After suffering the effects of decades of crippling sanctions, the Iranian economy has been afforded some breathing room in recent months. Mild relief has come as a result of a deal negotiated in november last year, whereby the P5+1 agreed to relax a limited number of international sanctions in return for Iranian concessions on nuclear enrichment and a resumption of IAEA inspections. While economic growth has yet to resume, the Rouhani administration’s efforts to engage the international community can in part be credited for producing a spectacular revival in Iranian equities. As Bloomberg reports, the Tehran Stock exchange has been buoyed by optimism that Rouhani’s efforts will bear fruit:
While daily trading equals only about 22 seconds worth of stock transactions in the U.S., Iran’s market has been booming. The benchmark index soared 133 percent this year through Dec. 24 to a record, beating returns posted by the 93 major global equity gauges tracked by Bloomberg. Most of the rally followed the June election of 65-year-old Rouhani, who delivered an initial accord with global powers just five months into office.
Whether the real economy is reflecting this recent change in sentiment is open to debate. There is no doubt that sanctions have been painful, with collapsing oil exports contributing to a 6% fall in GDP over the past year. Writing from Tehran for Lebanon’s Daily Star, David Ignatius notes that the burden of sanctions have reduced the Iranian economy to “a shadow of what it might be”…
This cost in lost opportunity will only grow if Iran can’t make a nuclear deal that would ease the squeeze on oil sales and banking. And Iranians know it: Many told me during a visit here last week that their economy could be booming if the country wasn’t so isolated.
“The situation from the economic point of view is very bad, this is no secret,” says Saeed Laylaz, an economic commentator and analyst who advises Iran’s domestic automobile industry. Car production has plummeted the last two years, he says, after rising from 6,000 vehicles annually when he started in 1989 to 1.5 million in 2011.
The main issues facing the Iranian economy include high inflation, high unemployment and a sustained fall in government revenues, which has spurred large fiscal deficits. On November 25th last year, the Rouhani’s administration published its budget for the upcoming year. A recent piece by Bijan Khajepour offers context on the regime’s approach and its effectiveness in Iran’s chronic economic malaise:
All in all, Rouhani’s first budget bill offers some signs of new realism and discipline. However, there are still big questions on how the government will close the current financial gaps (emerging from debts left behind by the previous administration) without adding to already existing inflationary pressures. Furthermore, the budget bill does not offer clues with regard to job creation. A contraction of government budget will in reality lead to job losses among state subcontractors. However, Rouhani and his team may hope that the new positive momentum alongside sanctions relief and a new sense of political stability will promote private sector investment to create the needed jobs.
There is no doubt that the Iranian government is facing many economic challenges and that tackling all these issues will be a huge task. In fact, the challenges are so complex that it is difficult to identify an appropriate entry point. For example, one of the key issues in the economy — unemployment — was not even discussed. Though it is valid that the improvement of the business climate and the promotion of the agricultural sector will lead to job creation, the economy will need much more than short-term solutions.
The following puts the unemployment situation in perspective: Experts say the Iranian economy needs to grow by 8% annually to create enough jobs for its annual number of job seekers (about 800,000). According to Rouhani, last year, the economy stagnated by 5.8%. This year, it will experience zero growth and next year, the optimistic forecast is for 3% growth. This means that unemployment will grow, leading to further socioeconomic issues and tensions.
As such, managing the expectations of society for economic improvement is the right path, and it is clear that the government is engaged in expectations management. However, considering the depth of the crisis, it is tempting for the government to move toward becoming a “provider” of basic goods and grants to the low-income classes. That approach would be a regression, and it certainly would be a better path to opt for a growth scenario through unleashing some of the locked potential in the Iranian economy such as tourism, expansion of the gas sector and promotion of gas-based industries that could unleash export potential. To achieve this, the government needs to produce a medium- to long-term strategy addressing all bottlenecks that the economy is facing.