Iran’s economic challenges after election

It is too early to read what happens next but it appears Rohani and the Iranian economy have become beholden to issues beyond their control.

Uncertainties. An Iranian dealer checks the stock prices next to stock market activity board at the stock exchange in Tehran. (AFP)


2017/06/18 Issue: 111 Page: 21


The Arab Weekly
Sabahat Khan



Dubai - When Hassan Ro­hani took office as Iranian president just more than four years ago, there was widespread sentiment the coun­try’s economy was heading for the bad times. Firebrand President Mahmoud Ahmadinejad had styled his time in office with defiance with the West and Iran’s internation­ally sanctioned nuclear programme combined unhelpfully with a loose monetary policy to over-stretch the Iranian economy.

While Saudi Arabia was hosting US President Donald Trump in Ri­yadh for the Arab Islamic Ameri­can Summit — during which much of the talk centred on the threat from Iran — Rohani was celebrat­ing a convincing re-election victory. With high voter turnout — 73% — Rohani exceeded expectations with his comfortable margin of victory, securing 57.1% of the vote to decide the election without a run-off.

Rohani is considered a pragmatist in Iran’s political arena but his re-election strengthens a mandate to broaden a reform programme that has promised more freedom for Ira­nians, reintegration with the inter­national community and, crucially, a structural economic turnaround.

When Rohani took office in 2012, inflation was more than 40% and threatening the collapse of the Ira­nian rial. Iran’s economy had con­tracted 7% in 2012 and the coun­try’s international isolation over its nuclear programme was creating bleak economic prospects — even for a “resistance economy” that had survived economic sanctions for decades.

As the Rohani government got to work in controlling economic con­traction, the collapse of oil prices in 2014 shocked Iran with a harsh reality check to remove hopes the economic situation could be turned around quickly. Iran remains a country heavily reliant on oil in­come, with oil exports representing about 70% of government revenues. However, the Rohani government successfully cut economic contrac­tion to less than 2% in 2014.

The biggest boost to Iran’s econ­omy, however, arrived in 2015 after Iran successfully negotiated the Joint Comprehensive Plan of Agree­ment (JCPOA) with the P5+1. Sanc­tions relief following the JCPOA made the economic recovery much stronger as Iranian oil output re­turned to pre-sanctions levels of around 4 million barrels a day and Iran’s economy grew about 7%. Per­haps the most important economic achievement of Rohani’s first term was bringing runaway inflation down to 9% and stabilising the cur­rency.

Yet, while Iran’s gradual eco­nomic recovery has been promising under Rohani it remains a work in progress with much left to do. With oil production close to utilising any spare capacity, Iran’s economic prospects hinge on its non-oil sec­tors — with agriculture and services expected to drive growth.

While Iran’s economic growth is stabilising and the World Bank’s medium-term outlook predicting 4% growth, expansion in its non-oil sectors remains subdued over­all. Current growth trajectories do not allow Iran to create the jobs it needs for its labour market quickly enough, creating its biggest chal­lenge moving forward, especially given current high levels of youth unemployment.

Rohani’s domestic economic re­form agenda will target the banking sector, private sector competitive­ness and infrastructure moderni­sation. Reforms will aim to bring Iranian banks in line with Basel banking norms, which involve stricter transparency and compli­ance frameworks. Enhancing com­petitiveness will help better regu­late business activity, encouraging entrepreneurship and small- and medium-sized enterprise (SME) growth. Infrastructure modernisa­tion in a post-sanctions period will provide economic stimulus and di­rection as Iran seeks to attract tour­ism and become a trade gateway to landlocked Central Asian countries.

These are all important structural reforms that the Rohani govern­ment will expect to push through, especially with its new public man­date. However, what Iran needs, even more, is foreign direct invest­ment (FDI) and proper reintegra­tion into the global banking system — both of which have been slow and uncertain.

Though JCPOA lifted more than 90% of nuclear-related economic sanctions against Iran, unilaterally imposed US non-nuclear sanctions, including banking restrictions, re­main in place.

Uncertainty about US policy and sanctions against Iran has allowed the United States to maintain an indirect but important lever over Iran’s economy. Foreign investors have been reluctant to move into Iran fearing penalties from the US Treasury and, while SWIFT banking services have been restored with dozens of Iranian banks, the coun­try has not fully connected to the Western banking system.

Without FDI and proper recon­nection to the international bank­ing system, Iran’s non-oil sector will struggle to meet its growth am­bitions, producing worrying con­sequences for unemployment and inflationary risks just as the govern­ment plans further spending cuts to balance its books.

As such, the looming challenge for Rohani as he attempts to imple­ment his reform agenda to recon­figure the national economy ulti­mately relates to its international standing and ability to remove lin­gering uncertainty, especially the impact of US policy towards Iran.

Tehran must find ways to cir­cumvent American pressure and influence that is slowing, if not al­together scaring away, foreign in­vestors but there are no straightfor­ward solutions. The United States maintains major concerns with Iran on sensitive issues such as Iran’s re­gional footprint, proxy groups and ballistic missile programme.

Iran could offer the US compa­nies lucrative opportunities as its economy opens up — the $17 bil­lion deal with Boeing to acquire 80 civilian airliners is an example of how. However, strategic issues in Iran are controlled by Supreme Leader Ayatollah Ali Khamenei and the powerful Islamic Revolutionary Guards Corps and both will almost certainly offer no space to Rohani to negotiate.

The conundrum would have been more delicately poised but Trump’s visit to Riyadh may have kicked off a new era of US policy and coopera­tion with allies in the Gulf. Qatar is feeling the heat but the target is as much Iran. It is too early to read what happens next but it appears Rohani and the Iranian economy have become beholden to issues beyond their control and a storm is forming on the horizon.


Sabahat Khan is a senior analyst at the Institute for Near East and Gulf Military Analysis (INEGMA).


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