Hassan Rouhani and Post-Sanctions Economic Challenges

In a press conference on Sunday evening, August 1st, Hassan Rouhani, the President of the Islamic Republic, appeared on television as a politician who has completed his mission to end one of the greatest tensions in the past century of contemporary Iranian history and is very pleased with the outcome. With the approval of the Joint Comprehensive Plan of Action (JCPOA) by representatives of Iran and the group known as the 'P5+1', which took place on July 14 in Vienna, the head of the executive branch of the Islamic Republic can conclude the second half of his presidency with greater calm and confidence. It can even be said that if the negotiations over Iran's nuclear file ultimately fail, Hassan Rouhani's continued presence in the presidency would not only become impossible but would at least face a mountain of difficulties. In such a bleak scenario, Iran would have to take a different path. The economic messages from Hassan Rouhani during the first half of his presidency were focused on managing the nuclear file and efforts to end economic sanctions. Those who expected the eleventh government to innovate in other important areas such as economic reforms, political liberalization, or cultural opening have undoubtedly been deeply disappointed. Nevertheless, those dissatisfied with the record of the 'Hope and Prudence Government' in these three areas (and they are not few) can console themselves with the argument that without lifting the heavy burden of horrific tensions and crippling sanctions from Iran's international relations, progress in other areas would have been impossible. In the matter of political liberalization and cultural opening, neither journalists raised questions during the press conference on Sunday night, nor did the president bring up any issues. In these two very sensitive areas, red lines were meticulously respected from both sides. Instead, economic issues held significant importance, both in assessing Rouhani's two-year record and in the visions he outlined for the future. In the economic sphere, Hassan Rouhani attempted to convey several messages clearly and semi-clearly to the Iranian public during the Sunday night television interview: First) Despite the difficulties remaining from the previous era and the continuation of crippling sanctions, the eleventh government managed to reduce inflation from around forty percent to fifteen percent and raise economic growth from below zero to about three percent. Second) With the lifting of sanctions, the currency resulting from the return of Iran's blocked assets abroad, or the income from increased oil exports, is not intended to open the country's doors to a flood of imports, leading the economy to the same situation it faced during his predecessor's term. Third) The people should not expect that following the lifting of sanctions, the government will provide them with a 'painkiller' through artificial prosperity. Their situation will require time to improve. The goal is to move towards an 'outward-oriented endogenous economy' that should replace an 'inward-oriented outward economy' and ensure their income in the long term through increasing non-oil exports, achieving an eight percent growth rate, and realizing single-digit inflation. Fourth) Iran has chosen the path of 'interaction with the outside.' However, major economic powers should not view this country as a market for their consumer goods. Iran needs foreign investment and technology, and through this, it can diversify and increase its non-oil exports to global markets. Hassan Rouhani emphasized several times that Iran's main goal in trade with industrial powers is to attract investment. The doubts and questions regarding the president's ability to convey these four main messages to his audience were expressed intelligently. Nevertheless, his two-year economic record is such that his audience cannot share in his hopes for the future. The doubts and questions mainly focus on the following: a) In terms of inflation, the eleventh government cannot boast of its achievements over a long period by comparing itself to the worst period of Ahmadinejad's presidency. Although the reduction of this index from forty percent to fifteen percent over two years is certainly successful, this success appears very relative because Iran's inflation rate remains among the highest in the Middle East and North Africa and is considered one of the ten highest inflation rates globally. Furthermore, it seems that the process of reducing Iran's inflation rate has reached a 'hard ground,' and its continuation depends on fundamental economic reforms. b) Regarding the end of recession, one cannot firmly agree with the eleventh government's claims. It is true that the negative growth rates of 2012 and 2013 have turned into a three percent growth rate in 2014. Despite this statistical change, there is still no sign of the wheels of Iran's economy turning. On the morning of Sunday, August 1st, the same day that Mr. Rouhani raised the issue of the country's economy exiting recession, Dr. Farrokh Ghavami posed the following questions in the editorial of the 'Donya-e-Eqtesad' newspaper: 'If the country's economy has exited recession, why are industrial parks still deserted? Why do the vast majority of businesses see themselves in uncertain and fragile conditions, with many feeling they are on the brink of collapse? ... Markets are sluggish, inventories are increasing, and a large portion of production units are not breaking even, with delays in paying salaries and wages and being unable to make timely payments on debts to banks, tax authorities, and social security.' c) Over the past two years, the Rouhani government has not taken any steps towards fundamental economic reforms, and very important files such as privatization, liberalization including price reforms, improving the subsidy system, enhancing the banking system, combating monopolies, fighting corruption, etc., remain neglected. Until now, it has been assumed that the president has dedicated all his efforts to the nuclear file and is waiting to address other areas until this issue is resolved and sanctions are lifted. On Sunday night, it was expected that the president would take the opportunity of his television interview to propose specific plans for reforming the country's oil-dependent economy to create a transformation in Iran's business environment. This expectation was not met. As Hassan Rouhani reaches the halfway point of his presidency, the question is increasingly raised in Iranian business circles: Is there still an opportunity to address these sensitive issues? d) Without addressing fundamental reforms to modernize the country's economic structures, foreign investment will, at best, be limited to traditional oil and gas sectors. Of course, with increased foreign currency revenues from the export of these two products, the growth rate can be raised to five to six percent, but this is not the sustainable and beneficial growth rate characteristic of an 'outward-oriented endogenous economy.' The large industrial, agricultural, and service sectors of Iran need foreign investment and technology. However, foreign investors (like domestic investors or Iranians living abroad) will only take risks when Iran's economy is governed by appropriate governance (in terms of the rule of law in areas such as property, labor, taxation, effective judiciary, and combating corruption) and stability (including the realism of exchange rates, avoiding severe fluctuations, and low inflation). The post-sanctions era presents a great opportunity for Iran's economy, provided that Rouhani's government can also overcome its major challenges.