Iran's Economy in 1395: Two Sides of a Report Card

All statistical centers, both domestic and international, evaluate the economic performance of the year 1395 in the government of Hassan Rouhani as generally positive. The president, who is passing the last Nowruz of his four-year term, can confidently defend his economic achievements against his rivals in the Islamic Republic and the voters of the twelfth presidential election. It is observed that he often emphasizes two main macroeconomic indicators: growth rate and inflation rate, whenever an opportunity arises to justify his satisfaction with the past years. The reassuring message from the president, which is currently reiterated by him and his colleagues, can be summarized as follows: 'We inherited an economy with a negative growth rate and a forty percent inflation rate and brought it to a high growth rate and single-digit inflation.' Senior officials of the eleventh government only show one side of this report card to their audience. The other side, which indicates the reasons for the positive transformation of these two macroeconomic indicators and their instability, remains in the dark. The problem for the people is this: why does the government's economic report rely on such solid and hopeful statistics, yet the reflection of this transformation is not seen in the lives of Iranians? In confronting this contradiction, the first reaction from a segment of public opinion, which is often heard, is to label the statistics as lies. This reaction is understandable, but the issue is more complex. One cannot blame the statistics presented regarding growth and inflation rates. The blame lies with those who derive incorrect conclusions from these more or less accurate statistics. Here, we review the most important macroeconomic indicators of Iran in the past year. The contradictions in growth rates are evident. The statistics provided by various domestic and foreign sources (Central Bank, Statistical Center of Iran, Research Center of the Islamic Consultative Assembly, International Monetary Fund, and World Bank) regarding the growth of this indicator are not uniform, but all estimate the country's economic growth in 1395 at a relatively high level: - World Bank: 4.6 percent - International Monetary Fund: 6.6 percent - Research Center of the Islamic Consultative Assembly: 7.2 percent. - The Central Bank goes even further in its assessment of Iran's growth rate in 1395, which was published on Tuesday, March 23. According to this institution, Iran's economic growth in the first nine months of the current year was 11.6 percent and even reached 15.7 percent in the autumn. If we consider this assessment as a criterion, Iran's economic growth rate is likely to fluctuate between eight to nine percent by the end of 1395. These statistics indicate that Iran's economic growth has surged after negative growth in the years 91, 92, and 94 and weak growth in 93. In other words, in quantitative terms, Iran's growth rate is at a high level and even (based on Central Bank statistics) very high. What becomes problematic here (and this is the hidden side of Iran's economic report card in 1395) is the quality of this growth rate. In discussing the quality of growth, three very important points can be emphasized: First) The source of this high economic growth. To simplify the issue, we rely on the Central Bank's data, which has assessed Iran's growth rate at such a high level. Why did Iran's economic growth rate (which reached negative 1.6 percent in 1394) suddenly soar so quickly in 1395? The fundamental reason for this change, based on the same Central Bank statistics, is the surge in oil production and exports following the signing of the JCPOA. This 'miracle' led to an increase in Iran's crude oil exports by about one million barrels per day. Considering that in 1395 the dollar value of oil in the global market also experienced a relatively significant increase compared to the previous year, the added value of the oil sector in the first nine months of the current year was about 65 percent higher than the same period last year. In other words, the surge in Iran's GDP in 1395 is oil-driven, and if we consider non-oil growth, the report card for 1395 is indeed lacking. The International Monetary Fund also evaluates Iran's economic growth as 6.6 percent with oil and only 0.8 percent without oil. Second) The second point regarding the quality of Iran's growth rate in 1395 is its impact on the labor market. The International Monetary Fund estimates Iran's unemployment rate at 11 percent in 1394 and 12.5 percent in 1395. The Statistical Center of Iran sees the situation as worse, concluding from the latest labor force survey that the unemployment rate increased from 10.9 percent to 12.7 percent between the summer of 94 and the summer of 95. The question is, despite the very high growth rate published by the Central Bank, why has the unemployment rate in Iran increased? There are many answers to this question (including the rising participation rate), which cannot be addressed here. One of the main reasons for the worsening labor market despite the rising growth rate is the oil dependency of the growth. In fact, the activation of the oil industry and the increase in production and exports of this commodity are not inherently job-creating. Additionally, in the same Central Bank statistics, we see that the construction sector, the most influential industry on the labor market, experienced a negative growth rate of 25 percent in the autumn of 1395. This severe decline, especially in the most critical driving sector of an economy, is one of the worst news of 1395. But one of the main reasons for the worsening labor market despite the rising growth rate is the oil dependency of the growth. In fact, the activation of the oil industry and the increase in production and exports of this commodity are not inherently job-creating. Additionally, in the same Central Bank statistics, we see that the construction sector, the most influential industry on the labor market, experienced a negative growth rate of 25 percent in the autumn of 1395. This severe decline, especially in the most critical driving sector of an economy, is one of the worst news of 1395. Third) And finally, the third point, again related to the quality of Iran's growth rate, is its future transformation. We reiterate that this growth rate is born from the exceptional conditions arising from the implementation of the JCPOA, which allowed Iran's oil industry to return to a relatively normal state in terms of production and exports. Currently, Iran's oil production has reached about three million eight hundred thousand barrels per day, similar to the period before the sanctions related to the nuclear issue, and its increase depends on the influx of foreign investors into the country's oil fields. Additionally, the Iranian oil sector will be significantly affected by the future price level of this commodity next year. If Iran's growth is to remain oil-dependent, repeating the growth rate of 1395 next year will be impossible unless there is an exceptional surge in global oil prices. Instability of the inflation rate undoubtedly represents the most significant economic achievement of Hassan Rouhani's government. According to statistics published by the Central Bank, Iran's inflation rate decreased from 34.7 percent in 1392 to 15.6 percent in 1393 and 11.9 percent in 1394, finally reaching single digits at 9.5 percent in June 1395. During Hassan Rouhani's presidency, compared to the previous president, overall financial discipline has improved, inflationary expectations have decreased, trade costs have gradually lowered with the gradual lifting of sanctions, and despite the fluctuations of the past few months, there has been more stability in the currency market than before. However, it would be simplistic to assume that the inflation monster in Iran has been tamed. Achieving an inflation rate below ten percent cannot be considered a sustainable success under the current conditions in Iran. If we look at the slope of the inflation rate's decline in Iran, we will see that this indicator decreased sharply from 1392 to the end of 1394, but after that, the decline slowed to a crawl and ultimately stopped, and it even seems to have taken an upward path again. In fact, we see that during the months of Aban, Azar, and Dey, the inflation rate remained steady at 8.6 percent and increased to 8.7 percent in Bahman. Given these signs, expert circles both domestically and internationally predict a return of Iran's inflation rate above ten percent. In fact, Iran's current single-digit inflation faces significant challenges such as high liquidity and problems within the banking system. The Research Center of the Islamic Consultative Assembly, the expert arm of Iran's legislative body, predicts in one of its latest reports that the inflation rate will exceed nine percent again by the end of 1395 and will return to double digits next year, reaching eleven percent. The International Monetary Fund also predicts that Iran's inflation rate will rise to twelve percent in 1396. It should also be noted that the Central Bank is currently making every effort to prevent the rise in currency prices in Iran, which could fuel inflationary tensions. It is highly likely that Hassan Rouhani's government will continue strict control over the currency market until the elections for the simple reason that stability in the currency market and keeping inflation in single digits will help solidify his position against his rivals. And several other indicators... In the past year, Iran's ranking in the economic and social rankings of international governmental and non-governmental organizations has not changed significantly. Here, we mention three examples of these rankings: One) The 2017 World Bank report on the 'Business Environment,' published on October 25, ranks Iran 120th among 190 countries in terms of the conditions necessary to facilitate economic activity. Compared to the 2016 report of the same institution, Iran's situation regarding the 'business environment' has worsened, dropping two places in the rankings. Two) In the 2017 report by the American Heritage Foundation, which ranks countries based on economic freedom, Iran ranks 155th among 180 countries surveyed. In this report, Iran's position improved by sixteen ranks compared to the previous year, moving from the group of closed economies to the group of mostly unfree economies. Three) From the perspective of the 'Corruption Perceptions Index,' Iran ranks 131st among 176 countries surveyed in the latest report from Transparency International. Hassan Rouhani hoped that in 1395, under the influence of the implementation of the JCPOA, the overall economic atmosphere of Iran would be completely transformed. With the normalization of oil production and exports, part of this hope was realized. However, contrary to his expectations, international economic circles showed little enthusiasm for investment in Iran. The process of 'normalization' of Iran's position in the network of international economic relations faced obstacles due to the continued tensions with the United States. Domestically, economic structures remain largely untouched, and no significant reforms have been made that could free Iran from the grip of a deeply state-controlled and oil-dependent economy. Fereydoun Khavand is an economist, economic analyst, and professor of economics in Paris, France.