Sanctions relief has done little to solve Iran’s unemployment problem. Who is to blame?
In Tehran, exiting a cab used to take nearly as long as the journey itself. No longer: with the arrival of Snapp, Iran's answer to Uber, pre-agreed fares are paid instantly via a registered credit card, sparing travellers tortuous negotiations with their driver. But the start-up is driving efficiency gains in other ways. For a few lucky graduates, it can potentially cut short another drawn-out process: their search for a first job in a society where youth unemployment stands at 25%.
Thanks to a recent infrastructure push by the country's telecom giants, the app economy has become one of Iran's most dynamic employment hubs. Yet the sector remains a rare breed: despite a rebound since last year's nuclear deal, the job market remains frozen. While the nation's GDP was projected to rise 4.5% in 2016 – compared to 0.4% in 2015 – the unemployment rate jumped from 10.7% to 12.2% in the six months to June. Underemployment, at 9.5%, is also rife.
Some culprits are easy to identify. Iran's rebound owes much to a boom in oil exports, which at 2.2m barrels per day in October were at their highest in seven years. More labour-intensive sectors, such as carmaking, have been slower to recover. Remaining sanctions loom large: dollar trades with the Islamic Republic are still restricted and domestic businesses are struggling to import inputs. The threat of hefty fines also makes foreign investors nervous; so does Donald Trump's pledge to scrap the nuclear deal once in the Oval Office.
But Iran's private sector woes have a deeper cause: its tottering financial system. In 2012, after EU sanctions came into effect, the rial's precipitous fall pushed inflation to more than 30%. Eager to avoid a popular backlash, the government kept suppressing interest rates to about 12%; it also strong-armed financiers into backing state champions it could no longer sponsor, says Hadi Esfahani, a professor of economics at the University of Illinois and a board member of the International Iranian Economic Association. Unable to pay attractive interest on deposits while remaining solvent, banks started looking for high-yielding investments.
That led them to plough money into real estate. Seen as a hedge against inflation, the sector was booming. Banks jumped on bandwagon by opening new branches in affluent neighbourhoods. Yet property prices have stagnated since the reformist government of Hassan Rouhani, through fiscal and monetary rectitude, brought inflation down to single digits. Many sanction-era loans have also soured: non-performing assets officially represent 12% of lenders' total. Burdened balance sheets now leave little room for banks to extend new credit.
Corporations, the traditional engine of job creation, are bearing the brunt of the financing squeeze: while bank lending to the public sector grew 25% in the year to July, private businesses could only secure a 15% rise. Many structural issues, including red tape and corruption, also tie them down. These will take long to fix. But Iran's jobless, who were promised swift progress, are beginning to wonder whether they've not been taken for a ride. Mr Rouhani should start oiling the wheels by putting banks back on track.
Further reading: I wrote a broader article about the Iranian economy for The Economist last month. You can read it here