United States Institute of Peace

The Iran Primer

IMF: More Economic Reforms Needed

On May 15, International Monetary Fund (IMF) First Deputy Managing Director David Lipton arrived in Tehran to discuss economic developments and policy initiatives following the lifting of sanctions. He told Iranians that “your ultimate success depends on what you do at home” in a speech at the Central Bank on May 17. Lipton highlighted areas for improvement in the banking sector that could help attract more foreign investment. He also emphasized the need to build a strong and flexible economy that will be less dependent on the oil sector.
 
 
During the two day visit, Lipton met with senior government officials, private sector representatives, bankers, academics, and students. “With an improved economic outlook in prospect, there is a unique opportunity to begin implementing reforms to entrench macroeconomic stability and promote higher sustainable and inclusive growth,” he said at the end of his trip. The following are excerpts from his speech and concluding statement. 
 
I speak here today at a pivotal moment for Iran’s economy. With important sanctions lifted, your country has a new opportunity to deepen its integration into the global economy. That process has the potential over time to support faster growth and rising living standards for Iranians.
 
But positive results depend on overcoming two major obstacles as well. The first is navigating a difficult global economic situation. And the second is building a competitive and flexible domestic economy that will serve as a suitably strong platform for growth. I want to talk about those challenges today.
 
But first, let me say a few words about the IMF and how we have been helping Iran for several decades. The Fund’s membership of 189 countries has given us the responsibility—among our many mandates—of analyzing and advising members on economic trends at the global, regional and country levels. This has placed the Fund in a unique position to assess and compare country experiences, and by sharing those assessments and experiences to help countries chart their strategies, particularly at times of momentous change and opportunity. We have used these experiences in our policy dialogue with Iran for many years and I believe our perspectives now, at a historic time for the country, could be especially helpful in thinking about future prospects.

The Global Outlook
 
First, the global growth outlook is for continued recovery, but one that is weak, and holds formidable economic and political downside risks. The bottom line for Iran is that in the near future the global economy is unlikely to be the driving force to lift up emerging economies that it was in the past.
 
Our most recent forecast has global growth remaining largely unchanged this year at a subdued 3.2 percent rate, with only a slight increase to 3.5 percent in 2017. Overall, the outlook has weakened a bit over the past half year.
 
Emerging and developing economies will still account for the lion’s share of world growth. But their prospects remain subdued, particularly for two reasons that are important to Iran: the sharp fall in commodity prices led by oil, and China’s economic rebalancing.
Meanwhile, the modest recovery in advanced economies is expected to continue. But unresolved crisis legacies continue to weigh on growth. In many parts of Europe, for instance, sovereign and private sector balance sheets remain highly leveraged, and some banks are facing high nonperforming loans.
 
We are also witnessing increasing downside risks:
• The global slowdown is hurting bank balance sheets, and financing conditions have tightened considerably.
• Emerging markets face excess capacity in some sectors, capital spending is declining, and private debt—often denominated in foreign currency—is rising.
• We have witnessed an increase in financial market volatility Emerging market currencies have weakened—and some equity markets have fallen sharply.
• There has been a retrenchment of global capital and trade flows. Emerging markets last year experienced about $200 billion in net capital outflows, compared with $125 billion in net inflows in 2014.
• Inflation has fallen to historical lows, too low in fact. With headline inflation in advanced economies last year at its lowest level since the financial crisis, emerging markets’ core inflation well below central bank targets, the world risks a debilitating disinflation.
 
The Outlook for the Iranian Economy
 
So, what does all this mean for Iran? I suggest that while Iran will gain from pursuing integration with the global economy, your ultimate success depends on what you do at home: strengthening macroeconomic policies in the short run and forging ahead now with deep structural reforms for the long run. It is time for a plan of action on the economy. Let me talk about the short run and long run components in turn.
 
Iran has already taken important measures to secure macroeconomic stability, including an important decline in the rate of inflation. That was done despite an episode of increased costs of trade and financial transactions, and limited access to foreign exchange assets that caused inflation to jump and the rial to depreciate significantly. That achievement will serve Iran well as its implementation the Joint Comprehensive Plan of Action continues.
With the oil sector regaining access to export markets, with businesses and banks facing lower transaction costs as they reintegrate into global trade and financial systems, both the oil and non-oil economy will gain.
 
But the global economy poses challenges that could eat into those gains.
 
• Like other oil exporters, Iran has to manage the transition to lower oil prices. Although the impact of lower prices will be partly mitigated by higher oil export volumes, there are limited prospects for a large increase in Iran’s oil revenue because of high global output and weak demand.
• Second, Iran’s non-oil exports also are feeling the effects of weak global demand—something that all exporting countries are experiencing. Some of that comes from slower growth in China.  
• And third, global lenders and investors have become more exacting and cautious, differentiating among countries according to how sound and reliable their policies are and how stable their fiscal, monetary and financial systems are.
So this is a time for convincing macro policies and clear communications:
• To sustain the recent success in the battle against inflation, liquidity growth needs to be contained. This can anchor inflation in single digits, reduce potential pressure on the exchange rate, and help maintain the competitiveness of the non-oil sector. In addition, Iran’s commitment to exchange rate unification will be critical to entrenching economic stability.
• The banking system needs to be able to effectively channel credit to the private sector. This will require addressing the high levels of nonperforming loans, bolstering bank capital, restructuring weak institutions, dealing with unlicensed financial institutions, and strengthening risk management systems and bank supervision.
• And fiscal policy also has an important role to play. Iran’s fiscal policy would be most effective by focusing on a gradual reduction of the non-oil deficit. But instead of cutting spending, it might be better to mobilize more non-oil tax revenue. That would create space for increased public investment in infrastructure and human capital.
 
Global Experiences: How to Build a Strong and Flexible Economy
 
The second topic I promised to address is building a competitive and flexible domestic economy that will serve as a suitably strong platform for future growth.
 
Future sustainable growth will depend increasingly on the performance of the non-oil sector, which is where almost all job creation will have to come. That, in turn, points to the need for a reorientation of the Iranian economy—both to take advantage of the opening to international trade and investment and to unleash entrepreneurial forces that can spur investment, lift productivity, provide jobs, and raise living standards.
 
I spoke earlier about the perspective on economic trends that the IMF brings to bear across countries and regions. I would add that we also can draw upon decades of experience with economic transformations. This global and historical frame of reference is very useful in assessing where Iran now stands and where it might go in the coming years.
 
There are several important examples in recent years of economies that have emerged into the global economy after periods of relative isolation—or even closed doors. We have witnessed Latin America successfully abandon years of import substitution policies after experiencing hyperinflation and a debt crisis that brought their economies to a standstill.
 
China opened its doors beginning in the 1970s to emerge a generation later as one of the two largest economies in the world. In Eastern Europe, the collapse of the Soviet Union sparked a profound restructuring of many economies that today have largely integrated into both the European Union and the global economy. And Korea dismantled close connections between companies, their banks and government that had led to a lack of competition as well as a borrowing binge that was disconnected from enduring profit prospects.
 
I am not suggesting that Iran is the same as these other countries. Far from it. The point is simply to say these are experiences that policymakers in this country can study and draw upon.
 
Let me list a few lessons that emerge from other countries’ experiences:
 
• One that has been heeded here, though it is important continually to bear in mind, is that a loss of monetary stability can undermine structural reforms and set back growth for a long time. Well intentioned reform plans have been undermined by attempts to use liquidity to address real and structural problems, ending in inflation and exchange rate depreciation.
• Another is that a lack of competition both limits growth and can breed corruption by sustaining economic rents to be fought over. Protection from global competition, through import tariffs and other restrictions, and domestic monopoly rights, created by law and regulation, deprive consumers of the benefits of better quality products at low prices. And they prevent the job growth that would come from vibrant competition among new enterprises, and which is badly needed in countries with a large and growing youth demographic.
• Ownership links between companies and banks eventually lead to conflicts of interest, excessive and irresponsible borrowing and lending and debt problems. When such relations involve state owned enterprises and banks, the debt problems often end up weakening or even crippling public finances with dire growth consequences. Reforms to privatize state enterprises, and to separate companies and banks lead to improvements in governance and more responsible decision making as each has to face a hard budget constraint.
 
We have seen these problems play out in many of our member countries. And we have seen how countries—from Peru to Poland, China to the Czech Republic—that have managed to stabilize, liberalize, privatize, and open up have seen those actions pay off over time in investment, productivity and trade. Through the process of liberalization, competition leads to more efficiency, less corruption, and higher productivity. Privatization and governance reforms prevent the misallocation of credit and thus allow the private sector to grow and create jobs for young people and room for the middle class to thrive.

The Challenges in Iran
 
How does this fit with the current situation facing Iran? If there is a consensus that Iran needs to become a more open and integrated economy, then this is a key moment to take a broad perspective and make the most of the opportunity.
 
In our advice to the Fund’s membership at last month’s IMF Spring Meetings, we highlighted structural reforms for all countries as a crucial element in the quest to boost growth and create jobs. Some of these structural reforms would likely benefit Iran. They are, in essence, built around the principles of liberalization and privatization,
 
• Opening up product and services markets can be particularly effective because they bring short-term gains. They can spur more competition, and increase integration with the world economy. They can help create high-quality jobs for the younger generation of Iranians.
• Labor market reforms can be particularly effective in drawing people into the workforce. This approach could be considered in Iran, where unemployment remains high, and demographic pressures will continue to bring large numbers of new entrants to the labor market in the coming years. But it is important that some measures—tax cuts and training programs—that have fiscal implications are able to fit within the broad fiscal framework.
• Another area of structural reform is the policy mix that can help to foster innovation. This can be achieved by removing barriers to competition and foreign investment, reducing the hold of monopolies and special interests, cutting red tape, and increasing investment in education and research. Countries are finding that increased openness to foreign investment can facilitate technology transfers and enhance access to foreign markets. They are trying to reduce the cost of doing business, address vulnerabilities in the corporate and banking sectors, advance privatization, and foster financial transparency and a level playing field for all investors and entrepreneurs.
Iran faces a unique set of issues related to the reintegration of its banks to the international financial system. The Iranian authorities have made recent progress in the establishing a framework aimed at combating money laundering and the financing of terrorism. This is a critical element for reconnecting with the international financial system. The IMF will continue to support the Iranian authorities’ efforts in this area.
 
Conclusion
 
Let me conclude with the big picture. The opportunity for Iran to deepen integration into global economy is coming. Development that builds on the economic stabilization already achieved, combined with new reforms, can unleash creativity and entrepreneurship that hold great promise. By continuing to strengthen its economy, Iran can change the lives of its own people, particularly the younger generation, and build a legacy for the future. That is a challenge befitting a country with a heritage like Iran’s.
 
The experience of countries going through similar challenges shows that successful reforms require leadership and popular support. There inevitably will be costs and dislocations, but they ultimately will be outweighed by the long-term benefits.
 
A more prosperous Iran also can help to put the global economy on a sounder footing. The process of reintegrating with the global economy will not be without its challenges, but the potential rewards are worth the effort.
 
Iran has been a respected voice of economic cooperation at the IMF for many years. Its voice can only be enhanced by taking the steps now to build strong, sustainable and inclusive growth. The IMF looks forward to working with Iran on this endeavor.

 

Click here for more information on the IMF and Iran.   

 

Iran Boycotts Hajj in Saudi Arabia

On May 12, Iran announced that it will not send pilgrims to Saudi Arabia this year for the annual hajj ritual. The culture minister said he blamed Saudi Arabia for stonewalling talks on logistics for Iranian pilgrims. The boycott follows a stampede in Mina during the 2015 hajj that killed almost 2,500 people, including more than 460 Iranians. Tehran accused the Saudi government of mismanagement and incompetence. Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani said Riyadh was failing to expeditiously identify and return bodies to their mourning families. It took some two months to identify the body of a former Iranian ambassador to Lebanon.
 
 
Streamlining coordination for the 2016 hajj has proven especially difficult because the countries have not had diplomatic relations since January. Tensions between the regional rivals hit a boiling point after Saudi Arabia executed a prominent Shiite cleric on January 2. Sheikh Nimr al Nimr’s execution prompted protests in predominantly Shiite Iran. Riyadh cut diplomatic ties with Tehran after protestors attacked the Saudi Embassy in Tehran and Consulate in Mashhad.
 
In April, an Iranian delegation held four days of talks in Saudi Arabia over the hajj. But they did not resolve disputes. Culture Minister Ali Jannati said that the Saudis did not accept Iranian proposals about visas, transport, and security for the pilgrims. The Saudi attitude “was cold and inappropriate,” according to Jannati. The Saudis evidently wanted prospective Iranian pilgrims to go to other countries to fill out their visa applications. Tehran, however, offered to issue visas to Saudi visa officers to come to Iran to perform the procedure. Iran also wanted to evenly split pilgrims between Saudi and Iranian airlines.
 
 
Saudi Arabia’s Minister of Hajj and Umra Mohammed Bintin blamed the disagreement on Iran. “Iran is the only country that refused to sign the agreement on the Hajj. It insisted on a number of unacceptable demands,” he told Saudi state TV channel Ekhbariya. 
 
Iran has boycotted the hajj before. In 1987, Iranian pilgrims clashed with Saudi police during the pilgrimage, resulting in a stampede. At least 400 were killed. Saudi Arabia severed diplomatic ties with Iran and reduced the number of Iranian pilgrim visas. So Iran boycotted the hajj from 1988 through 1990. The following are comments on the hajj by Iranian Culture Minister Ali Jannati and Foreign Ministry Spokesman Hossein Jaberi Ansari.
 
Minister of Culture and Islamic Guidance Ali Jannati
 
“Conditions are not prepared for conducting Hajj; we have lost the time; we made our utmost effort but the sabotage is coming from the Saudis.”
 
“Their attitude was cold and inappropriate. They did not accept our proposals concerning the issuing of visas, the transport and security of the pilgrims.”
 
“Saudi officials say our pilgrims must travel to another country to make their visa applications.”
—May 11, 2016, according to the press
 
Foreign Minister Spokesman Hossein Jaberi Ansari
 
“If no agreement is reached on these issues, Saudi Arabia will be responsible for shutting the way to the dispatch of Iranian pilgrims.”
 
“Performing the pilgrimage is contingent upon the host government’s fulfillment of its obvious [relevant] obligations.”
 
The Saudi government has refused to act on “its recurrent assertions that it would not let political disputes get in the way of the issue of Hajj.”
 
“Performing the pilgrimage is contingent upon the host government’s fulfillment of its obvious [relevant] obligations.”
 
“It is obvious that a non-normal status is not acceptable to Iran.”
 
“There is still time. We hope Saudi Arabia changes its wrong policy.”

May 10, 2016, to the press 

 

Click here for a timeline of Iran-Saudi relations.  

 

Kerry: Euro Banks Free to Deal with Iran

On May 10, Secretary of State John Kerry said that European businesses “should not use the United States as an excuse” for not dealing with Iran. He arrived in London to meet representatives of European banks and discuss implementation of the nuclear deal and implications for financial transactions. “I think it’s important to have clarity, and the clarity is that European banks, as long as it’s not a designated entity, are absolutely free to open accounts for Iran, trade, exchange money, facilitate a legitimate business agreement, bankroll it, lend money,” he told reporters.
 
On May 12, Kerry met with nine executives from leading European banks. British Foreign Secretary Philip Hammond, secretary of state for business Sajid Javid and trade envoy to Iran, Norman Lamont, also attended the meeting, a British official told Reuters. Deutsche Bank, HSBC, Credit Suisse, Santander, Royal Bank of Scotland, Societe Generale, and Barclays were represented, as well as Standard Chartered and BNP Paribas, which have both been fined billions of dollars for sanctions violations in previous years. After the meeting, Standard Charted and Societe Generale said they had no plans to resume commercial activities with Iran. 
 
Iranian officials have argued that the United States has fallen short of its obligations under the nuclear deal. “The United States needs to do way more. They have to send a message that doing business with Iran will not cost them [European banks],” Foreign Minister Mohammad Javad Zarif told The New Yorker in April. Zarif and Kerry met in New York on April 22 to discuss disagreements related to implementation of the deal. The following is an excerpted transcript of Kerry’s remarks to the press in London. 
 
Roundtable Discussion
May 10, 2016
 
QUESTION: Why is it our job as America to be trying to sell people on doing business in Iran given the fact that their financial system is still not up to par and that they’re still doing a whole lot of other concerning activities?
 
SECRETARY KERRY: Well, it’s not our job to sell them on doing business. It’s our job to make clear to them what the rules are, that’s all. I mean, we’re not telling people what to go do, but we are telling people what they’re allowed to do, and there seems to be some confusion about that. So it’s very simple.
 
And it’s clarifying that an agreement was reached in which the sanctions affecting European banks, particularly, and businesses were lifted. And some people don’t – aren’t clear about what is lifted, what is not, and that clarity has to be drawn. And the reason you do that is because if you make an agreement, you live up to an agreement. It’s very simple. It’s – Iran has a right to the benefits of the agreement they signed up to, and if people by confusion or misinterpretation or, in some cases, disinformation are being misled, it’s appropriate for us to try to clarify that.
 
With respect to the banks overall, et cetera, we’re simply responding to inquiries that people have about what the limits are of their – of the permissiveness within which they’re operating. And since we were the principal designer, implementer, enforcer of the sanctions themselves, and obviously a key player in the negotiations, I think it’s important for us to answer those inquiries. Any legitimate business that has a question, we have an obligation to answer.
 
QUESTION: And in terms of the possibility that this could change dramatically in a different direction?
 
SECRETARY KERRY: Well, I don’t believe that. I just don’t believe that a new president regardless – is going to suddenly say, “Let’s go have a war in the Middle East,” and give up the restraint on a nuclear weapon. And I just don’t think the advisors to that president or anybody are going to suggest that that makes sense.
 
QUESTION: When you talk to bankers, do they raise those kinds of concerns with you?
 
SECRETARY KERRY: No. They have concerns about our secondary sanctions and the alternative – we do maintain sanctions on certain designated entities as a result of arms activities or missile activities, but there really shouldn’t be any confusion – and in some ways, there is. But it’s not a – it’s just not as complicated as some people make it. There are a clear list of designees who have been lifted and there’s no game being played here. There’s a – Iran gave up its nuclear weapon chase, so to speak.
 
QUESTION: In the oil and gas sectors, for example, like the IRGC, it can be hard to – in some instances to see where the ties sort of end and begin –
 
SECRETARY KERRY: I don’t think it’s that hard.
 
QUESTION: -- based on what’s spelled out in the U.S. sanctions.
 
SECRETARY KERRY: I really don’t think it’s that hard, and that’s what – it’s OFAC’s job, obviously, to clarify to people. And OFAC has said if you have a question, come to us and they’ll clarify it. So it really shouldn’t be complicated. It’s not a – it’s not incomprehensible or undefinable. It’s clearly defined and when people have a question, we are available to answer those questions. And we’ve encouraged people, if you have a question, come to us.
 
QUESTION: It’s just since almost every transaction, especially in banking, it touches the U.S. financial system at least briefly, and you’ve maintained this restriction on the U.S. dollar. What are you telling these banks about how they can do those kinds of transactions and not –
 
SECRETARY KERRY: Banks in Europe are allowed to open accounts for Iran, banks in Europe are allowed to do business, banks in Europe can fund programs, lend money. That’s absolutely open for business as long as it’s not a designated entity, period, very simple. And they shouldn’t use us as an excuse. Businesses should not use the United States as an excuse if they don’t want to do business or if they don’t see a good business deal. They shouldn’t say, “Oh, we can’t do it because the United States.” That’s just not fair. That’s not accurate. And we sometimes get used as an excuse in this process. So I think it’s important to have clarity, and the clarity is that European banks, as long as it’s not a designated entity, are absolutely free to open accounts for Iran, trade, exchange money, facilitate a legitimate business agreement, bankroll it, lend money – all of those things are absolutely open, permissible.
 
Remarks by Secretary of State John Kerry and Foreign Secretary Hammond
May 12, 2016
 
SECRETARY KERRY:  I want to thank Secretary Hammond for hosting key bankers from around Europe in order to answer questions that the banking community has had regarding the impact of lifting of sanctions and questions that they have about what this really means and how does it really work.  And in some cases there have been – there has been a reluctance in some places to take risk or to – what they think is a risk.
 
So what we’ve been trying to do here today with the representation of the Treasury Department and our officials who are dealing with this is clarify and put to rest misinterpretations or mere rumors about how this is applied.  We want to make it clear that legitimate business, which is clear under the definition of the agreement, is available to banks.  As long as they do their normal due diligence and know who they’re dealing with, they’re not going to be held to some undefined and inappropriate standard here.
 
We also will be continuing to hold Iran accountable to live to up to the agreements and the standards that Iran needs to meet.  So this was really an effort to listen to the bankers, to hear from them what their perceptions are, the hurdles that they see to moving, and to be able to address those as directly as we can and define for them our interpretation of the law and of the standards so that there’s a clarity going forward and, hopefully, an ability to be able to do those things that are meant to be done under the agreement.
 
Both sides have an obligation to live up to this agreement and both sides need to get the benefit of the agreement.  Our benefit is that we see a nuclear program that is now visible, open to inspection, understandable, restrained, and living up to the standards of the IAEA.  And they have an expectation that the sanctions that were supposed to be lifted are in fact lifted and that the implementation is appropriate.  That’s the agreement and that’s what we’re trying to do.
 
FOREIGN SECRETARY HAMMOND:  What we’re trying to address is a gap between the undoubted political commitment of the United States to make this agreement work in practice, to allow Iran to access the world’s trade system and the world’s financial system, and the reality of what the European banks are finding in practice.  We’re trying to bridge that gap; we’re trying to understand where those disconnects are between the political intention and the banking world reality and work out together how we can bridge them to allow these European and global banks to support European businesses in resuming normal trade and investment patterns with Iran.  That’s what all of us want in order to deliver the dividend from the JCPOA that Iran expects and deserves. 
 
And if we’re going to achieve our strategic objective, which is drawing Iran back into the international community – normalizing relations, including trade and investment relations with Iran – we have to succeed in this.  It’s – essentially it’s the first hurdle in the race, and if we fall at this one, then we’ll never get the chance to demonstrate all the other benefits that can flow from this agreement that we spent so much time and energy delivering last year. 
 

Lawmakers Petition Rouhani on Nuclear Deal

On May 9, more than a third of the Members in Iran’s outgoing Parliament submitted a petition to President Hassan Rouhani demanding that the government end compliance with the nuclear deal. The petition called for resumption of research and development of Tehran’s nuclear program if the United States fails to fulfill its obligations. “America denies its lack of commitment and in practice sabotages Iran by blocking the lifting of sanctions, banking exchanges, and the returning of assets,” the letter said. It was signed by 103 Members of Parliament. 
 
 
The petition specifically cited Central Bank chief Valiollah Seif, who recently said that that the United States and its partners in diplomacy have not done enough to implement the accord. During a visit to Washington in April, Seif said that “almost nothing” has happened four months after the deal went into effect. Foreign Minister Mohammad Javad Zarif has also urged the United States to be more proactive. “The United States needs to do way more. They have to send a message that doing business with Iran will not cost them [European banks],” he told The New Yorker in April.
 
Ebrahim Karkhaneh, a conservative lawmaker who is critical of the nuclear deal, organized the petition. With a new parliament due to convene on May 27, hardliners in the outgoing Majlis are running out of time to challenge Rouhani’s foreign policy. Rouhani’s supporters— a loose group of reformists, centrists and moderate conservatives —will outnumber hardliners in the new Parliament, which will convene on May 27. The following is an excerpted translation of the letter.
 
“While the Islamic Republic of Iran has implemented all of its commitments, the agreement according to sections 7, 13, and 14 of Annex 5 of the JCPOA [Joint Comprehensive Plan of Action] was that the opposing side would implement its commitments in sections 16 and 17 of the same annex on Implementation Day. The sabotage and prevention of the implementation of the JCPOA by the Americans over the past three months is explicitly contrary to section 3 of the “The Proportional and Reciprocal Plan of Action for the Implementation of the Joint Comprehensive Plan of Action.”
 
“America denies its lack of commitment and in practice sabotages Iran by blocking the lifting of sanctions, banking exchanges, and the returning of assets. According to the governor of the Central Bank – because of the Americans’ sabotage – there have scarcely been any economic gains for the people of Iran. The current situation requires urgent deadlines to be demanded of the Americans. The continuation of sabotage, the non-normalization of financial transactions and banking, and the failure to return frozen assets of the Islamic Republic of Iran and new sanctions will result in the stopping of voluntary proceedings and the Islamic Republic of Iran will resume all of its activities, like before, under the framework of the NPT.”
 

Katayoun Kishi, a research assistant at the U.S. Institute of Peace, provided the translation.  

 

Report: Iranian Economy at Crossroads

Iran’s political elite is divided on what direction to take Iran’s economy. One camp, consisting of President Hassan Rouhani and his centrist and reformist supporters, prioritize economic growth through greater cooperation with the outside world. “The second force, as represented the hardliners, the ruling clergy and the Islamic Revolutionary Guards Corps (IRGC), would prefer to retain the current economic structure, as these forces maintain a significant stake in the economy,” according to Zubair Iqbal, a scholar at the Middle East Institute. The following are excerpts from his new paper.
 
Iran’s Economy Post-Sanctions
 
The Iranian economy is at a crossroads. Hard choices will have to be made in the wake of changing international conditions and the global oil outlook. The lifting of sanctions following the nuclear agreement has the potential to reinvigorate growth. Steps taken over the past few years have helped contain inflation, reduce some subsidies, and achieve a degree of exchange rate stability with some growth. However, the economy remains weak.
 
Unemployment, especially among the younger generation, remains high. Prospects for the current year look better in light of the easing of financial constraints following the release of large official foreign exchange reserves, higher oil production, and improved market confidence leading to higher investment. Iran’s fiscal position will likely be consolidated further if planned revenue measures, including an increase in VAT and elimination of tax exemptions and a reduction in subsidies,  are implemented, which, combined with higher domestic production and imports, could further reduce inflation.
 
However, the Iranian economy is confronted with a dramatic fall in oil prices. It is compounded by the requirements of time-consuming and expensive investments in reviving output toward its pre-sanctions level of about 4 million barrels per day and rising domestic demand. While an increase in oil output and related investment would help increase GDP, lower export prices will likely further weaken the external position and the budget. With limited prospects, at present, of any meaningful supply restraint agreement among the major oil producers, oil revenues for the next 3-4 years could be up to 30 percent lower than those projected on the assumption of a strong recovery in 2016. Similarly, there would be little accumulation of foreign exchange reserves that have served as a cushion against future uncertainties. In this event, there would be little room for expansionary policies to reinvigorate growth. Thus, downside risks to growth have increased.
 
At the same time, the Iranian economy is saddled with significant structural distortions that continue to constrain its growth outlook. Critical prices, including exchange rate and interest rates, are still out of line; the financial sector is burdened with large nonperforming loans; the private sector faces weak demand and inadequate availability of credit; and government arrears have accumulated while subsidies remain large. Public sector entities control a significant share of the economy and access to bank credit. Governance of the private sector and the business environment is inadequate and nontransparent, undermining private investment. Increased regional instability as well as uncertainty with respect to the implementation of the nuclear agreement further compound downward risks.
 
Domestic Vs. Regional Priorities
 
Broadly, Iran aims to accelerate economic growth under the existing political structure while simultaneously strengthening its regional strategic position. Within the Iranian political elite, however, lies two competing strands. One, as represented by the reformists and the technocratic government of President Hassan Rouhani, prioritize economic growth. As such, they are more inclined to seek a regional strategic balance and greater cooperation with outside powers in order to serve their economic agenda. If the authorities choose to liberalize the economy through widespread economic reforms, and reduce the role of the inefficient public sector, domestic political power would likely shift in their favor.
The second force, as represented the hardliners, the ruling clergy and the Islamic Revolutionary Guards Corps (I.R.G.C.), would prefer to retain the current economic structure, as these forces maintain a significant stake in the economy. …

Iran’s Policy Options
 
Iranian authorities could pursue three broad strategies in the current circumstances: (a) maintain the status quo, (b) implement widespread and coordinated reforms, or (c) implement mild politically-neutral reforms. The third option would ease some constraints on private sector investment and fiscal consolidation in response to lower oil earnings, but leave the economic and political structure broadly unchanged. …

Click here for the full text.  

 

Tags: Reports

Connect With Us

Our Partners

Woodrow Wilson International Center for Scholars Logo