Rohani One Year On: A Glass Half Full Or Half Empty?

By-Jahangir Amuzegar*

1 August 2014 marks the first anniversary of Hojatol-Islam Hassan Rohani’s accession to the Islamic Republic’s presidency. A mid-level Shiite cleric having an advanced degree in theology from a Scottish university, Mr Rohani defeated his five non-turbaned rivals – including both the popular mayor of Tehran, and a hardline theologian believed to be the Supreme Leader’s favorite – in the June 2013 presidential election. Given no more than 10% chance of winning by political pundits, he received an absolute majority of the popular vote in the first round – albeit by a very small margin.

Running on an attractive platform of easing tension with the West, resolving Iran’s nuclear issue with the major world powers, reducing crippling universal economic sanctions, reviving the inflation ridden and stagnant domestic economy, and fighting corruption, he appealed to the masses who were badly hurt by the twin scourges of high inflation and massive unemployment – on top of onerous socio-cultural restrictions on their daily lives. In his post-election speeches, too, he vowed that his government of “Initiative and Hope” would strengthen the national currency, control the runaway rise of credit liquidity, increase domestic investments, and reform public subsidies.

With a year now passed since his inauguration, and with his priorities for action set forth for the first year, time seems appropriate to take a look at his performance.

THE PRESIDENT’S CLAIMS

Fulfilling his campaign promise of regularly informing the public about his achievements, Mr Rohani gave a brief report on his first 100 days in office in a live television address on 12 November last year. He emphasized that, faithful to his election promises, he was “honored” to take the opportunity to inform the public on his administration’s performance. He then started reciting a number of thorny problems inherited from the previous administration in need of desperate remedies: shortages of essential commodities (one province had only three days’ of wheat stocks), the treasury’s need to borrow money to pay for current expenses, fiscal revenues coming in at less than half budgeted levels, and the economy facing a combination of inflation and unemployment unseen in 50 years.

The Ahmadinejad government, he emphasized, had the highest oil reserves of any administration in Iran’s history, and yet ended up with the largest debts to the banking system, private contractors, and the public. While liquidity had increased seven-fold, some 70% of the government’s expenditure commitments were unfulfilled. And the revenues from raised energy prices could only cover half of the payments made under an ambitious cash subsidies program.

His own immediate domestic agenda, he said, targeted the stockpiling of essential commodities, control of liquidity and inflation, revival of economic growth, attention to agriculture, and reform of subsidies. His foreign efforts zeroed in on reducing tension with the West and thus reducing sanctions. As a result, he claimed, inflation had fallen; the shortage of prescription drugs has been almost eliminated, and the Tehran Stock Exchange has been on the rise. In foreign relations, major success has been reached with the 5 + 1 group on the nuclear program leading to easing of sanctions.

Public reaction to his verbal report was muted. Analysts found the report shallow, populist, devoid of needed substance, and particularly remiss in addressing domestic political and social issues. They considered it a litany of familiar grievances about the previous administration instead of details of the new government’s accomplishments. They found his profuse expression of gratitude to the people highly ironic as the masses had nothing to do with the government’s actions and inactions – just continuing their life of quiet desperation.

The president’s second televised interview on 1 May this year, again consisted of rambling, disjointed statements on improved public health services and health insurance, moderate raising of energy prices despite Majlis authorization for larger hikes, the resumption of the second phase of targeted subsidies, and increased welfare assistance to some 11 million poor under the protection of various charity organizations. The only statement of broad substance involved the claim that in the first eight months of his administration, inflation was cut from 40% to 26% – an unprecedented feat in “Iran’s history”.

Based on his broad campaign promises, president Rohani was expected to take certain urgent measures in his first year in office (MEES, 12 July 2013). The most urgent and immediate task was to try to reach a rapprochement with the 5 + 1 world economic powers on Iran’s nuclear program, in order to lift the crippling economic sanctions widely believed to be responsible for the country’s economic contraction and high unemployment. The first domestic economic expectation was to deal with the budget deficit inherited from the outgoing administration, and prepare a new budget for 2014. The second urgent measure was to reduce galloping inflation – the second highest in the world at the time, as well as the second highest on record in the history of the Islamic Republic. The third task was to end the prevailing multiple exchange rates, establish a unified rate, and eliminate the ongoing “black market” in foreign currency. The final expected step was to deal with the deficit-ridden Subsidies Targeting Program by taking a new and serious look at the program’s philosophy, modus operandi, finances, and beneficiaries.

THE SUCCESSES

On his first anniversary, the president’s overall record on these issues has been somewhat uneven. On the long-standing foreign dispute, the president’s political goal, interests, and attention were primarily directed at reaching agreement with the world powers. Faithful to this ambitious objective, 100 days after his inauguration, a “confidence-building” agreement was reached at Geneva in November 2013 with the five veto-powered members of the UN Security Council plus Germany – the 5+1 group. Under this so-called Joint Plan of Action (JPA), Tehran agreed to suspend for six months its activities to enrich uranium to the 20% level. The group, in turn, agreed to ease restrictions on Iran’s crude oil exports, free some $7bn of blocked Iranian assets in several tranches, remove sanctions on petrochemical exports and precious metals transactions, and allow the sales of airplane and automobile parts to Iran. A final agreement on all related issues was to be worked out by 20 July 2014.

The JPA agreement resulted in raising business confidence, restoring relative calm to the currency and precious metal markets, a near doubling increase in automobile production, noteworthy rises in both oil and non-oil exports, and revival of durable goods output. By the 20 July deadline some $4.2bn of blocked assets had been released, though $2.8bn remained to be disbursed. Significant remaining differences between the two parties on (a) Iran’s number of allowed centrifuges, (b) the fate of the Arak cold water reactor, and (c) the speed of removing economic sanctions, however, prevented the conclusion of a final comprehensive agreement by the deadline. And the negotiation time had to be extended by four more months. President Rohani claimed the progress already reached on other issues between the negotiating parties as a success. Actual verdict, however awaits the outcome of post-extension developments.

The president’s second most outstanding success has been taming runaway inflation inherited from the previous administration. Despite raising prices of gasoline, diesel and electricity by 25- 75% to finance the deficit-ridden monthly cash subsidy payments, galloping inflation has been arrested thanks to the Central Bank of Iran (CBI) reducing liquidity, the government adhering to a more prudent 2014-15 budget and terminating some money-burning projects. According to CBI data, inflation for the year to June 2014 had fallen to only 15%, compared to 30.3% a year earlier. The 12-month average rate of June 2013-June 2014 was just over 25%, down from 43% a year earlier. In his November 2013 television interview, the president had promised to get the 12-month average down to 25% by March 2015; this goal has evidently been reached eight months early.

THE SHORTFALLS

A somewhat troubling aspect of the success in taming inflation has been the widespread belief among analysts that the feat has been achieved at the cost of prolonging and even intensifying the recession. The contention is that falling prices have been due to controlling growth of money supply, reducing bank loans, and terminating certain development projects rather than through new investments and job creation.

Attesting to this conclusion has been the behavior of national economic growth and high employment over the last 12 months. High economic officials, boasting that the Rohani administration has improved growth from minus 6.8% for 2012-13 to minus 1.9% for 2013-14, admit that the current year, ending in March 2015, might show only 1.5% positive growth – at best.

The latest report on unemployment also shows that it has gone up during the current administration, with industry continuing to lose jobs. A more distressing factor in this regard is that while national unemployment is officially around 12-13%, the jobless figure for college-educated young people entering the workforce has reached 43%, some 1,100,000. The reasons for the continuing slack are not difficult to find. It took Mr Rohani’s economic team 11 months to come up with a remedial “proposal” in July 2014 to deal with the recession. The tightly-written 15-page presentation, however, is a pedantic and theoretical treatise dealing with the causes and effects of economic stagnation – a tightly argued and elaborately discussed piece of literature, understood by only a very tiny minority of the country’s highly educated groups. Yet, its four recommendations for dealing with the situation are somewhat elementary: facilitating and promoting exports; reducing taxes; augmenting the government’s development budget; and increasing competitiveness of domestic enterprises through the adoption of an appropriate foreign exchange regime. The administration is now expected to submit specific proposals in each category to the Majlis for implementation.

The government’s second disappointing shortcoming has been its inability to unify the exchange rate. Exchange rate unification has, indeed, proved to be most elusive of all the president’s immediate tasks. Despite repeated promises to bring the free market rate close to the $1=IR 24,500 legislated in the current fiscal budget, unification has remained a distant goal – pending, in the words of the CBI governor, the “clearing of the international conditions” – a code phrase for the successful outcome of the nuclear negotiations.

Short of exchange unification, however, some order has been achieved out of the total chaos prevailing in the last three months of Ahmadinejad’s administration, where a fixed “reference rate” ($1=IR22,600), a fluctuating “transaction” rate ($1=IR24,000), and a fluctuating “free market” rate ($1=IR36,000-38,000) existed side by side. Following the passage of the 2013-14 fiscal budget where a $1=IR24,500 was set for calculating the rial value of oil export dollars, the Rohani government eliminated the “reference” and “transaction” rates. The free market rate remained the only rival of the budget’s rate.

The enthusiasm created by the Rohani election, the JPA agreement with the world powers, and a partial easing of economic sanctions caused the free market rate to fall below $1=IR30,000. The lack of further good news, and particularly concerns about the course of nuclear negotiations, pushed the rate back to around $1=IR32,000. On Mr Rohani’s first day in office, the rate was $1= IR32,700. At the anniversary date, it registered at $1=IR31,260 – a slight improvement.

The reasons are clear. Drastic reductions in oil export volume and income, difficulties in repatriating even the reduced oil export revenues (due to Iran being largely cut off from the international financial system), lingering doubts about the successful outcome of nuclear negotiations, declining stock market values, and private non-oil exporters’ reluctance to exchange their dollar proceeds on the domestic market, made the official target of $1=IR24,500 totally out of reach.

Other reasons for persistently higher dollar rates are not hard to find. With the Tehran Stock Exchange losing steam, gold prices universally falling, the real estate market down, and the interest rate on savings deposits cut to 21% (ie below the long-term inflation rate), the only outlet for speculative demand remains the foreign exchange market. At the same time, with oil export earnings as the main source of foreign exchange and supply thus reduced by international economic sanctions, the outcome has been predictable. Accordingly, with every little sign of optimism regarding Iran’s negotiations with the major powers on the nuclear issue, the rate has slightly come down – and with each small disappointment, it has gone up.

Under these circumstances, it would have been more logical to bring the statutory rate close to the free market rates – rather than the reverse. But the lingering public adherence to the desirability and prestige of a “strong” currency has blocked such a move. The low price elasticity of Iran’s non-oil exports, and the need for “cheaper” imports as a means of fighting inflation have been added reasons for the reluctance.

SUBSIDY REFORM FLOP

The Rohani administration’s third performance shortfall involves his inability to improve the second phase of the energy subsidies program. Despite numerous findings regarding runaway costs and small overall benefits of the first phase, and despite his repeated promises to come up with new ways of dealing with the flawed undertaking, the ongoing practice of monthly cash payments to nearly the entire population was maintained. At the same time, attempts, under the current fiscal budget, to cut the rich from the list of beneficiaries have proved unsuccessful. By asking the 77 million or so current recipients of the monthly checks not to apply for continued benefits if they really do not need it, the government was hoping to find 7 to 10 million volunteers. The result was a disappointing 2.4 million – as millions of well-to-do registrants chose to conceal their financial status despite penalties for false statements. A subsequent scrutiny of self-declared applications, according to the Finance Minister, has found some 9 million ineligible applicants. The government, however, has so far found no ways of dealing with them.

In addition to the deficit-ridden monthly cash subsidies, a clumsy attempt was made during winter 2013-14 to distribute food baskets to Tehran city dwellers given 65% food price inflation. The experiment turned out to be a fiasco. The designated distribution day happened to be a cold, snowy, winter day where long lines of participants, regardless of income, had to endure many waiting hours in order to receive the basket. The contents of the package were also criticized by the recipients. The president had to apologize for the gaff. Chastized by the failed attempt, a second food basket delivery was made in July 2014. This time, the recipient families had to be registered with the Imam Khomeini’s Relief Committee or the State Welfare Organization.

SOCIO-CULTURAL ARENA

The harshest and most pointed criticisms of the Rohani administration have been focused on his shortcomings in the socio-cultural arena. Despite his solemn campaign promises to improve the domestic political environment, ease various restrictions on individuals’ daily lives, relax cultural censorship, and enforce his own new “charter for citizens’ rights,” the president’s performance in these areas leaves much to be desired. According to the March 2014 Report of the UN Special Rapporteur on the situation of human rights in the Islamic Republic, while a number of positive overtures have been taken by the Rohani government to strengthen human rights, and remedying some cases of human rights violations, they do not fully address laws and practices that infringe upon the rights to life, to the freedom of expression, association, assembly, belief and religion, to education, and to non-discrimination. Arbitrary detention of individuals for peacefully exercising their fundamental rights to expression, association, belief and religion remain prevalent, including the frequent use of the death penalty for crimes not considered “the most serious offences” under international law.

Despite the Iranian Judiciary’s strong rebuttal of the UN report’s content, palpable evidence shows that during Mr Rohani’s tenure freedom of speech has continued to be violated. Dissident students, journalists, and opposition politicians have been detained and jailed. Executions, even for non-violent crimes, have increased. Death by stoning has been resumed. Political prisoners have been beaten in their cells. Expelled students and professors who were purged during the previous administration have not all been brought back. The two prominent politicians – Hossein Mussavi and Mehdi Karrubi – who had protested against Mr Ahmadinejad’s disputed re-election, have remained under house arrest without charge for a fourth year. Labor and women’s- rights activists, novelists, filmmakers, and Muslim converts to other religions have faced harsh treatments. The internet and social networking sites have been periodically blocked. Three new newspapers have been shut down. According to a June 2014 report by Reporters Without Borders, the Islamic Republic continues to be one of the world’s top five incarcerators of journalists: 58 reporters are currently in jail, 25 of whom were arrested and imprisoned during Mr Rohani’s tenure. The president has been witness to all these violations, but has failed to intervene.

A WORD OF CAUTION

This analysis of President Rohani’s first year in office, and particularly the litany of shortcomings leveled against his administration, should be viewed in the context of Iran’s unique political system where the president has to share his limited policy-making power with several other political power centers. In Mr Rohani’s case, further allowance should be made in this regard due to the unfriendly political environment where he was fiercely challenged from seven different quarters.

First, he had to content with the Supreme Leader (the Rahbar) who was determined to keep him on a short leash because he was suspicious of the new president’s overtly liberal views on personal freedoms, unsure of his adherence to the strict version of Islamic theocracy and Shiite ritual, envious of his growing popularity with the rank and file, and unhappy about his apparent tendency for accommodation with the West. The Rahbar gave Mr Rohani and his nuclear negotiating team a tepid endorsement at first, but his simultaneous expression of “pessimism” regarding the outcome of the talks, and his recent renewed opposition to any bilateral negotiations with Washington does not bode well for those hopeful of rapprochement.

Second, he has had to find a modus operandi with the conservative Majlis deputies who were elected during the Ahmadinejad administration, and remain loyal to him. The hardline members have been increasingly annoyed by the president and his ministers constantly lambasting their hero and his government for incompetence, mismanagement, waste, and corruption. True to form, this so-called Steadfastness Bloc has so far given six ‘yellow cards’ to current cabinet ministers – a symbol of its dissatisfaction with their official testimonies. It has succeeded in impeaching the Science Minister for ignoring their demands. Also it has obtained barely enough votes in the Majlis to nullify a quarter century of Iran’s highly successful family planning program, praised by UN agencies, and to outlaw all types of birth control and permanent contraception.

Third, he has had to watch helplessly the police, the security forces, and the Judiciary – all answering only to the Supreme Leader – arrest, detain, and send to prison the regime’s dissidents without the president’s knowledge, consent, or involvement.

Fourth, he has had to endure daily attacks by conservative newspapers, political groups opposed to the West and Washington, and the various vested interests which are likely to suffer financially in case of successful nuclear negotiations and lifting of sanctions.

Fifth, he has had to engage in relentless quarrels with some senior clerics: he refers to them as “stone age clergy,” who want “to send people to heaven by whips.”

Six, he had to somehow accommodate the powerful and domineering Islamic Republic Guard Corps whose close lucrative relations with the Ahmadinejad government were cut short by the new administration, and were not happy with their share of power under the new administration.

Finally, he has to quell a rebellion among his young and middle class supporters who are unhappy about the lack of any tangible progress in the socio-cultural and political area, and accuse him of reneging on his election promises.

THE ROAD AHEAD

In the absence of unexpected events in the socio-political arena, President Rohani’s second year in office will in all probability be defined by the outcome of the nuclear negotiations with 5+1 group and the resultant relaxation or otherwise of sanctions. Paradoxical as it may sound, while Iran’s current economic malaise cannot all be blamed on sanctions, the country’s future economic recovery almost totally depends upon the latter’s removal. Faster economic growth and higher employment require substantial new investment. With the government’s financial situation extremely tight, no substantial public investment in new development projects or thousands of unfinished ones from the past, can be expected unless oil export receipts are substantially increased through an easing of sanctions. Private investment, in turn, requires business confidence and a favorable climate for trade and business – neither of which can be expected without the successful conclusion of the nuclear negotiations, and the end of sanctions.

The goals of unifying the foreign exchange rate and financing the costly subsidy programs both require substantial government resources available only through lifting of sanctions, and a resultant sharp rise in oil exports. The Tehran Stock Exchange’s lost luster can be regained through business and public confidence in a calm and conducive climate once the sanctions are lifted.

Sanctions – current and future – do not pose an existential threat to the Rohani government. But they impose a heavy burden on the economy.

*Dr Amuzegar is a distinguished economist and former member of the IMF Executive Board.