressure is falling in its main production field in the Persian Gulf that it shares with Qatar. Only the largest Western oil companies have the technological capability to remedy the situation.

The Pezeshkian government has limited options to address the crisis, apart from a complete overhaul of the country’s foreign policy and opening its economy to global engagement.

The latest wave of economic and public sector shutdowns, which began on December 9, has led to widespread closures of schools, universities, and government offices across many provinces.

The electricity and fuel crisis, combined with a sharp decline in the national currency’s value since September, has fueled an increasingly volatile public mood.

Iranians are facing daily price hikes while also witnessing a series of regional setbacks for the government. The most unexpected blow was the rapid overthrow of President Bashar al-Assad, which forced Iranian forces to retreat from Syria, reportedly with Russian assistance.

Recent statements saying that the government is in touch with Syria's new ruling parties reflects possible concern about the perception of its diminishing authority and credibility among the population, both following the debacle in Syria and the deteriorating economic conditions at home.

On Sunday, Supreme Leader Ali Khamenei delivered a speech warning that those within Iran who align themselves with foreign powers, particularly the United States, would face severe consequences.

During the 2022 protests, triggered by the death in police custody of Mahsa Amini, arrested for not wearing her hijab properly, Khamenei blamed the US and foreign powers of having stoked the fires of protests.

"The fools smell the scent of kebab," Khamenei said on Sunday, using a metaphor to describe what he sees as misguided ambitions from those seeking to overthrow the Islamic Republic. "Anyone inside the country who chooses to serve the Americans, the Iranian people will trample them underfoot."