Iran’s Economy After One Year of Rouhani

Rouhani’s most visible accomplishment is lower inflation, down by more than half from over 40 percent a year ago. The runaway inflation of the last three years that alienated the middle class and even many conservatives from former President Mahmoud Ahmadinejad is now back to a level that Iranians consider normal.

Containing inflation was achieved at considerable cost, though, by keeping government expenditures to a minimum and forgoing any kind of fiscal or monetary stimulus. Rouhani even managed to increase energy prices last April without any protest, indicating that his popularity has so far survived austerity. The energy price hikes were substantial enough to close the budget gap left by Ahmadinejad’s generous – some would say irresponsible – cash transfers. The price of gasoline was increased by 75 percent, diesel by 67 percent, and other energy prices by about 30 percent.

Rouhani’s second economic achievement was restoring the business confidence lost to the erratic economic management of the Ahmadinejad years. He did this by simply getting elected and by appointing a competent team. His election stopped or at least slowed down the hemorrhaging of Iran’s economy, which has been hit by draconian international sanctions and bad domestic policies.

Rouhani’s greatest economic success came in the form of a political victory. He overcame substantial domestic opposition to rapprochement with the West to sign the Joint Plan of Action (JPA) with world powers last November. The economic impact of the JPA has been underwhelming, but without it the economy would have continued to slide.

The agreement can be credited with the strengthening of Iran’s currency, the rial, which is a good indication of rising business confidence. Since November, Iran’s oil exports have also increased by 30 percent, about $7 billion of Iran’s frozen funds have been released, and petrochemical exports, which received specific sanctions relief, have increased.

This spring, auto production (also marked for sanctions relief in the JPA) was up by a whopping 90 percent compared to a year ago according to Mohammad Reza Nematzadeh, the minister for industry, mines and commerce. He also mentioned increases in petrochemicals production by 9 percent and durable goods by 30 percent.

These improvements are most likely lost on the average Iranian, whose job prospects and income has not increased since Rouhani took office. The obvious culprit is, of course, the financial and shipping sanctions that limit Iran’s access to its foreign exchange earnings and continue to choke large sections of its industries. Manufacturers are still using cumbersome and costly channels to procure their raw materials and parts. For them, the optimistic official statements and newspaper headlines proclaiming the imminent “collapse of the sanctions regime,” is just talk. Indeed, while Western critics of Iran’s limited sanctions relief, particularly in Washington, point to the flood of foreign business missions to Tehran, no actual investment has occurred due to the continued uncertainty about the future of the sanctions.

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