United States Institute of Peace

The Iran Primer

Rouhani’s Next Test: Empty Coffers

Kevan Harris

What is the status of Iran’s economy three months after President Hassan Rouhani’s inauguration?
     In a televised interview marking his first 100 days, President Rouhani acknowledged that the state coffers were virtually empty when he assumed the presidency. The government did not have sufficient revenue to pay public sector salaries. Iran also faced major shortages in basic commodities, such as wheat, at the same time. To compensate for the unexpected shortfall, the new government had to stop several development projects and borrow from the Central Bank.
            In the November 26 televised interview, Rouhani also outlined the latest economic indicators:
• Inflation was over 40 percent in the last Persian year, which ran from March 2012 to March 2013.
• Iran’s GDP declined by 5.8 percent over the same period, according to the Central Bank.
• Unemployment was above 12 percent, with youth unemployment at over double the rate. (Unemployment does not include discouraged workers, who mask problems of under-employment and part-time work.)
            Rouhani said Iran had not suffered this depth of stagflation since the revolution’s early years. 
            The government is also in debt to a wide variety of public and private entities:
• Iran’s Central Bank, Social Security and Retirement funds
• Municipal governments
• Provincial development contractors
• Energy and industrial producers
• Educational institutions 
            Rouhani put the current debt at 200 trillion tomans, or roughly $70 billion using the open market exchange rate. If true, the ratio of government debt to GDP is about 30 percent, a sizable jump from previous years even with the currency’s devaluation. In comparison, Turkey’s ratio of public debt to GDP is about 36 percent, and Egypt’s ratio is over 80 percent.
What role does Iran’s economy have in Rouhani’s political game plan?
            Rouhani’s foreign and domestic economic strategies are irrevocably linked. Inside Iran, the issue is not whether international sanctions or domestic mismanagement caused its economic woes, which is largely a rhetorical question used by Iran’s politicians to criticize each other. So the barriers to economic rejuvenation are mostly political.
            Iran’s economic woes will be easier to solve if it can increase access to:
• Foreign exchange
• Global financial flows
• Oil revenues 
      Rouhani’s team is trying to mobilize allies in parliament behind a range of new economic policies to address these issues. Given perceptions of President Mahmoud Ahmadinejad’s disastrous legacy, hardliners have little leverage – for now – to challenge the new centrist president and his reformist allies on economic policy. If reforms deliver results, conservatives can say they were part of the solution. If not, Rouhani’s initiative lessens the chance of Iran’s entire right-wing establishment attacking him – as happened during former President Mohammad Khatami’s tenure.
What strategy is Rouhani pursuing to improve Iran’s economy?
           Rouhani is engaged in a precarious balancing act. So far, his administration has decided not to massively curtail government spending on cash grants, energy subsidies, and other public arenas. Given the importance of government spending in the economy through various formal and informal networks, a rapid move toward austerity to reduce inflation would drive the economy into a deeper recession. Rouhani is cutting back the budget both this year and next year, but his team has argued they can spend limited revenues in smarter ways.
           Rouhani concedes that the government cannot cut enough spending to balance the budget, since Iran’s lower and middle classes rely on subsidized healthcare and income grants. The administration fears social backlash. So, for now, Rouhani is trying to establish social trust in public institutions in a way that will allow more reforms down the road.  
            At the same time, Rouhani has promised to accomplish two goals over the next two years:
      • Reduce inflation to 25 percent
      • End the recession. 
           His ambitious agenda will require more stringent monitoring of public spending and directing it in more productive ways, while also creating an investment climate that encourages productive, not speculative, activities by a fickle private sector. 
What shifts have occurred in the economy since Rouhani’s election—with what impact?
            The new government has largely stopped using shares of public sector companies to pay existing debts to semi-governmental holding companies, pension funds, and contractors. A recent Reuters investigation on the Imam’s Orders Headquarters detailed how one such holding company – ostensibly run by the office of Supreme Leader Ayatollah Ali Khamenei – invested in wide swaths of Iran’s economy. The story grabbed headlines, but it was misleading.
           This form of investment and asset management is common in Iran, not just for companies attached to the Revolutionary Guards or the Supreme Leader’s office. There are dozens of such holding companies, with ownership spread among political actors. Rouhani’s administration has made a decisive break from the Ahmadinejad era by halting government transfer of state assets into this form of ownership and rethinking how to privatize the public sector.
            The government has also put a stop to the previous administration’s huge public housing program – the Mehr Housing Plan – which is widely regarded as a major driver of Iran’s inflation. The plan was supposed to construct public housing for poor Iranians, mostly newlyweds, so they could obtain low-interest loans and move out of parents’ homes. But the plan was botched.  
           Large apartment complexes were built on the distant edges of urban centers, often without access to other public facilities. Beneficiaries of the plan were predominantly Iran’s new middle classes, not the poor. And, partly as a result of subcontracting out the work with little oversight, construction was shoddy. The Iranian press is now filled with pictures of sub-par housing complexes and stories of people refusing to move in. The Rouhani government terminated the Mehr Plan and promised to revamp it into a “social housing” program – in several years.
What has happened to Iran’s subsidy reform plan and income grant program?
           In his televised interview, Rouhani said the government is weighing its options. It could raise the price of energy, reduce the value of income grants, or determine some way to restrict recipients of income grants to lower-income households. But each option has its costs. Rouhani said the government could have looked at individual bank accounts to estimate household incomes, but in the end rejected this option. People must regain faith in the banking system, he said, so they would feel more comfortable about investing.
           So, for now, Iran’s subsidy system is in a holding pattern. The government is not reducing subsidies this year on fuel or energy, nor is it changing the nominal level of grants to the population. In the meantime, several industrial sectors – from gas to auto to steel – are lobbying the government for financial support because of energy costs of production.
           Overall, bolder economic policy shifts on any issue require an ever-wider political coalition. Rouhani has so far maintained a wide base of political support as his administration pursues engagement with Western powers on the nuclear issue. If he can keep this coalition intact, then he just may be able to walk the economic tightrope.
Kevan Harris is a sociologist and postdoctoral research associate at Princeton University.
He was a 2011-12 USIP Jennings Randolph Peace Fellow. His recent publications are available at http://kevanharris.princeton.edu.
Photo credit: President.ir, Semira Nikou


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Poll: Americans Back Geneva Deal 2-to-1

            Americans support the interim nuclear deal with Iran by a two-to-one margin, according to a new Reuters/Ipsos poll. Some 44 percent of respondents backed the agreement, and 22 percent opposed it. When asked what Washington should do if the deal fails, only 20 percent of Americans supported using military force to stop Tehran’s nuclear program. Nearly a third said the United States should continue diplomatic efforts and half supported increased economic sanctions. But 25 percent of respondents were unsure. The following are excerpts from the poll conducted on November 26.

Q1. Which of the following Middle Eastern countries do you think treats its citizens best? Please choose only one.
Israel 33%
Turkey 5%
Egypt 4%
Saudi Arabia 3%
Iran 2%
Iraq *%
Syria *%
None of these 20%
Not sure 33%
Q2. Which of the following Middle Eastern countries do you believe poses the biggest threat to the United States and its allies? Please choose only one.
Iran 42%
Iraq 11%
Syria 9%
Israel 3%
Saudi Arabia 2%
Turkey 1%
Egypt *%
None of these 6%
Not sure 26%
Q3. Diplomatic relations between the United States and Iran are substantively improving. Which of the following statements comes closer to your personal view?
• The US is right to improve its diplomatic relations with Iran 36%
• The US should hold a hard line with Iran and maintain or expand current sanctions 37%
• Unsure 28%
Q4. Thinking about Iran’s nuclear program, do you think that it is for...
• Peaceful purposes (e.g. energy) 6%
• Weapons development (e.g. nuclear bomb) 63%
• Unsure 31%
Q5. When it comes to preventing Iran from developing a nuclear bomb, do you think the US should...
• Use diplomatic channels 32%
• Use military force 6%
• Both 39%
• Neither 4%
• Unsure 18%
Q6. The United States and other world powers have reached an interim deal with Iran to freeze on the nation's nuclear program in exchange for lifting some sanctions on the country. Do you support or oppose this deal?
• Support 44%
• Oppose 22%
• Not sure 34%
Q7. If this deal fails, should the US..?
• Continue diplomatic efforts 31%
• Increase economic sanctions 49%
• Use military force 20%
• Not sure 25%
Q8. If Israel were to launch military strikes on Iran to prevent Iran from developing a nuclear weapon, would you approve or disapprove this action?
• I would approve of it as long as it was supported by the US government 15%
• I would approve of it even if the US government did not support it 25%
• I would disapprove of it if the US government didn’t support it 6%
• I would disapprove of it even if the US government supported it 17%
• Not sure 37%

Click here for more detailed results.

New Rouhani Video: He Mimics Obama in Yes We Can Message

            To mark President Hassan Rouhani’s first 100 days in power, his supporters posted a music video that appears to be inspired by President Obama’s 2008 “Yes We Can” video. It is especially striking because music generally and female performers specifically were banned after the 1979 revolution as “Westoxication,” or poisoning by Western culture.
In the sepia-toned video, a song by both male and female singers is mixed with excerpts of Rouhani’s maiden speech after his inauguration on August 3 and public comments about the president. The participants include members of Iran’s many ethnic groups as well as the disabled, deaf and children. The following are translated excerpts of the song, the president’s remarks and public comments. Links to the video were posted on Rouhani’s unofficial English and Farsi Twitter accounts.

Let us give all Iranians who love their country the opportunity to serve it…

Let those with merits serve the nation
Let us allow the hearts to be cleansed of resentment.
Let us have love, peace, and friendship instead of anger and antagonism. Let this take root.
Let us allow Islam with its peaceful face,
Iran with its rational face,
The revolution with its humane face,
And the affectionate face of the establishment
Continue to create epics.
Rouhani: I feel the weight of this election, the weight of these votes and feel the weight of this endorsement. I seek refuge in God, and God alone.”
Old man: May God assist you.
Young boy: Tomorrow is definitely bright.
Rouhani: From God who always hold the hands of his servants, sincerely and humbly…
Little girls: May God help you.
Rouhani:  …I request that you save your weak servant (himself) from the evils of haughtiness and pride, greed, envy and jealousy, oh God.
Man, woman, old man and child: God, I take refuge in you. I seek refuge in you…
Young woman, man, signing woman and man : … from autocracy of opinion, haste in decision making, putting personal or group interests ahead of those of the public, and of shutting the mouths of rivals and critics
Rouhani: Oh God, help me to be an honest servant for you…
Little boy: Oh God, help him.
Rouhani: … to be a competent servant for the people. And don’t forget what has happened to previous leaders. There is much to say but time is short. It would be best to stop talking and start on the path.
"O holy bird! May your blessing guide his path" [Hafez]
Rouhani: The road to our goal is long.  And I am a new traveler.
Maral Noori, program assistant for USIP’s Asia Pacific Program, and Simin Noori contributed to this translation.

Rouhani’s 100 Days: As Told in His Tweets

      On November 26, President Hassan Rouhani assessed his achievements during his first 100 days in office. Rouhani claimed progress in curbing inflation, relaxing government control on society, securing an interim nuclear deal and drafting a citizens’ rights charter. “We pride ourselves on being accountable to our people,” he said at the beginning of the nearly two-hour address broadcast on state television. His Twitter account posted highlights of his remarks from his speech .
      Rouhani said he seeks to get out of Iran's recession by March 2014, and achieve three percent growth by the year after that. “Investment will increase, economic activity will increase,”
  he said. The president began counting his first 100 days when his cabinet took office, not when he was inaugurated. The following are Rouhani's tweets based on his address.

Kerry and Zarif: Selling the Deal in Video Pitches

            The following are two videos featuring Secretary of State John Kerry and Foreign Minister Mohammad Javad Zarif. Kerry’s video pitch was posted on November 26. Zarif’s interview with Iranian state television was broadcast on November 25 and then posted with English subtitles.



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