Iran’s presidential election is approaching. One and a half years will have passed since the crippling international economic sanctions against Iran were lifted when the elections are held on May 19. This monumental impact occurred following the nuclear agreement with the P5+1 group of world powers that brought economic benefits to the country over the past months.
Iran has succeeded in securing several billions-worth commercial deals required for rehabilitating its weak economy. The biggest deal involves the purchase of aircraft needed for upgrading its aging air force, while others were sealed to attract investment into the country's oil and gas sector.
Despite these deals, the government of incumbent President Hassan Rouhani, who is running for a second term along with five other candidates, is facing multiple challenges arising from economic pressures; the most important of which are poverty and unemployment rates.
Throughout his first term, there were signs that Rouhani has run into recurrent disagreements with a number of official state institutions over the Iran Revolution Guards Corps' large-scale interference in economic activities. Moreover, the declining performance of the economy during Rouhani's presidency appears to have helped increase other contenders' chances in the upcoming election.
Regardless of who will be the winner, the Iranian economy is going through a new stage characterized by tough hardships. The economy is aggravated by renewed uncertainty surrounding US administration's plans to ratchet up non-nuclear sanctions against Tehran, relating to Iran’s backing for terrorism and its human rights abuses. The Iranian crippled economy has been suffering from sluggish economic reforms coinciding with an increasing role of traditional institutions, such as the Revolution Guards Corps, in the country's economy.
Multiple Gains
The July 14, 2015 nuclear deal has produced the following economic benefits for Iran:
1- Increased oil exports. Iran's return to global oil markets represents one of the major gains of lifting the international sanctions in January 17, 2016. Within a few months, Iran was able to raise daily oil production gradually to a record level of 3.8 million barrels by end of March 2017. At the same time, Iran regained its presence in Asian and European markets, increasing its crude and condensate exports to over three million barrels per day since February 2017.
2- Economic Recovery. Economic growth rebounded with the increasing oil production recording an impressive 7.4 percent growth of GDP in the first half of 2016/2017, rebounding from recession in 2015/16 where GDP at factor cost went down to -1.8 per cent, according to a late February 2017 report released by the International Monetary Fund (IMF). Inflation declined to single digits and has hovered in the 9.5 percent range, year-on-year, since mid-2016. In addition, the foreign exchange market stabilized although it experienced some volatility towards end-2016 before recovering in January 2017. The spread between the official and the market rate has narrowed to about 15 percent.
Growth is projected to stabilize at 4.5 percent over the medium-term as the recovery broadens. The IMF expects Real GDP growth to reach 6.6 percent in 2016/17 and to ease to 3.3 percent in 2017/18 as oil production remains at the OPEC target.
3- International Deals. The biggest of achievements made by Iran through the nuclear agreement was, perhaps, a string of deals sealed with foreign corporations to upgrade its aging air force. In December 2016, US-based aircraft maker Boeing singed a deal worth USD 16.6 billion to sell 80 passenger planes (50 Boeing 737 aircraft and 30 Boeing 777 planes) to IranAir after the economic sanctions were lifted. Later in the same month, Europe's Airbus also signed a firm contract on Thursday to sell 100 jets worth USD 18-20 billion at list prices to IranAir. Most recently, in early April 2017, Boeing signed a tentative deal with Iran's Aseman Airlines to sell at least 30 Boeing 737 MAX jets worth USD 3.4 billion at list prices.
Moreover, Iran's openness to the West has enabled foreign oil companies to commence operations to rehabilitate the country's aging oil sector. In January 2017, the Iranian government qualified 29 international companies from 10 countries to bid in tenders for oil and natural gas development projects under the terms of the new Iran Petroleum Contract (IPC). Earlier in November 2016, the National Iranian Oil Company and France's oil and gas company, Total, finalized an agreement whereby the French oil giant will develop the South Pars 11 project. The project is expected to have a production capacity of 370,000 barrels of oil per day. The development of the giant gas field would require investment of about USD 4 billion.
Widening Criticism
Nevertheless, these large economic gains would not increase Iran's chances in improving the living standards of the population while failing to curb unemployment rate which rose to 12.45 percent in 2016 or projected to rise to 12.52 percent in 2017. Poverty rates also rose significantly sparking wide popular criticism of Rouhani's government. At the same time, the worsening economic situation in Iran became a weakness used by Rouhani's political opponents.
This situation even drew official pressure and criticism. In March 2017, the Supreme Leader, Ali Khamenei, said the government's economic policies has fallen short. He stated, "I feel the pain of the poor and lower class people with my soul, especially because of high prices, unemployment and inequalities. The government has taken positive steps, but they do not meet people’s expectations and mine." Khamenei even called for a new "resistance economy" to create jobs. In the same month, Ayatollah Ahmad Jannati, the head of the Assembly of Experts of the Leadership that selects Iran’s supreme leader, lashed out at Rouhani’s failure to improve the economy as well. Jannati said, "If the resistance economy has not been followed in the way that it should and must have been, then [Rouhani] must apologize and tell them [Iranians] the reasons."
Future Challenges
The poor performance of the Iranian economy under Rouhani's government will help increase other candidates' chances. That is, regardless of who will win the race in May, the Iranian economy will continue to go through a new stage characterized by tough hardships of which the following stand out:
1- Potential sanctions. The renewed uncertainty surrounding the prospects for the Iranian economy is further exacerbated by the US administration of President Donald Trump's decision to review the Iran nuclear deal, while to ratchet up non-nuclear sanctions (relating to Iran's backing for terrorism and its human rights abuses) against Tehran. On April 19, 2017, US Secretary of State Rex Tillerson revealed the review, on the Obama-era decision to lift sanctions on Iran, in a letter to Congress.
Earlier on April 10, the United States' ambassador to the United Nations, Nikki Haley, said that the Trump administration is considering additional sanctions against Iran, and Russia, over their support for Syria's Bashar Assad regime. Earlier in March 2017, the US sanctioned 11 firms and individuals for transferring sensitive technology to Iran.
2- Slow Economic Reforms. Iran continues to grapple with structural weaknesses such as a fragile banking system, unfavourable investment climate. There are several indications that stability of the country's banking system remains weak due to high performing loans (12 percent of gross loans), with the capital adequacy ratio going down to as low as 5.8 percent in March 2015, compared to 8.4 percent in March 2012. Moreover, Iran's investment climate continues to suffer from hardships caused by administrative and bureaucratic complications, and spreading corruption. According to the World Bank's Doing Business report, the country ranked 120 among 190 nations in terms of ease of doing business in 2017, a decline from the 117th rank a year earlier.
3- Internal Struggle. Another dilemma facing the Iranian economy is caused by the hardline conservative camp's opposition to many economic reforms planned by the Rouhani government in the past months. This was evident in postponing the implementation of the new oil contracts adopted by the government in 2016.
Within this context, Iran's Oil Minister Bijan Zanganeh, on April 9, 2017, said "The new oil contracts are currently being reviewed by the Supreme National Security Council", which indicates the possibility that traditional institutions have interfered to amend or even cancel these contracts. This spurred President Rouhani to criticize once again the Revolution Guards Corps’ interference in the country's economic activities asserting that the armed forces' preoccupation with the country's economy is preventing them from carrying out their chief responsibilities.
In conclusion, the next Iranian president will have to deal with a complicated economic scene, especially if escalation between Iran and the United States reaches unprecedented in the coming period.
