Iran’s economic challenges after election
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.