On Saturday 15 June 2013, Iran’s Ministry of the Interior announced that Hojat-al-Islam-val- Moslemeen Hasan Rohani, a mid-level Shi’ite cleric, had become the Islamic Republic’s seventh president, having won 50.7% of the total votes (18mn out of 35mn) cast for the six final running candidates. His closest rival received only 16.6%.
President-Elect Rohani’s landslide victory was indeed stunning, as none of the regular political pundits inside or outside of Iran had predicted the result (one fairly astute observer of Iranian politics had given him only a 10% chance). His surprise victory was most probably due to a sudden and spectacular surge in the last few days of the electoral campaigns when two former presidents and two grand ayatollahs – all highly critical of the ongoing political leadership – strongly endorsed him. The final vote was thus a rejection of the last eight years of Iranian domestic and foreign policies, and in reality a virtual referendum on the leadership.
Mr Rohani was one of only eight candidates, out of some 686 aspirants, allowed to run by Iran’s Guardian Council. Registered hopefuls included active politicians, former cabinet ministers and Majlis (parliament) deputies, businessmen, university professors, housewives and a variety of oddball wannabes. The oddest feature of the election, however, was not in its bizarre array of aspirants, or the large number of eliminations, but in the fact that the Council also rejected the “competence” of ex-president Hashemi Rafsanjani, the current member of the Experts Assembly, and the current chairman of the Expediency Council – the country’s highest tribunal in charge of “discerning the best interest of the regime.”
The new president, unlike his hardline and conservative rivals, is widely regarded at home and abroad as a voice of moderation and reason who may introduce meaningful changes to Iran’s internal politics and external relations. In reality, however, this expectation may be somewhat exaggerated: as a member in good standing of the current Experts Assembly, the current Expediency Council, the National Security Council, and as a former member of the Majlis and chief nuclear negotiator, Mr Rohani is a consummate insider. He is neither an iconoclast nor a radical reformer, and not even a true liberal. He firmly believes in strict Shi’ite theology and the concept of the velayat-e-faghih (rule by a theologian), and he subscribes to the Islamic Republic’s undemocratic constitution. The vote in his favor should thus be considered a vote against his “principalist” rivals, and a repudiation of the outgoing administration’s disastrous external political adventurism and gross domestic economic mismanagement. From all indications and post-election analyses, the decisive vote was really more than anything else a vote for “change”.
Whether or not the president-elect will be the “ideal” chief executive described by the Supreme Leader, only time may tell. In Ayatollah Khamenei’s view, the ideal president is supposed to be valiant, courageous, and intrepid in foreign relations. In domestic affairs, he has to have a concrete program and display wisdom, ingenuity and a firm belief in what the head of state has called “the resistant economy.”
Of the three televised debates between presidential candidates – on economic problems, socio-cultural issues and foreign relations – it was the one on the country’s economic problems that was the most watched and publicly discussed. Topics chosen by the television organizers included: plans for achieving economic justice; measures to deal with falling oil export receipts; strengthening domestic production and protecting domestic labor and capital; the second phase of the Subsidies Targeting Program; unemployment; housing policy and price control; and relations with other domestic constitutional power centers and supervisory agencies. None of the participants appeared to have any concrete plans. Proposals ranged from a vague promise of “improving the business climate” to a modest one of “increasing non-oil exports” and finally the grandiose call for “the defeat of capitalism, communism, and Zionism on the global scene, and the creation of an Islamic empire.”
Mr Rohani’s answers to the proposed questions included: domestic production rather than imports, decentralization and the fight against corruption; the replacement of oil exports by petrochemical products; true privatization and the improvement of the trade and business climate; payments of cash subsidies only to the poor; the establishment of a non-partisan administration; and a program for low-cost housing. In his post-election statements he has signaled that his agenda will be dominated by efforts to revive Iran’s stagnant economy, strengthen the devalued national currency, control liquidity, increase domestic investment and improve targeted subsidies.
All the indications are that the new president is likely to face challenges that dwarf those encountered by his six predecessors (the only exception, arguably, being the first president, Abolhasan Bani Sadr, who had to deal with massive domestic political opposition and the Iraqi invasion). Given the nature of these challenges, it is impossible to know whether he can succeed. His handicaps are many and varied. First, he has the support of only slightly more than half of the voters – less than any previous president. Second, he lacks a political organization of his own: his supporters currently consist of an informal and impromptu coalition of reluctant reformers, middle-of-the road enthusiasts and even some disappointed fringe conservatives. As time goes by, and problems remain unsolved, this precarious “alliance” is likely to begin to unravel. Third, for the first three years of his administration, his program will need to win the approval of the current Majlis, nearly half of whose members backed another candidate. Finally, he has to work out a modus operandi with other mostly conservative national institutions – the Judiciary, the Guardian Council, the Television and Radio Organization, the powerful and economically dominant Islamic Revolutionary Guard Corps, the Baseej militia, the hard line clerical societies, and the right-wing press headed by Kayhan.
THE TASKS AHEAD
The challenges faced by the new president are partly external, although largely domestically based. The external challenge, overshadowing all Iran’s other problems, is to defuse tensions with the west over the nuclear program, reach a détente with other regional powers on security issues, enhance cooperation with the International Atomic Energy Agency and improve the Islamic Republic’s badly tarnished image in the international community – ie the measures needed to help ease crippling Western economic sanctions and steer the Iranian economy back towards normalcy. The urgency of this task reflects the abrupt realization by top Islamic Republic officials that their earlier bravado regarding the beneficial effects of economic sanctions as a spur to greater economic self-sufficiency has all been whistling in the dark. The fact is that the current measures, particularly the all-encompassing restrictions put into effect as of 1 July 2013, are wreaking havoc with the Iranian economy. And despite repeated claims by those imposing the sanctions that the embargo is not designed to hurt the Iranian people but to make the regime change its behavior, the opposite has been true. People are suffering unbearably, while the regime is steadfast in pursuing what it claims to be its legal rights.
For these reasons, the first order of priority for the new president is to end the standoff with the west, and reach a mutually satisfactory accommodation with the 5+1 group (the five permanent members of the UN Security Council – the US, China, Russia the UK and France – plus Germany) on the nuclear program. It is now widely conceded that the Islamic Republic may survive with sanctions, but it cannot prosper. The removal of sanctions is essential for Iran’s economic salvation.
The new president’s domestic priority is to the rescue the “sick” economy, which is suffering from a protracted recession, galloping inflation and substantial unemployment. According to an April 2013 report by the International Monetary Fund, Iran’s GDP contracted 1.9% in 2012 and is forecast to shrink 1.3% this year. Next year’s economic growth is expected to be in low single digits. (Iran’s current five-year economic development plan calls for 8% annual growth.)
Inflation is another intractable problem. A June 2013 report by the World Bank, confirmed by Iran’s own Central Bank and Statistical Center, puts the country’s annual inflation at over 40%, among the world’s highest, and the highest seen in Iran for 17 years. Food prices are reported by Iran’s Statistical Center to have risen by over 60%. Prescription drugs have gone up 40-90%. Land prices in the capital went up more than 150% last year. Private observers routinely question the veracity of inflation figures published by Iranian government agencies, and consider the true inflation rates to be much higher.
Unemployment is the third major predicament. The Statistical Center puts the country’s current unemployment rate at 12.2%, with an additional 8.9% underemployed and joblessness among 15 to 24-year olds at 26.9%. The IMF has forecast unemployment this year at 13.4%, rising to 14.7% next year. Accurate and consensus figures on Iran’s labor market are a rarity. According to a Ministry of Labor report, in the last seven years some 5.5mn people have entered the labor force and some 5.2mn new job opportunities have been created, increasing total unemployment by only 300,000, to some 3mn. A member of the Majlis’ Labor Commission disputes the official government figures and estimates the national jobless rate to be as high as 30%. In his view, the low 3mn unemployment figure excludes “women and university students.” Domestic private analysts also believe that despite the government’s claim to have created 5.2mn new jobs, no more than 100,000 have actually been created. And the reason for the official unemployment number remaining unchanged at around 3mn is that the 16mn babies born in the 1980s entering the bleak job market in the last five years have decided to take advantage of the zero opportunity cost of pursuing higher education at tuition-free government universities. As a result, Iran’s national labor force is a mere 34.7% of its population – one of the lowest rates in the world for comparable countries. These millions of university graduates are now entering the market, and asking for jobs commensurate with their newly acquired qualifications.
The solutions to these triple problems may best be looked at in terms of the immediate (first year), short-term (two-year), and medium term (four-year) outlook.
The new president’s immediate economic task will be to tackle this year’s budget deficit as the major cause of Iran’s endemic inflation. The current year’s budget assumes 1.3mn b/d of oil exports at $95/B, which seems somewhat optimistic, particularly since oil exports fell to 700,000 b/d in June, the lowest in 25 years. The deficit is widely expected to be some $30bn – due to the already substantial fall in oil exports, limited domestic tax collection due to the recession, and substantial financial commitments by the outgoing Ahmadinejad administration. Given the reportedly enormous (but as yet undeclared) debt owed by the central government to the banking system, government bondholders, state enterprises and private contractors, the prudent way to deal with the shortfall would be to issue short-term bonds to the public at attractive interest rates, use the proceeds of foreign exchange earned at government-set artificially high rates, sell off money-losing state enterprises and temporarily postpone non-urgent development projects.
The second immediate measure should be to end the current multiple exchange rate regime, establishing a unified rate based on some rational formula – preferably the purchasing power parity ratio between the Iranian rial and the US dollar. This floating unified rate should be applicable to all purchase demands regardless of their essence or urgency. The “vital” foreign currency demands (for food, medicine or security imports) should be compensated by special subsidies rather than a different exchange rate. There should be an end to the free (black) market.
The third immediate priority should be dealing with inflation by strictly controlling liquidity and restricting commercial banks’ borrowings from the Central Bank. And the fourth urgent priority is to put some order in the current Subsidies Targeting Program, which is a useless drain on the Treasury’s limited resources. The ongoing scheme, consisting of selling state-produced energy products at higher prices, and distributing the proceeds in monthly cash payments to nearly the entire population, has turned out to be deficit-ridden, inflationary, addictive and harmful to energy-intensive small private industries. The program’s basic philosophy, modus operandi, finances, beneficiaries and termination process have to be thoroughly reviewed and rethought. A firm and binding coordination between fiscal, monetary and exchange policies is essential to the realization of these tasks.
The new president’s short-term tasks will consist of (1) dealing with the minor role of taxes in the GDP and the fiscal budget and (2) increasing labor (and total factor) productivity. The Islamic Republic is probably one of the world’s least taxed and most subsidized countries. Some 40% of the total national product is legally tax exempt, and a further 20% consists of smuggling in the underground economy. The taxes paid by the remaining 40% fall far below statutory requirements. Despite a modern and progressive tax system (including value-added taxes) on paper, taxes account for less than 7% of GDP and only 25% of the annual fiscal budget due to the system’s faulty structure and dismal collection record. Of the 400,000 registered businesses in the country, only 193,000 bother to file a tax return. While small private businesses (asnaf) produce some 30% of total national product, their share of taxes is less than 5%. Seventy-five percent of the budget consists of oil export receipts, sale of state enterprises and borrowing from the Central Bank.
Labor productivity is also frighteningly low. According to various private estimates, backed by occasional official data, the average “useful” work per week in Iran is estimated to be 11 hours per worker, compared to 60 hours in Japan and 74 hours in South Korea. The annual “fruitful” work in Iran averages 800 hours, compared to 2,420 hours in Japan, 1,330 hours in Turkey and 1,100 hours in Pakistan. Due to a large number of official holidays (including weekends) the total number of annual work days in Iran is only 156.
The third crucial medium-term task confronting the new president will be to overhaul the Islamic Republic’s basic economic structure, a relic of the radical left input in the original constitution and its even more problematic amendments (the so-called Article 44 interpretation). The task is akin to what ex-president Ahmadinejad called “Great Economic Surgery” (MEES, 24 November 2008). This should involve: (1) downsizing the very large and highly inefficient public sector (characterized by increasing inroads by the Islamic Revolutionary Guards Corps); (2) remedying an unfavorable climate for trade and business, shot through with mafia-type private monopolies and other impediments to entry; (3) the removal of burdensome and pernicious regulation of the banking system; (4) faster and more transparent privatization of state enterprises in deficit; (5) an end to wage and price controls; (6) the establishment of a permanent and politically secure oil stabilization fund (MEES, 21 November 2005); and (7) the reversal of the pro-natal policy recently reinstated after the successful population control measures of the last decade.
Reducing the government’s reliance on crude oil exports should be the new administration’s final task. Oil has been, and continues to be, the Iranian economy’s lifeblood. Oil export receipts account for 80-85% of all foreign exchange earnings and provide 50-60% of the fiscal budget. Domestic excise taxes on oil products, plus levies collected from imports (largely financed by oil money) constitute the lion’s share of total collected taxes. The fluctuation of world oil prices in the last 35 years has been mainly responsible for ups and downs of Iranian GDP.
PROSPECTS FOR SUCCESS
Barring unforeseen circumstances, Mr Rohani has a fairly good chance of success. Being a “diplomat shaikh” – savvy, courteous, well-mannered and open-minded – with laudable negotiating skill and experience, he is eminently qualified for the task of reaching a mutually satisfactory compromise with the West. The catch, however, is that, under the Islamic Republic’s constitution, all issues of vital national interest are decided and directed by the Supreme Leader, and carried out through the National Security Council chaired by the president. Iran’s current position on the nuclear program, dictated by Ayatollah Khamenei, is one such issue. The hope is that Mr Rohani, as the Supreme Leader’s long-time trusted representative in the National Security Council, can persuade him to take a pro-active stand.
On the domestic front, too, his qualifications are better than average. Judging from his statements on several occasions, he seems to be more knowledgeable about economic issues than his rivals. His best-selling book, entitled ‘National Security and Iran’s Economic Regime’, published by the Expediency Council’s Strategic Studies Center, attests to his awareness of the basic problems and their possible remedies. In his recent trip to Qom to meet with various clerical figures, he expressed concern about the problems facing Iran’s industrial enterprise and agriculture. More significantly, in a meeting with the governing board of Iran’s Chamber of Commerce and Industry on 7 July, he said he does not believe in a “command” economy (dastouri), and thinks that the government’s duty is to set policies and see to their implementation, rather than engaging directly in economic activities. He has also promised to choose a non-partisan administration composed of experts in different fields. But above all, given the harsh criticism of the outgoing administration by all presidential candidates, he is bound to shine by comparison.
*Dr Amuzegar is a distinguished economist and former member of the IMF Executive Board.