IMF loan request exposes severity of Iran’s financial crisis

After the International Monetary Fund (IMF) announced that it was dedicating $50 billion to combat the global coronavirus pandemic, Iran’s regime, via its central bank and Foreign Minister Mohammed Javad Zarif, last week requested a $5 billion emergency loan — 10 percent of the total sum allocated by the IMF to fight the disease worldwide.

Since the 1979 revolution, Iran has never asked the IMF for help and has criticized it and other international financial organizations such as the World Bank for ideological reasons.

In order to understand why Iran has sought the IMF’s help, it is imperative to understand the current economic situation in Iran, which could be described as the most dangerous economic crisis in the country since the regime’s war with Iraq in the 1980s.

Since 2018, the Trump administration has tightened sanctions on Iran, resulting in the country experiencing a severe economic recession. A 40 percent inflation rate has led to a steep decline in consumer purchasing power and worsened socioeconomic conditions. This is in addition to an increasing budget deficit due to plummeting oil exports and a sharp decline in tax collection and foreign trade.

It is evident that the Iranian government was already struggling before the coronavirus, whose outbreak has aggravated Iran’s existing economic woes. The coronavirus has led to a collapse in Iran’s hard currency income, with the country’s tourism sector coming to a halt and cross-border trade between Iran and neighboring nations, including Iraq, being suspended. Also, the dollar exchange rate rose to 15,500 tomans to the dollar — a 16 percent increase when compared to the past two months.

So, what are the possible reasons as to why Iran has changed its policy of not seeking help from the IMF?

The economic situation in Iran has reached a very dangerous level, with the country unable to withdraw the $5 billion it needs from its National Development Fund (NDF). Today, the NDF’s reserves are unknown, despite standing at $80 billion two years ago. It is believed that the Iranian government has exhausted the NDF’s reserves in order to finance the country’s ever-increasing military expenditure and plug the gap in the budget deficit. Despite this, Iran posted foreign exchange reserves of up to $70 billion at the beginning of this year. However, there is a strong possibility that Iran’s foreign exchange reserves have since declined to such an extent that Tehran has been forced to seek help from the IMF. If this is correct, Iran’s economic situation has reached a perilous state, requiring the regime’s decision-makers to act immediately to change the status quo or face imminent economic collapse.

It is highly likely that part of any IMF loan would go toward treating infected foreign fighters, even at a time when Iran is unable to help itself

Dr. Mohammed Al-Sulami

For Iran, the situation is a bit more complicated because combating the coronavirus may not be confined to its borders, with treatment possibly extending to the regime’s proxies in Iraq, Lebanon and Syria, as reports indicate that the virus has spread among them. Therefore, it is highly likely that part of any IMF loan would go toward treating infected foreign fighters, even at a time when Iran is unable to help itself.

Although the cost of combating the coronavirus is unknown, the budget allocations announced by countries such as the US and Italy — Italy alone has put aside $28.3 billion — to confront it indicate the vast sum that is needed. These budget allocations suggest that Iran’s regime has been forced to reverse its policy of not seeking help from the IMF due to its dire economic situation.

Perhaps it would be more useful for the Iranian people and neighboring states if the IMF supplied medicine and medical equipment instead of agreeing to a $5 billion loan. This would ensure that no money is diverted to financing Iran’s regional projects, ballistic missile/nuclear program, or treat its infected fighters across the region.

The Iranian government seeking help from the IMF is a significant change in its policy of not approaching international financial organizations, with its external debts currently standing at $5 billion. Iran has taken loans from friendly states such as Russia.

Iran is well skilled in covering up its financial realities, but the coronavirus variable has exposed a severe economic crisis at home due to the regime’s incompetent leadership and management.

• Dr. Mohammed Al-Sulami is Head of the International Institute for Iranian Studies (Rasanah). Twitter: @mohalsulami