Economic challenges loom in Rohani’s second term
Virginia - Despite its flaws, the May 19 presidential election offered Iranian voters a real choice between the moderate incumbent President Hassan Rohani and a hard-line rival, Ayatollah Ebrahim Raeisi. Rohani’s decisive win with 57% of the vote, combined with a sweep by reformist candidates in the city council elections in Tehran and several other major cities, gives him a strong mandate to move forward with his programme of economic reform.
Rohani implemented two key parts of this programme during his first term: Macroeconomic stability at home and greater integration with the outside world. He brought inflation down from 35% in 2013 to less than 10% this year and stabilised Iran’s currency, which had lost two-thirds of its value in 2012. Rohani achieved a milestone in 2015 when he concluded a nuclear deal with world powers, which resulted in the removal of the UN sanctions against Iran.
Despite these gains, during the campaign, Rohani’s economic record came under heavy criticism for failing to lower unemployment and take care of the poor.
Unemployment, which had hovered in the 10-11% range for several years, increased to 12.1%. The economy added 1.5 million jobs but a rapid increase in the number of job seekers pushed up the unemployment rate, especially for people aged 15-24, whose unemployment rate rose from 24% to 29% during Rohani’s first term.
Another major weakness of his record was an increase in the poverty rate. As my own research has shown, poverty rates, which declined during the presidency of Mahmoud Ahmadinejad — thanks to cash handouts — increased in 2014 and 2015. There were 1 million more people considered in poverty in 2015 than in 2013. Rohani’s fourth year in office, 2016, when the economy grew 6.6% according to the International Monetary Fund, may have turned this around but the numbers for that year are not out.
Evidently most voters valued his accomplishments more, so these criticisms failed to stick. After all, the nuclear deal has been in operation only since January 2016, so giving Rohani the benefit of the doubt and four more years seemed warranted.
Given this mandate, if Rohani fails to deliver on these two objectives in the next four years he will not lose another election because he cannot run for a third consecutive term but the reform movement that he firmly leads would lose credibility.
Success in the second term is by no means guaranteed, especially since all previous Iranian presidents have fared worse in their second terms and Rohani faces especially difficult challenges.
Some sanctions that have been lifted are still hampering Iran’s banking and trade. Iran’s banking system remains isolated because it does not comply with regulations to fight terrorism financing and money laundering. Foreign investors who competed frantically to sign deals with Iran last year are hesitating to put actual money behind the ink for fear of running afoul of US-imposed sanctions should the Trump administration try to punish those who deal with Iran.
There are important domestic challenges as well. Foreign direct investment (FDI) goes where there is a welcoming business environment. Iran’s hardliners campaigned strongly against Rohani’s pro-Western stance and can jeopardise FDI by scaring it away.
On the positive side, Rohani should be able to count on the support of Iranian Supreme Leader Ayatollah Ali Khamenei, who has welcomed FDI as long as it creates jobs and transfers technology to Iran.
A more daunting domestic challenge is economic. Iran’s banking system is buried under the weight of bad assets it accumulated following the real estate crash five years ago. Rohani has yet to find a way to jump-start the housing sector, to lift the banks from de facto bankruptcy and into the business of lending. The current extremely tight credit situation, with real interest rates of more than 10%, does not allow local businesses to play a positive role in economic recovery.
Getting economic growth under way soon and making sure that it is inclusive are necessary if the reformists are to prevent a populist backlash in 2021, similar to 2005 that put Ahmadinejad in power after eight years of the reformist Khatami administrations.