Iran. Economic Challenges for the Re-Elected President

Hassan Rouhani was re-elected president with a score of 57% on 19 May of this year. The perspectives of an economy open to the rest of the world which he propounds seem more convincing than the often very rash promises his conservative opponents made to attract the poor. The fact remains that unemployment, which has replaced the subject of inflation in political debates, can be overcome only by developing industrial sectors other than oil. There is still a long way to go.

Loey Felipe/United Nation Photo, 28 September, 2015.

Four years ago, in 2013, the debates preceding Iran’s eleventh presidential election were focused on economic issues. During the three previous years, the country’s currency had suffered from high rates of inflation : 26% in 2011, 2I% in 2012 and 34% in 2013. Growth was negative, -3.7% and -7.8% in 2012 and 2013, and unemployment was higher than ever.

While inefficient public policies were partly responsible for this situation, it was in reality the sanctions voted by the UN Security Council that had brought the Iranian economy to a virtual standstill. In 2013, for most Iranians and even many officials, these sanctions were not just another problem, they were the source of their poverty and their isolation. So it is not surprising that the moderate candidate Hassan Rouhani should have said, in one of the campaign’s TV debates : “the centrifuges [for the enrichment of Uranium] must spin but so must the wheels of the economy “, promising to resume negotiations between Iran and the P5+1 countries with an eye to lifting the sanctions. On 14 July 2015, with the signature of the Joint Comprehensive Plan of Action (JCPOA) between Iran, the European Union and the P5+1 group, Iranians expected rapid changes.

And yet economic difficulties are still the main subjects of debate, although according to Rohan and his supporters, the situation has undeniably improved in many respects during this last presidential term of office. Thus inflation has gone down from 34% in 2013 to less than 10% in 2016. This is the lowest figure on record since 1998 and it has been relatively stable over the last few years: oil exports have risen from 1.3 million barrels per day in 2012 to 2.8 million; the importation of medicines as well as industrial and medical equipment has been facilitated; and economic growth has begun again, from -7.8% in 2013 to over 6% in 2016, of which only 1%, however, involve sectors other than oil. Rouhani’s supporters also point to the many structural reforms in the banking, taxation and customs system, many of which were validated by the International Monetary Fund (IMF).

Unemployment, Focus of Debate

Nonetheless, the economy still appears to be Iran’s weak spot. Mohammad Bagher Ghalibaf and Erahim Raisi, the two conservative candidates in the 2017 presidential election continually challenged Rohan’s competence in this area. Whereas for four years inflation had been the main focus of public debate, now it was unemployment. The two conservative candidates competed fiercely with promises to reduce unemployment. Thus Ghalibaf promised to create five million jobs in four years and to provide every job-seeker with 80 dollars a month unemployment compensation (2,596,471 Iranian rials). Raisi was less ambitious, promising to create at least one million jobs per annum.

Unemployment Rate
Unemployment Rate

Unemployment is indeed the Iranian economy’s biggest problem. The average level of joblessness has been 11.6% since 1991 (see graphic 1). After having fallen by 3% between 2010 and 2013, it rose to 10.4% in 2013 and to 11.3% in 2016, in spite of the net creation of 1.3 million jobs during that period. Nonetheless, the current situation is far better than it was, the net number of jobs created between 2005 and 2013 was less than 40,000 and the drop in unemployment figures between 2010 and 2013 was due solely to a smaller participation in the labour market.

One of Iran’s strengths is a very young population. As graphic 2 shows, during the last decade, the ratio of persons of working age (15 to 65) to the population as a whole was nearly 5% higher than in the EU or the Middle East. According to the IMF report, this ratio should reach 8% by 2040.

Moreover, the working population is well trained. In the last twenty years, the number of college students has increased considerably (see graphic 3). In 2015, 4.8 million Iranians went on to higher education, representing 6.2% of the total population (as against some 3.5% in France). The large number of college enrolments is proof of a better access to education in general. However, the difficulties in finding employment coupled with compulsory military service (for men) prompt the younger generation to pursue their studies in order to delay their entry into the labour market. This pool of highly qualified young people which would be a godsend in any other country might prove to be a source of social and political instability in Iran, if they continue to remain outside the labour market.

Dependence on Oil

However, unemployment is a structural problem for which there is no simple solution. The creation of a significant number of jobs requires growth in other sectors besides petroleum. The examples provided by emerging countries show that a high degree of competitiveness in export-sensitive sectors and especially industry is the only way to achieve long-term growth and job creation, particularly for a skilled labour force.

To a large extent it is the dependence on oil which is responsible for the inadequacy of the Iranian industrial sector. Over the last fifty years, Iran’s economy has been closely tied to oil revenues. Now, the petroleum sector is not labour-intensive and does not generate jobs. At the same time, the role played by the public and semi-public sectors has steadily increased to the detriment of a private sector which has not been allowed room for growth. Relying as it does on oil revenues, the public sector seems satisfied with its own lack of efficiency and productivity. Besides which a private sector suffering from the “Dutch disease” phenomenon, remains sickly and noncompetitive.

Isolated for several decades now, the Iranian economy needs to modernise and stimulate the creation of productive jobs to attract foreign investments. The low cost of energy, the proximity of the Middle-Eastern market and—more importantly—the presence of a cheap and well-trained workforce should make Iran an ideal destination for would-be foreign investors. However, the tensions in the region, the fact that European banks are reluctant to work with their Iranian counterparts but also the institutional difficulties and political risks involved, have made transnational corporations wary of investing in this market despite its considerable potential. According to Vice-President Eshaq Jahangiri, Iran has been unable to attract more than six billion dollars in foreign investments, in other words, far less than what Hassan Rouhani had hoped before the sanctions were lifted.

The Conservatives’ Rash Promises

Contrary to Hassan Rouhani, the two conservative candidates had little to say attracting foreign investments and working with transnational corporations. Considering the close proximity of these two candidates with the “hard-liners” and the Revolutionary Guard Corps, had either of them won the election, this would not have gone down well with foreign corporations.

In an attempt to win the support of low-income households, Ghaliba and Raisi both promised to raise Yaraneh, a cash grant which benefits every Iranian. It was created as part of a 2010 reform in order to replace the energy subsidies and currently amounts to 14.5 dollars (470,610 rials) per month and per person. Ghalibaf announced his intention of tripling Yaraneh for everyone, which would have cost fifty billion euros. Raisi was more cautious and only promised this same rise for the three lowest deciles. These promises unleashed a torrent of criticism, even among conservative MPs, since neither candidate bothered to explain how he intended to finance these reforms. The only ways to deliver the necessary financing would have been to increase the money supply (the central bank free to do so), raise taxes or increase the price of energy (the State being the sole supplier of energy). However, any combination of these three approaches would be disastrous for production and would cause even greater inflation, which is presently around 10%, i.e. much higher than in many emerging or developed countries.

At the same time, both candidates promised to increase civil service wages as well as pensions and the minimum wage, never explaining exactly how they expected to go about it. Thus while their electoral platforms seemed enticing, they were unrealistic, incoherent and ambiguous. Incumbent President Hassan Rouhani, who had to respond to the keen expectations of the population, had to convince people that he had achieved positive results.