Iran’s Economy One Year On

Precisely one year has passed President Hassan Rouhani took office, and most Iranians, though momentarily anxious over the instability in Iraq, are weighing his government’s economic performance. The economy’s parlous/perilous state was a key grievance among Rouhani voters, and many hoped for a quick shift toward stability.

Though important progress has been made stemming the rapid rise of inflation, the transition out of the Mahmoud Ahmadinejad era’s reckless spending into a phase of moderation is far from over. Suspense still defines the business environment in Iran. While there are many optimists who have started new ventures, banking on the success of the nuclear negotiations, that optimism cannot be mistaken for real economic dynamism.

Although uncertainty is no longer as intense as it once was, it has not begun to decline. Iranians are still waiting to see whether the West will lift sanctions and many remain deeply discouraged by the country’s entrenched and extensive corruption. Rouhani’s government is hard at work trying to have sanctions lifted through nuclear diplomacy; corruption is a different matter entirely.

If one believes what one hears, few actually grasped the true extent of corruption and fiscal irregularities that emerged under Ahmadinejad’s tenure. Some have even claimed that if the regime reveals the true state of affairs under the previous administration the ensuing scandal would endanger the very existence of the Islamic Republic. This reasoning also works to discourage accountability, as it holds that any move to prosecute Ahmadinejad and his associates will destabilize the regime. The irony is not lost on Iranians, who know that the economy will not improve by protecting the corrupt and continuing to enable regime cronies who profit.

To create jobs and spur economic growth, Iran needs entrepreneurs, experts and workers, who are usually compromised by the rent seekers. To protect them the government must fight corruption. Still Dr. Rouhani’s government has announced no official plan to do so and seems to lack the political will to take such a course. But the indecision cannot go on forever. In the second year the president must choose how to deal with corruption, and his choice will cause tension whatever he does.

Some economists view fighting corruption as just one issue among a list of economic ills the government must address. They believe Rouhani’s administration has done well on the whole, considering the crushing effect of international sanctions and the structural problems it inherited. There is ittle doubt that the economy has shown some sign of stabilization since Rouhani took office. The inflation rate has slowed and is no longer increasing exponentially. The currency exchange market has been calm as well.

We should remember that inflation went past 40 percent last year as Iran was preparing to hold the presidential election. The annual change in consumer price index (CPI) reached as high as 45 percent. Post-election, that inflation rate has begun to increase at a lesser rate. This is particularly apparent when one reviews the monthly change in CPI. Before the election the inflation rate was increasing rapidly from month to month. CPI increased by 5 percent in less than one month. These vacillations have stopped since last June. CPI has changed at much smaller steps and for the past nine months its monthly change rate has been less than one percent. Currently inflation has fallen to 30 percent with the annual change in CPI, or point inflation, dropping to 15 percent. Many interpret the slowdown in inflation as a the beginning of a period of economic stability, or at least economic predictability.

The currency exchange market is the next market where the fluctuations began to shrink. Shortly after the 2013 election the Iranian Rial began to gain against foreign currencies. Soon the exchange rate for USD dropped from 35,000 Rials per USD to less than 30,000 Rials. It remained at that level until spring when it began to increase, reaching 33,000 Rials per USD. The government did well to resist the calls to inject its hard currency reserves into markets following a shopping power approach to this market. As Iranians realize that the promised reserves in Geneva amount to little facing Iran’s economic challenges, the currency exchange market began adjusting to the new reality. The change in exchange rate has been continuous without sudden shocks, giving the business community enough time to adjust.

Several factors have inspired such a change in macroeconomic trends; however one must admit Rouhani’s administration contributed noticeably. The current administration did not increase the monetary base. It promoted fiscal responsibility and discipline. It did not vow vainly to intervene in the currency exchange market. Thus it did not encourage further rent seeking behavior.  The administration’s economic team believes in some economic rationale and that has been comforting.

It is too soon to consider President Rouhani’s economic performance a brilliant one. So far his administration has prevented further deterioration of the macroeconomic conditions. However the economic recovery has not yet begun. Iran’s economy needs jobs, export revenues and growth. Iran’s economy recovers when there is a political will to carry on necessary economic reforms and policies.

If the government is hesitant to combat corruption, it is part of a pattern. The current Iranian administration has sought a middle road in every difficult situation. It wants a solution with minimum cost for all interested parties and the most gains for them. Such a solution does not often exist; after all, trade-off is an economic necessity. It also does not want to disfranchise millions who benefited from Ahmadinejad’s populist policies. President Rouhani‘s cabinet chose to continue the subsidy reforms in their existing form and distributed goods across the country.

To continue a bad policy for political reasons may prove disastrous. However, there is little sign of any change in programs such as subsidy reforms. There have been last minute halfhearted attempts on promoting voluntarily withdrawal without significant success. 

To be fair one must acknowledge that Hassan Rouhani has inherited an economy in ruins, suffering from corruption and suffocating at the hands of sanctions. There is no miracle here. It is true to achieve, any government needs time. Still, without political decisiveness no length of time will be sufficient.

One year after his victory, despite promising signs of stabilization,  It seems President Rouhani’s cabinet is waiting for an opening, hoping time and success in negotiations will give them just such an opening. The economy cannot wait much longer.