Surprising Warning from Ministers Regarding Economic Recession

The presidential election in June 2013, which resulted in Hassan Rouhani's victory, announced the composition and orientations of the 11th government's economic team, a shift in nuclear negotiations aimed at ending sanctions, and ultimately the signing of the Joint Comprehensive Plan of Action (JCPOA) last July. All of these created the expectation that with the presence of 'rationality' in Iran's economic policymaking apparatus and the emergence of much clearer prospects in the international arena, the wheels of activity in the country would start turning again, opening a window of hope for millions of Iranians, especially the youth. However, this expectation has turned into despair today, and the Iranian economy is grappling with a very severe recession. In a joint letter to the President, published in Tehran's media on Sunday, October 12, the Ministers of Economy, Industry, Labor, and Defense warned about the current state of the country and its prospects: 'There is a fear that this recession could turn into a crisis and then into distrust, which may take a long time to remove its effects.' The presence of the Minister of Defense among the signatories of this letter likely indicates that 'the transformation of recession into crisis and then into distrust' naturally brings national security into the picture. The content of the letter from the four mentioned ministers, which was reportedly submitted to the President about twenty days ago, speaks of realities that have been repeatedly emphasized by business circles and economic experts in the country over the past few months. These realities must be examined in close connection with the record of a politician who declared his main mission from the very beginning of his presidency to end the very tough constraints that the Iranian economy was trapped in. Hassan Rouhani's economic record can be summarized in three points: 1) The successful advancement of nuclear negotiations has significant economic dimensions, simply because it paves the way for the gradual lifting of crippling sanctions. The initiation of this process in the first months of the coming year will undoubtedly provide a much more favorable international environment for the country's economy, provided that this favorable atmosphere is not lost due to negative events in Iran's internal, regional, and global environment. 2) The reduction of the inflation rate can be considered an important achievement for the 11th government, as long as the continuation of this index does not stop on a downward slope and especially that the sweet taste of reduced inflation is not accompanied by the very bitter taste of a severe recession. Hassan Rouhani takes pride (and he is right) that he has reduced the inflation rate from about forty percent to fifteen percent. However, the reduction in the inflation rate has almost stopped in recent months. From April to September 2014, the inflation rate decreased from 32.5 percent by eleven units to 21.1 percent, whereas from April to September 2015, the inflation rate has only decreased by four-tenths of a percent, from 15.5 percent to 15.1 percent. In other words, the country's inflation rate is currently locked in the fifteen percent range, which is practically the average inflation rate in the years following the revolution and has become known as the 'hard core' of inflation. 3) In contrast, the situation regarding economic growth is severely dire, and this is the recession that, according to the Ministers of Economy, Industry, Labor, and Defense, in their joint letter, could turn into a crisis. We know that during the years 2012 and 2013, Iran's economic growth rate fell to minus 6.8 and minus 1.9 percent, respectively. In 2014, based on the statistics from the Central Bank of Iran, the Gross Domestic Product growth rate increased to three percent. This rate is very low for a developing country like Iran, which needs an eight percent growth rate over consecutive years to cope with existing tensions in its labor market. However, there was optimism that at least the growth rate had moved out of the negative range. Last year's optimism has been lost again this year. Even the main economic officials of the country, including Valiollah Seif, the Governor of the Central Bank, speak of the possibility of the growth rate in 2015 falling to one percent. Those who are more pessimistic, considering the prevailing conditions in production units, talk about the return of the country's growth rate to below zero. One of the very effective factors in the current recession is the sixty percent drop in oil prices over the past fifteen months and its impact on Iran's treasury. Given the prospect of a very high budget deficit, Hassan Rouhani's government has halted a large part of its construction programs. At the same time, there is no hope that the raw materials market, including oil, will improve anytime soon. According to the Iranian Statistics Center, the production index in the country's industry (a measure of production in various industrial sectors, including manufacturing, mining, and public services that include water, electricity, and telephone) decreased by two percent in the spring of this year compared to the same period last year. It seems unlikely that this negative growth can be compensated by positive growth in other sectors of Iran's economy. Alongside official statistics, field observations from business stakeholders and the perspectives of observers in the media indicate that the Iranian economy is truly grappling with an exceptional recession. Mohsen Jalalpour, the President of the Chamber of Commerce, states that 'due to the rolling of economic units into recession, a serious danger threatens them.' (ILNA, October 6, 2015) Members of the board of the House of Industry and Mine of Iran speak of widespread bankruptcies of production units in the country (including a report from ISNA, October 12, 2015). According to Farrokh Ghobadi, an activist and economic analyst: the situation has gone beyond 'signs of recession' and 'the possibility of the economy being in recession' and the country is facing an unprecedented, paralyzing, and very dangerous recession (Donyaye Eghtesad, September 24, 2015). From the perspective of Alinaghi Mashayekhi, a university professor, one manifestation of this stagnant economy is the lack of demand for produced goods: 'The warehouses of many producers are filled with goods that have no buyers. The filling of warehouses also leads to production and unemployment of workers and businesses and a decrease in household income, deepening the recession.' (Donyaye Eghtesad, September 23, 2015) Interestingly, the joint letter from the four ministers of Rouhani's government also emphasizes the accumulation of warehouses filled with unsold goods. They write that 'the inventory of car manufacturers has reached over one hundred thousand cars at the factory.' Given the lack of sales of such products, the automotive industry is facing a 'liquidity crisis' and is 'on the verge of stopping.' The same four ministers state that 'a similar situation is evident in the steel, copper, housing, cement, tile and ceramics, and mining industries. Regarding the current state of Iran's economy, the following question can be posed: Why, despite the successful conclusion of nuclear negotiations and the signing of the Joint Comprehensive Plan of Action, is the Iranian economy grappling with such a deep recession? Wasn't it supposed that with the removal of this heavy obstacle, a new psychological space for economic activities in the country would emerge? Did a mountain give birth to a mouse? Solving this 'mystery' becomes even harder when we see that economic delegations from the major industrial powers of Europe are heading to Iran one after another, and the country's image in international financial circles has significantly improved. More importantly, following the dynamics within the U.S. Congress, there are no longer any obstacles to the JCPOA, and the process of gradually lifting sanctions is likely to begin in the near future. It is clear that Hassan Rouhani's government is primarily looking to the commencement of the implementation of the JCPOA to exit the recession. This calculation is not unfounded. There is no doubt that the removal of barriers to banking transactions between Iran and abroad, the return of Iran's blocked foreign assets, the increase in the country's oil exports, the ability of domestic production units to access advanced technologies, the entry of foreign investors, etc., cannot have a positive impact on the country's economy. However, at the same time, a passive approach to this transformation could lead to many disappointments. Even after the complete removal of sanctions (which will take several years), the Iranian economy will only return to the pre-sanction period, with all the constraints it faced. Additionally, the course of developments could create new disruptions in Iran's international environment. In short, while the JCPOA certainly opens up brighter horizons for Iran's economy, one should not forget the factors that are dragging the Iranian economy into recession and also preventing the optimal use of the consequences of the JCPOA: 1) One of the very effective factors in the current recession is the sixty percent drop in oil prices over the past fifteen months and its impact on Iran's treasury. Given the prospect of a very high budget deficit, Hassan Rouhani's government has halted a large part of its construction programs. At the same time, there is no hope that the raw materials market, including oil, will improve anytime soon. 2) Hassan Rouhani's government sees its future in 'interaction with the outside' and its efforts to normalize Iran's position in international economic relations are undeniable. In contrast, it seems that other powerful centers of the Islamic Republic have fundamental problems with the 'economic diplomacy' as envisioned by the 11th government. Iranian business circles, as always, face the issue of 'multivocality' in the country's policymaking apparatus and their trust in the future is very fragile. 3) Since the beginning of his administration until now, Hassan Rouhani's government has made no changes to the fundamental structures of Iran's state and oil economy. Iranian economic experts warn that the current banking system in Iran is a ticking time bomb, and the possibility of its collapse should not be overlooked. Nothing has been done in this regard. The privatization process has remained at the same defective level as before. Cash subsidy payments, despite all the criticisms leveled against them, continue as usual. There is no news of fundamental efforts against corruption and the influence of quasi-state institutions. The only economic outlook of Rouhani's government at present is the beginning of the process of lifting sanctions. Hassan Rouhani's government sees its future in 'interaction with the outside' and its efforts to normalize Iran's position in international economic relations are undeniable. In contrast, it seems that other powerful centers of the Islamic Republic have fundamental problems with the 'economic diplomacy' as envisioned by the 11th government. Iranian business circles, as always, face the issue of 'multivocality' in the country's policymaking apparatus and their trust in the future is very fragile. 4) Foreign economic delegations are enthusiastically visiting Iran and speaking with excitement about the economic capacities of this country. However, these visits have not yet led to specific and tangible initiatives, including commitments to invest in this or that economic sector. It can be said with certainty that international financial circles, despite their strong desire to deal with Iran, are raising questions that, for some of them, currently have no answers due to the complexities of the country's conditions. For example, members of the 130-person French economic delegation that visited Tehran and Mashhad at the end of September praised Iran's economic capacities upon their return to France, but at the same time, some of them (including Stéphane Le Foll, the French Minister of Agriculture) raised the question of how Iran intends to finance its investments and bulk purchases from abroad under the current conditions. This question arises because the oil market is in poor condition and Iran's blocked foreign assets, contrary to what was previously stated, amount to no more than thirty billion dollars. 5) The JCPOA has created new conditions in Iran's relations with the international community, but new polarizations in the Middle East, especially in Syria, could create unforeseen variables and disrupt existing calculations. Such developments could also fuel a climate of distrust in Iran and lead an increasing number of economic activists to conclude that, even with the JCPOA, Iran's international environment will not normalize anytime soon. In conclusion, the very act of writing a joint letter by four ministers of Hassan Rouhani's government, which has become an open letter due to its publication by the media, is highly questionable. The mission of a minister is to perform duties in their area of expertise and participate in decision-making within the executive apparatus. A minister advances their policy within the government alongside the government's public policy, and when they disagree with the government's policy, they resign. In many cases, Ali Tayebnia, the Minister of Economic Affairs and Finance, has criticized policies that fall within his area of responsibility. For example, he recently stated that the monthly payment of universal cash subsidies is a 'great calamity' for the government. Here, he forgets his role as a minister and becomes a journalist, analyst, and university professor. A minister is expected to say what should be done to address this 'great calamity.' In which part of the world do ministers write open letters and warn that recession in the country could turn into a crisis? Don't they participate in cabinet meetings? Is their communication with the President and their colleagues severed? And it seems they are waiting for Hassan Rouhani to respond to their letter. The question arises as to what response the President can give to the surprising warning of his ministers.