Iran’s Rohani: A Mid-Term Report

By-Jahangir Amuzegar*

Iran’s President Hassan Rohani began his third year in office in early August 2015, with no report or statement about the year passed. The official silence reflected the lack of notable achievements, and partly also a reluctance to boast about his record for fear of giving the hard line opposition opportunities for fresh criticisms. It perhaps also indicated his awareness of a private report showing that only 15% of his campaign promises had been achieved, while 38% were still being pursued, and 47% had been neglected or abandoned altogether. The economic situation remains parlous and even the expected easing of sanctions in early 2016 will struggle to make a significant improvement.

But a good deal of information from private sources, national newspapers, Majlis deputies and foreign correspondent dispatches show the Rohani administration achieved two concrete, albeit still contested, successes in its first 30 months, as well as a series of deplorable setbacks.

SUCCESSES

The first major accomplishment has been the president’s widely acclaimed success in international diplomacy – namely reaching a long sought détente with Western powers on Iran’s nuclear program. From day one, the president and his foreign minister devoted their wits and wisdom to find a solution. Consequently, after nearly two years of incessant and grueling negotiations, a framework was agreed upon in December 2013, and a final agreement signed in July 2015. The technical agreement, called Joint Comprehensive Plan of Action (JCPA), imposes limits on Iran’s level of uranium enrichment, disposal of the current stockpile, and the maximum number and type of centrifuges in exchange for the West gradually removing existing sanctions and releasing of Iran’s frozen assets.

But, though the agreement has enjoyed broad popular support, it has been denounced by hardline political groups in both Iran and the United States. In Iran, the Supreme Leader gave it only a tepid endorsement, and made its observance subject to several conditions – warning against Washington’s attempt to infiltrate Iran’s culture, politics and economics through money and sex. In order to further neutralize Washington’s influence, Ayatollah Khamenei ordered a ban on imports of US consumer goods. Political hardliners raised objection to the accord as surrender to foreign powers, especially the US. The Islamic Revolutionary Guard Corps – whose economic interests were particularly threatened by the agreement – was most vocal on the subject. In the US too, a large group of hardline Republicans and pro-Israel factions denounced the agreement as a license to enable Iran to make nuclear weapons. A bill submitted to Congress to make the agreement subject to congressional review and approval, however, failed to pass.

The second triumph involved the president’s dealing with the domestic economy. Ending Iran’s ongoing period of stagflation was at the top of the president’s campaign promises. Successful taming of the run-away inflation thus became his main focus of attention, and subsequent victory. The consumer price index, which was running at an annual 43% – nearly the world’s highest – when Rohani came to power, was gradually brought down to 9.9% in December 2015 – mainly through a halt in using Central Bank of Iran (CBI) resources (ie, printing money).

The quick and effective taming of inflation, and the president’s promise of bringing it down to single digits before the end of the Persian calendar year (March 2016), however, has been considered by many as responsible for prolonging the recession inherited from the previous administration. While economic officials emphatically reject this assertion, there is no doubt that taming inflation through reduced consumption and expenditure, rather than increased production and investment, must have contributed to the current slack – widely identified with the lack of demand for the immense unsold volumes of cement and steel.

SETBACKS

The great public enthusiasm and strong positive business reaction expected to follow the JCPA agreement did not materialize for a number of reasons: First, widespread published reports about the small size of Iran’s frozen dollars, and relatively small quantity of extra oil that can be exported in a weak global oil market. Second, the public’s finding that the benefits of the agreement – lifting of sanctions, release of blockaded funds, expansion of oil exports – would not be immediate, and may take several months to materialize. And, finally, strong opposition by domestic hardliners to the agreement’s content in both Iran and the US, and the document’s initial uncertain fate in both the US Congress and the Iranian Majlis.

To combat the lingering economic slack President Rohani, in August 2014, presented a much heralded stimulus package called “a plan for a non-inflationary exit from depression.” The economy was officially claimed to have grown by 3% in 2014 and the president called the recession over. But the claim has remained contested. And in late September 2015, the president admitted that the recession has returned, and attributed it to the continuation of international economic sanctions and the decline in annual oil export revenues from $119bn in 2011 to an estimated $25bn in 2015 – the lowest in 10 years.

Subsequently, in a scenario that appeared suspiciously pre-arranged and intended to produce dramatic effects, four senior cabinet ministers in early October 2015 disclosed an earlier letter they had written to the president, warning him that in the absence of prompt new action, the ongoing recession was bound to turn into a crisis. In this highly unorthodox and unprecedented gesture, the cabinet officials’ letter specifically singled out the severely depressed condition of the automobile industry, and the decline in the total worth of the Tehran Stock Exchange index by 42% over the previous 20 months.

Following the scenario, the president in late October 2015, announced a new six-point economic plan involving: 1) lowering interest rates on bank deposits and loans; 2) reducing the legal reserve requirement from 13% to 10%; 3) increasing bank loans to stimulate demand; 4) adding $2.5bn to the development budget; 5) speeding up payments of public debt to contractors; and (6) lowering the interbank lending rate from 29% to 26%. The outcome remains to be seen. With only three months left of the current Persian year, the CBI has yet to announce the GDP growth rate for this year’s first quarter. Critics have called the new proposals a change in the government’s anti-inflationary stand in favor of stimulating demand.

According to partial data, during 2013-15, the economy steadily shrunk, with the result that per capita income reportedly fell to $4,770 from $7,200: a serious recession unprecedented in nearly 50 years. As a probable manifestation of this disappointment, the Iranian rial, which had steadily gained value against the dollar in the two years following Mr Rohani’s election (rising from $1=IR36,000 to $1=IR29,000) had fallen back to around $1=IR36,000 by December 2015.

Another continued major setback has been the ailing job market. Masterful taming of inflation was accompanied by continued high unemployment. The official jobless rate of 10.5% – half the private estimate – is dwarfed by the numbers for youths and women. Youth unemployment stands at 21% of the 24mn-strong 18-26 year old labor force; for women it is over 40%. With 5.6mn new college graduates between 2005 and 2014, some 2.2mn have been added to the “educated unemployed,” with the rate twice that for ordinary job seekers.

The previous government’s unemployment solution – encouraging young people to enroll at universities – is now bound to cause a million more college graduates to join the current army of unemployment. More disturbing is the fact that some 45% of the graduates from certain universities are unemployed. Altogether, under Mr Rohani’s tenure some 118,000 new job seekers have been added to the unemployed. With 4.5mn youth currently at college now, this total is set to rise. A major cause of high unemployment has been fiscal budget deficits, due to the drastic fall in oil export revenues, causing the total neglect of development projects. Iran’s crude prices fell below $30/B in December 2015 — the lowest in 11 years. This means national oil export revenues are down to $25bn for 2015 — compared to an annual average of over $100bn during the Ahmadinejad administration.

Aggravating the budget problem has been continued payments of monthly cash subsidies to millions of well-to-do recipients. Though the 2015 budget pledged to cut $6mn from the roster of supposedly “needy families” receiving such aid, at best half this number has been removed.

SOCIAL RECORD

Tarnishing the administration’s image further has been the absence of a noticeable change in the observance of citizens’ human rights and basic personal liberties despite the president's rosy promises and the public’s wide expectations. After China, Iran is still the world’s number one in the frequency of executions. Stoning to death and juvenile hanging are still ordered by courts.

After Turkey, Iran is the world’s number one incarcerator of journalists. Newspapers need permits to publish, and are closed if they do not follow the official line. Manuscripts need prior review by the Ministry of Culture and Islamic Guidance before publication. Writers are arrested and imprisoned if they criticize the regime. Arrests and imprisonment of political activists and opposition figures are routine. Prisoners are sentenced by closed door courts without announcing the length of their sentence. Visiting foreign businessmen, tourists, and dual citizens are arrested under the vague pretext of national security. And, stifling restrictions on women’s dress, occupations, and attendance in public events have intensified.

The consensus of non-partisan observers is that, despite having the best and brightest socio-economic team of all post-revolution administrations, the Rohani government has not yet made a significant dent in any of Iran’s lingering economic or social ills. The team has showed no noteworthy initiative, no significant management reforms, no true privatization efforts, no solution for the lingering banking flaws, and no steps in fighting widespread corruption.

While Mr Rohani himself still remains personally popular, his team and his programs have thus been subject to widespread criticism and complaint. However, much of the public’s disappointment with the team is unrealistic given the president’s limited power, authority, and free hand in choosing his team. As the only cleric among six candidates running for the presidency, and having defeated his rivals in a decisive victory, he was expected to enjoy greater admiration, cooperation, and support from the Supreme Leader – an ayatollah. A turbaned president, after eight years of a disastrous non-clerical administration, he was also expected to receive greater amity and cooperation from the country’s powerful clergy. The only clerical Islamic Republic president exposed to Western education and culture, he promised better understanding and relations with the West. And as a former member and speaker of the Majlis, he was expected to be widely welcomed by the assembly.

With the possible exception of a détente with the West, however, none of these expectations has materialized. The president’s relations with the Supreme Leader have been cold and distant at best – with his views on women’s rights, relations with Washington, and religious indoctrination contradicted by Ayatollah Khamenei on every occasion. Unlike the Ahmadinejad government that initially had the full support of the Supreme Leader – despite its corrupt and incompetent staff – the Rohani administration which enjoys a well-qualified and honest cadre, has received much less backing.

As a result, he and his ministers from the beginning were steadfastly vilified by hardline newspapers, the Pasdaran commandos, the Judiciary, and Friday Imams. He still has not been allowed to share power with the Supreme Leader on the armed forces, the judiciary, the broadcasting media, and the police force. His lines of authority, in effect, have been limited to domestic economy and foreign diplomatic contacts. But, even in foreign affairs, Iran’s widely reported involvement in Syria, Lebanon, Yemen, and Gaza have been out of his hands, and perhaps even his knowledge.

Almost from the start, tensions began to develop between him and the entrenched hard line clergy: he called them “stone age” fanatics, and they labeled him “Glasgow-ordained” Hojatolislam—alluding to his attendance at a seminary in the British Isles. His relations with the Majlis have turned out to be cold and formal. His ministerial nominees have been repeatedly rejected; some have been threatened with impeachment, even death.

And, a powerful anti-American military/clerical complex, which finds its spiritual/financial interests threatened by closer ties with Washington, has become his number one nemesis on every occasion. Frequent arrest and imprisonment of opposition figures by the security forces on no specific charges are considered an attempt by the Pasdaran to embarrass the president.

2016 TO THE RESCUE?

All eyes are now on the year 2016. The public eagerly awaits the outcome of two significant events. First, the lifting of economic sanctions, the release of Iran’s blocked funds, and the resumption of sizeable oil exports – expected to end the three-year recession. In this scenario the government anticipates GDP growth of 5%, whilst inflation remains in single figures. And, second, the outcome of two national elections on 26 February – for Majlis deputies, and for members of the Experts Assembly members where Rohani supporters hope to win a majority. But, even in the fortuitous event that both of these goals are met, the Iranian economy will still not be out of the woods. The realization of anything like the 5% growth target totally depends on Iran’s released dollars being invested in productive development projects rather than increased consumer goods imports. The college graduates’ unemployment would not be helped by routine GDP growth, and would need special treatment.

Inflation, even if brought below 10%, would still be out of sync with those of Iran’s trading partners, putting pressures on exports. The rial’s foreign exchange rate would still be overvalued, and eroded by continued rising prices – threatening the import budget. The US dollar would still be highly undervalued, becoming more so as domestic inflation exceeds that of the US.

With the crude oil market depressed, the budget would still be in continued deficit. With high tariffs and unprotected borders, smuggling to and from the country – reported to have totaled $25bn last year – would continue. And, if the Supreme Leader’s edict banning imports of US consumer goods is strictly enforced, it would be increased. With lax enforcement machinery, tax evasion would probably even exceed the current estimate by the economy minister to have been some 43% of GDP. President Rohani’s team will have their plate full for the remaining next 18 months.

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