Rohani walks an economic tightrope

Relations with Europe will probably keep Iran in the nuclear deal until at least the 2020 US presidential election, despite the limited gains now offered.
Sunday 06/01/2019
People walk in front of a currency exchange shop in Tehran. (AFP)
Tough times. People walk in front of a currency exchange shop in Tehran. (AFP)

Last year was a pivotal one for Iranian President Hassan Rohani. While he resisted political attacks from the principlist camp, Rohani’s government suspended liberal economic reforms. This was a response to tightening US sanctions after US President Donald Trump abandoned the 2015 nuclear agreement.

In consequence, Rohani finds himself in an “odd position,” Djavad Salehi-Isfahani, an economics professor at Virginia Tech and visiting fellow at the Brookings Institution, wrote in a Brookings paper released in December. He is “overseeing price controls, punishing commodity hoarders and subsidising imports of a variety of goods, including mobile phones.

Salehi-Isfahani added that Rohani had “lost the most liberal members of his economic team [notably Masoud Nili, economics adviser].”

Rohani has thereby abandoned pledges of two presidential elections — 2013 and 2017 — that he would improve living standards by boosting international trade, foreign direct investment and Iran’s private sector. Salehi-Isfahani spoke of Rohani’s shelved plans for greater transparency and unified exchange rates.

Salehi-Isfahani expressed professional frustration at the lack of clarity about billions of dollars of cash handouts and energy subsidies. The handouts date to the tenure of the presidency of Mahmoud Ahmadinejad, who tried to wean Iranians off subsidies on everyday items, including petrol. Handouts originally targeted poorer Iranians but expanded. Under Rohani, petrol remains cheap but access to handouts has been restricted.

“None of the three bodies responsible — Komiteh Emdad Emam Khomeini, the public charity; the Welfare Ministry; the Organisation for Targeted Subsidies — publishes data on how many people they support and how much they pay them,” said Salehi-Isfahani. “The Ahmadinejad system was transparent. People knew who got what. Now the number of applicants has increased 50%, not because the numbers of the poor are rising but because people are afraid of missing out when their neighbour is receiving something.”

At 29 cents a litre, Iran has the world’s third cheapest petrol after Venezuela and Sudan, statistics by (not allowing for purchasing power) indicate. It is 43 cents in Egypt, 51 cents in Qatar, 54 cents in Saudi Arabia and 75 cents in Afghanistan.

Salehi-Isfahani argues this makes no fiscal sense, especially with Iran’s oil exports halved in 2018 by US sanctions. “The government is giving away its main source of revenue,” he said. “Iran sells twice as much energy to its own citizens — about 5 million barrels a day of oil equivalent, that’s gas and oil — as it has been exporting [before 2018 sanctions].”

Wary of losing public support, Rohani hasn’t raised petrol prices although he made cash handouts less accessible. “He thought cheap energy would please the middle class,” said Salehi-Isfahani. “He bought the argument used by the other side [the principlists] that giving money to people who aren’t poor is criminal whereas giving them cheap energy is acceptable.”

Unemployment figures are also hard to access, said Salehi-Isfahani, but there is a clear overall effect from “shrinking access to the world banking system” and from would-be investors’ reaction to government policy shifting from market reforms to greater state direction.

“The economy is shrinking,” he said, pointing to predictions that the country’s GDP would contract 3-7% this year. “The government puts unemployment at 12.5%. Probably it will go to 13-14% in 2019. The unemployed are mostly young,” Salehi-Isfahani said.

This, however, isn’t the biggest problem Iran faces in 2019.

“Unemployment is like the proverbial frog in a slowly boiling pot of water, whereas inflation is like pouring boiling water on the frog,” said Salehi-Isfahani. “Rising unemployment means your son is without work for three years rather than two. If rice or wheat doubles [in price], this hits everyone. The adjustment has to be immediate.”

Even with unemployment and inflation rising in 2019, Salehi-Isfahani said he expects the lure of globalisation to influence policy and Rohani to keep Iran within the 2015 nuclear deal. He may also win Iranian adherence to Financial Action Task Force regulations against money laundering. Accession proposals have been questioned by the watchdog Guardian Council.

“Ahmadinejad first proposed these changes to make Iranian banking compatible with the global system and eventually there’ll be enough bargaining inside Iran to pass them. It’s one of the signals they are sending to the Europeans that Iran can function as a country and is not so divided that you can’t deal with it,” Salehi-Isfahani said.

He also said he believes relations with Europe will probably keep Iran in the nuclear deal until at least the 2020 US presidential election, despite the limited gains now offered. “Globalisation is about trading with the West, not with Russia and China,” he said.

“Many people in Iran think this [Europe’s support for the nuclear agreement] is just food and medicine but this will matter in two years [if Trump loses, US sanctions ease and Iran’s economy opens up]. Anyone who looks at Iran with a broad perspective sees the country as a viable partner. It’s a matter of time. The middle class, young people, are looking to join in. They’re banging at the door.”