Iran's Economy in Serious Trouble

Investor's Business Daily - Yahoo News:

Tuesday April 4, 7:00 pm ET

Axis Of Evil: Our best weapon against an increasingly bellicose Iran may be its new hard-line leader, who is scaring off foreign investors and sinking the economy. President Mahmoud Ahmadinejad, who has vowed to "wipe Israel off the map," needs steady capital to maintain his ambitious nuclear program.

Yet Iran's economy is in serious trouble, in spite of its huge oil revenues. And the Iranian people, suffering from crushing unemployment and inflation, may soon grow weary of his regime sacrificing their butter for guns.

The U.N. should take heed. Imposing economic sanctions against Tehran would further isolate it and perhaps build enough internal pressure to force Tehran to comply with international demands to stop uranium enrichment.

Since Ahmadinejad's election last year, there has been a massive flight of capital from Iran. Many investors are nervous about the showdown over the country's nuclear program and have chosen to reinvest their funds in more stable markets such as nearby United Arab Emirates.

Thousands of companies owned by Iranians are now operating in Dubai and elsewhere outside of Iran. Even the normally active real estate market in Tehran has softened. The Hoover Institution estimates that more than $200 billion has already left Iran. Tehran, desperate for capital, began withdrawing assets from European banks earlier this year.

The nuclear crisis isn't the only thing on investors' minds. They're also worried about Ahmadinejad's anti-market policies.

For one, he's stopped cold previous reforms to privatize Iran's economy. Tehran already runs roughly 80% of the economy, and Ahmadinejad has redirected investments to the public sector. His first budget, approved by the Iranian parliament last month, ramps up government spending by 25%.

Private banking is in a severe crisis, according to Hoover. Since the president decreed banks should be a monopoly of the state, Tehran has been lowering interest rates. There are fears that inflation, already at 14%, could skyrocket.

It's said that Ahmadinejad wants to outlaw interest altogether to comply with Islamic law barring usury. Some orthodox bank managers have already announced a moratorium on lending.

The president has also suggested the stock market is a form of gambling and also is "un-Islamic." Not surprisingly, Iran's stock index has surrendered nearly a quarter of its value since Ahmadinejad was elected last June.

Iran's chronically high unemployment has only worsened under Ahmadinejad. It now stands at a staggering 30%. Fully 70% of the Iranian population is under the age of 29, and they have borne the brunt of the jobs crunch. In a recent survey by the state-run National Youth Organization, young people cited joblessness as one of the top problems they face. Their prospects are so grim that 55% of Iranian youth have contemplated suicide at least once, the study found.

This is a potential powder keg of discontent that could turn against the ruling regime. Economic sanctions, including restrictions on travel, could provide the match that sets off civil unrest.

Average Iranians would ultimately blame Ahmadinejad and the mullahs for their worsened plight. If things get bad enough, students might decide to revolt as they did in the 1970s -- only this time they might choose Western-style reforms.

Washington should pressure holdout members Russia and China of the U.N. Security Council to get on board sanctions. Domestic support will surely wane for Ahmadinejad's regime and its saber rattling, especially since its domestic policies are already hurting the economy and the Iranian people.