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Iran’s economy after elections

Apr 23,2016 - Last updated at Apr 23,2016

Recent gains by pro-government reformist candidates in Iran’s parliamentary elections have given President Hassan Rouhani a welcome mid-term boost.

But huge economic challenges remain. And in the coming months, these challenges are what will determine the battle lines between the president and his hardline adversaries inside and outside the parliament.

Elections are normally won and lost along political lines, and Iran’s recent vote is no exception. 

But on this occasion, there is reason to believe that economic concerns were a major driver of political change, as evidenced by the massive turnout at the electoral booths.

Ever since July, when Iran signed a landmark nuclear deal with the five permanent members of the United Nations Security Council and the European Union, popular expectations for an improvement in the state of the economy have reached a fever pitch.

Rouhani is well aware of the importance of economic expectations; indeed, they were what swept him into the presidency in 2013.

The recent election campaign once again drew strength from the promise to fix an economy battered by years of tough economic sanctions and domestic mismanagement.

That is why he placed a high priority on reaching a deal with the outside world that would close the nuclear file and pave the road to economic recovery.

The economy that Rouhani inherited from his predecessor, Mahmoud Ahmadinejad, had been distorted by years of generous redistributions of oil revenues to the president’s supporters and then hit with stagflation, as what US Vice President Joe Biden called the “toughest economic sanctions in history” began to take hold.

In 2013, the year Rouhani assumed office, inflation exceeded 40 per cent and the gross domestic product (GDP) contracted by 6 per cent.

Rouhani’s woes were exacerbated by the economic destabilisation that followed the introduction of comprehensive financial sanctions that cut Iran off from the international banking system.

Unable to sell oil, and faced with a blockade of the central bank by the United States and the EU, Rouhani faced the momentous challenge of trying to kick start growth and tame spiralling prices.

Rouhani has had some success in lowering inflation, which is now down to 13 per cent.

But rekindling growth has proven to be a tougher challenge. With the International Monetary Fund predicting that GDP will either stagnate or contract this year, Iran’s economy might well be set for a double-dip recession.

With sanctions lifted, however, the IMF now expects GDP growth to reach roughly 5 per cent next year — a rate that would make Iran the Middle East’s best-performing economy.

Attaining this level of growth will be essential if jobs are to be created; Iran habitually suffers from a double-digit unemployment rate, with official youth unemployment above 25 per cent.

But several obstacles stand in the way. The first is the collapse in oil prices, which have tumbled by 70 per cent since mid-2014.

A similar misfortune occurred in 1999, when President Mohammad Khatami was attempting to carry out his own reformist experiment, and prices fell below $10 per barrel.

Then, as now, the first two years of a reformist administration were thwarted by adverse external developments in the international oil markets.

The last crisis was driven by demand-side factors relating to the Asian financial crisis.

This time, supply-side factors are creating a global oil glut, with similar results.

Failing to understand this, conspiracy theorists can be forgiven for noticing that reform-minded presidencies seem to be negatively correlated with international oil prices.

Rouhani’s main challenges, however, are internal. 

They come from Iran’s complex post-revolutionary institutional architecture, which is beset by a labyrinth of decision-making entities interlaced with yet more bodies and agencies created to ensure compliance with Islamic tenets and revolutionary standards.

In recent decades, this system has produced tremendous political fragmentation, if not open factional fighting, at all levels.

It is in this labyrinth of power that Rouhani is fighting an intense battle with his conservative adversaries — a battle that may be far from over.

In fact, Rouhani’s economic remedies — attempting to open the economy to foreign trade and investment flows, and introducing economic reforms to foster the private sector following the lifting of sanctions — are at odds with the vision of Iran’s hardline conservatives.

For these so-called Principlists — who advocate a “resistance economy”, based on years of austerity marked by self-sufficiency and reliance on domestic resources — Rouhani’s desire to declare Iran “open for business” and to encourage foreigners to take an active role in Iran’s economy raises as much alarm as the nuclear deal.

The decline of the Principlists’ power bloc in the next parliament is undoubtedly a powerful message from Iran’s youthful electorate.

This resonates with what former US president Bill Clinton told Charlie Rose in 2005: Iran is the only country with elections “where the liberals, or the progressives, have won two-thirds to 70 per cent of the vote in six elections… . 

“There is no other country in the world I can say that about, certainly not my own.”

A decade later, Clinton will no doubt find it heartening to see this trend continue. 

But, while the Principlists might be down, they are certainly not out, as the looming battle over the future of the economy attests.

It is here that Rouhani will face his most difficult challenge. His electoral victory might raise the stakes for him, by increasing pressure to deliver on popular expectations.

But, as Khatami found when he lost to Ahmadinejad in 2005, growth and economic recovery cannot come at the expense of the electorate’s aspirations for greater equality and social justice.


The writer, director of the London Middle East Institute and reader in economics at SOAS, University of London, is the co-editor of “Iran and the Global Economy: Petro Populism, Islam and Economic Sanctions”. ©Project Syndicate, 2016.

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