by Djavad Salehi-Isfahani
The decision announced last Monday in Vienna to extend the talks aimed at a compressive agreement on Iran’s nuclear program for an additional seven months has resulted in Iran’s currency taking dive. In one week, the rial lost more than 5% of its value in the unofficial market. The devaluation has clear political and economic implications: it will revive inflation, slow or stop economic growth, and increase the pressure on Iranian President Hassan Rouhani as his government tries to make good on the election promises he made 18 months ago.
But will this soften Iran’s negotiating position? To answer this question, we need to look at the basis of this phase of the rial’s devaluation and what it means for ordinary Iranians.
The drop in the value of the rial after the extension was announced on Nov. 24 indicates that expectations in Iran for a final deal were high before the deal failed to materialize. This optimism had kept the rial’s value above what the economics of the situation warranted. In other words, rather than being in “free fall,” as several reports in the press have suggested, the rial is actually adjusting to a new equilibrium.
Two major factors have been putting pressure on the rial in the last few months, neither of which is related to the negotiations or the sanctions. The first is the decline of the price of oil, by more than 30% since this summer, which has reduced the already strained supply of foreign currency to the Iranian economy. As I noted in my previous post, prior to Nov. 24, the rial had remained surprisingly stable despite the falling price of oil.
The rial was also under pressure because Iran’s inflation exceeded that of its major trading partners, making Iranian producers less competitive. Prices in Iran have increased by 23% since Rouhani’s election in June 2013 when the rial traded around 31,000 per dollar. All else the same, the rial would have to fall by 23% to keep Iranian production competitive. That would mean an exchange rate of over 38,000 rials per dollar in the unofficial market and 32,500 in the official market. Presently, these rates are at 34,000 and 26,500.
Of course, all else is not the same. The price of oil is lower, Iran has started receiving around $700 million a month of its unfrozen assets, and there have been changes in economic policy. Some of these changes, like the lower price of oil, would require the rial to devalue further, while others would have the opposite effect.
At the same time, although the rial could continue to decline, currently it’s certainly not in free fall.
An overlooked fact in Western press reports on this issue is that the Rouhani government, populated in part by economists focused on the competitiveness of Iranian producers, had signaled its intention to officially devalue the rial before the Nov. 24 extension was announced. Indeed, officials spoke publicly last month about a (modest) 7.5% increase in the official exchange rate to be used in the 1394 (2015/2016) budget to 28,500 rials to the dollar.
Now on to that burning question: How long will this crisis last?
The pace of devaluation in the free market has quickly slowed down—the rial even rose against the dollar on Dec. 1—but as I mentioned earlier, further drops in the value of the rial are still possible as the reality of the lower price of oil sinks in.
Devaluation is a sign of an underlying imbalance in the economy, so when it happens, people are naturally alarmed. But it is also part of the solution to the same imbalances that need correcting. Consider, for example, that a cheaper rial is good for production and employment, even in a poor business environment hampered by international sanctions and domestic impediments to production, which business people refer to as “internal sanctions.”
Devaluations also redistribute income. In the short-run, inflation, which dropped last year below 20%, will rise as prices for goods bought and sold at the unofficial rate increase. The burden of the higher inflation will fall primarily on people living on fixed incomes, on the public payroll, and those who travel abroad or send money to their children abroad—all of whom compose the better part of the middle class.
Unlike former President Mahmoud Ahmadinejad, Rouhani does not believe in directly paying the poor, so what happens to this segment—about 10-20%— of the Iranian population is less certain. Wages of unskilled workers usually increase with inflation, though not always in tandem. They also rise with demand for labor, which could get a boost from devaluation. However, the 30% increase in the price of bread that was quietly implemented earlier this week, on Dec. 1, will hurt the poor disproportionately, as it was put through without any compensatory mechanism.
Of course, if the Rouhani government is forced to reduce the country’s much larger energy subsidies to balance its budget in the face of falling oil revenues, it may ultimately have to swallow its pride and take up the Ahmadinejad cash transfer mechanism, which Rouhani strongly criticized during his presidential campaign.
Ultimately, the drop in the price of oil will result in lower economic growth and loss of income across the country. But there is no policy that can fully compensate for a large decline in the terms of trade, which the recent decline in the price of oil represents—there are only good and bad policy responses. Allowing the rial to devalue is a good start, but not enough. The government should also be planning policies to help domestic producers rise to the occasion and measures required to protect the poor as prices for basic goods such as bread and energy rise.
]]>by Djavad Salehi-Isfahani
Iranian President Hassan Rouhani was elected to office largely on his promise to lift the economy out if its deepest recession since the Iran-Iraq war. One year later, evidence of a recovery is hard to find, but he has achieved a few significant accomplishments.
Rouhani’s most visible accomplishment [...]]]>
by Djavad Salehi-Isfahani
Iranian President Hassan Rouhani was elected to office largely on his promise to lift the economy out if its deepest recession since the Iran-Iraq war. One year later, evidence of a recovery is hard to find, but he has achieved a few significant accomplishments.
Rouhani’s most visible accomplishment is lower inflation, down by more than half from over 40 percent a year ago. The runaway inflation of the last three years that alienated the middle class and even many conservatives from former President Mahmoud Ahmadinejad is now back to a level that Iranians consider normal.
Containing inflation was achieved at considerable cost, though, by keeping government expenditures to a minimum and forgoing any kind of fiscal or monetary stimulus. Rouhani even managed to increase energy prices last April without any protest, indicating that his popularity has so far survived austerity. The energy price hikes were substantial enough to close the budget gap left by Ahmadinejad’s generous — some would say irresponsible — cash transfers. The price of gasoline was increased by 75 percent, diesel by 67 percent, and other energy prices by about 30 percent.
Rouhani’s second economic achievement was restoring the business confidence lost to the erratic economic management of the Ahmadinejad years. He did this by simply getting elected and by appointing a competent team. His election stopped or at least slowed down the hemorrhaging of Iran’s economy, which has been hit by draconian international sanctions and bad domestic policies.
Rouhani’s greatest economic success came in the form of a political victory. He overcame substantial domestic opposition to rapprochement with the West to sign the Joint Plan of Action (JPA) with world powers last November. The economic impact of the JPA has been underwhelming, but without it the economy would have continued to slide.
The agreement can be credited with the strengthening of Iran’s currency, the rial, which is a good indication of rising business confidence. Since November, Iran’s oil exports have also increased by 30 percent, about $7 billion of Iran’s frozen funds have been released, and petrochemical exports, which received specific sanctions relief, have increased.
This spring, auto production (also marked for sanctions relief in the JPA) was up by a whopping 90 percent compared to a year ago according to Mohammad Reza Nematzadeh, the minister for industry, mines and commerce. He also mentioned increases in petrochemicals production by 9 percent and durable goods by 30 percent.
These improvements are most likely lost on the average Iranian, whose job prospects and income has not increased since Rouhani took office. The obvious culprit is, of course, the financial and shipping sanctions that limit Iran’s access to its foreign exchange earnings and continue to choke large sections of its industries. Manufacturers are still using cumbersome and costly channels to procure their raw materials and parts. For them, the optimistic official statements and newspaper headlines proclaiming the imminent “collapse of the sanctions regime,” is just talk. Indeed, while Western critics of Iran’s limited sanctions relief, particularly in Washington, point to the flood of foreign business missions to Tehran, no actual investment has occurred due to the continued uncertainty about the future of the sanctions.
The latest disappointing jobs report shows the limited impact of the JPA so far. Industry as a whole continued to lose jobs last spring, more than 6 months after the signing of the agreement.
There were 700,000 fewer industry workers employed in spring 2014 than when Rouhani took office. These numbers cast doubt on the claim made in a recent report published by the Foundation for Defense of Democracies and Roubini Global Economics that the economic benefit of the JPA “is reflected in increased economic output and improvements in employment within Iran.” National accounts data published last week shows that industrial output for 2013/14 as a whole was down by 4.5 percent and industrial employment has been falling through spring 2014.
Data on personal incomes and consumption published by the Statistical Center of Iran also indicates that economic recovery is yet to come. For the Iranian year that ended on March 20, 2014, real household consumption fell by 5 percent for urban households and 12 percent for rural ones. Their real food expenditures meanwhile fell by 14 percent.
So does the anemic economic recovery weaken Rouhani’s hand in the nuclear negotiations and should the West therefore toughen its position now in order to extract further concessions from Iran?
Sanctions have no doubt increased Iran’s willingness to negotiate, but it would be a mistake to think that more sanctions always brings more concessions. Most Iranians believe their government has held its part of the bargain since last November, so they would see more sanctions now as bad faith on the part of the P5+1 (US, UK, France, Russia, China plus Germany) and blame the failure of the negotiations on them. This would reduce pressure on Rouhani to make further concessions.
Furthermore, the Iranian middle class, after having survived eight years of Ahmadinejad, still regards Rouhani as the best leader to champion its interests. The poor, who, despite years of sanctions are decreasing as a proportion of the total population, are meanwhile relatively well protected. Thanks to the cash assistance program instituted by Ahmadinejad (about $40 per person per month in international dollars) in 2012/13, when average real incomes and expenditures were falling, poverty rates actually fell. At the time, only 5 percent of the population was counted as poor, based on a $5 per day poverty line (in international dollars). Iran’s effective income assistance programs can be adjusted to protect them against further economic deterioration.
The more interesting question is how the course of the talks could affect Rouhani’s presidency beyond its first year.
As they stand now, Rouhani’s plans are helping the private sector lead the economic recovery and letting markets form the basis of economic life in the Islamic Republic. If the talks succeed in the next four months and sanctions are gradually lifted, Iranian businesses are sure to spring into action, as they do when oil money starts to flow. Rouhani will be then be well on his way to a second term.
But Rouhani has reservations about this scenario. In the past, oil-induced booms have deepened Iran’s dependence on the outside world, something that runs counter to the vision of a “Resistance Economy” identified with the Supreme Leader.
If the talks fail, as the Washington hawks seem to wish, Rouhani would have to reverse course; instead of re-integrating Iran into the global economy with the private sector in the lead, he would promote economic self-reliance and resistance to outside pressures, a strategy that fits much better with the state and its para-statals at the helm.
In the narrow, security-focused discussion of Iran that passes for analysis these days in the US, the broader issues of importance to Western leaders are easily lost. But for those interested in longer-term relations with Iran, it helps to bear in mind that the current negotiations are not just about Iran’s nuclear activities; they are also about the direction that Iran’s economy will take in the coming decade, and who could benefit from it.
Photo: Iranian President Hassan Rouhani visits the Shahid Rajai Port Complex port in Hormozgan Province on Feb. 25, 2014.
]]>by Djavad Salehi-Isfahani
The diplomatic push by Iranian President Hassan Rouhani to resolve the decade-long dispute over Iran’s nuclear program reached its zenith during his visit to New York in late September, exactly one year after Iran’s currency collapsed under the weight of US-led sanctions. Although the timing is largely accidental, the [...]]]>
by Djavad Salehi-Isfahani
The diplomatic push by Iranian President Hassan Rouhani to resolve the decade-long dispute over Iran’s nuclear program reached its zenith during his visit to New York in late September, exactly one year after Iran’s currency collapsed under the weight of US-led sanctions. Although the timing is largely accidental, the correlation between sanctions and Iran’s willingness to negotiate is not. These measures have clearly hurt Iran’s economy, and its leaders are searching for an agreement with the West that includes sanctions relief.
Much analysis of the reasons for Iran’s new conciliatory approach credits sanctions for the improved diplomatic prospects for reaching a deal. Where opinions differ is how to respond to Iran. Should the West begin with positive gestures and take steps to ease sanctions or tighten them to squeeze a better deal from an adversary in retreat. The question then becomes: whose side is time on?
As Vali Nasr argued forcefully in the New York Times last week, Tehran does not feel pressed for time on political grounds because it sees itself approaching new negotiations from a position of strength.
Only a few months ago, Iran concluded a landmark presidential election that brought to power a popular government much closer to the reformist camp than to the Supreme Leader, challenging the notion of the Islamic Republic as a political system in demise. The charm offensive in this case is an olive branch, not a white flag.
Those who believe that time is on the West’s side argue that Rouhani’s election is actually a sign of Iran’s desperation. They argue that Iran’s economy is in such dire circumstances that it has forced Ayatollah Ali Khamenei into a domestic compromise that makes an external one possible.
So how bad is the state of Iran’s economy, and will it collapse with more sanctions?
The “collapse” scenario, which at times excites US sanctions advocates into a frenzy like what we saw following the crash of the rial last October, is being revived as a way to dissuade the Obama administration from reaching a compromise with Iran too soon.
Iran’s economy is “already on the verge of collapse”, wrote the Times last week, failing to mention that it has been regarded as on that verge for quite some time. A Brookings report in 2009 called Iran’s economy “teetering”, when in fact it was one of the few countries in the world that was still growing after the Big Recession.
However, unlike political systems, economies do not collapse, they shrink. Economic activity in Iran declined by 2.9% last year (5.4% if you count oil activity) according to government figures, and unemployment is at historic levels, though not as bad as what we’re seeing in Greece or Spain.
If sanctions tighten, Iran’s economy will continue to slide for a year or two but will eventually reverse course. Per capita income will probably fall from about 20% below Turkey today to 30% below, but still more than 50% above that of Egypt. This doesn’t foreshadow a collapse as much as it does a slow adjustment to more difficult circumstances.
Positive steps to push Iran’s economy onto a recovery path were in fact taken in the last months of the Ahmadinejad administration and continue today. The rate of growth of Iran’s money supply and inflation started to fall before Rouhani took office. For the past three months, the average rate of inflation has been below 20% annually, about half of what it was in the months before.
The new economic team is also much more competent and looking in the right direction — to the private sector — for solutions to Iran’s economic problems.
Rouhani’s administration is the most business-friendly team to rule the Islamic Republic. The head of Iran’s Chamber of Commerce, Mohammad Nahavandian, is Rouhani’s chief of staff and the closest person to the president. The head of a private bank is also the governor of the Central Bank. Former president Hashemi Rafsanjani, whose men fill key posts in the new administration, encouraged the private sector to view Rouhani’s government as “family”.
Unemployment is approaching 20%, a record level, but will not surpass it. One reason is demography. For every person who entered retirement age in the last few years, 5 new people reached the working age. In the next few years this ratio will fall to 3, substantially reducing the pressure on the labor markets.
Future growth will also likely bring more jobs. After 2005, a large inflow of oil revenues opened a floodgate to cheap imports that hurt local production, causing jobless growth. Thanks to a more realistic value for the rial, the local production of most consumer goods has become more economical for local producers. The easing of sanctions, especially on the banking sector, would be of enormous help to these producers, but this will not be the game-changer.
In deciding how far they can push Iran, the P5+1 negotiating team should bear in mind another important fact about the political context in which the peace initiative of Iran’s new president is taking place. For Rouhani, reaching a compromise with the West is important, but not if it risks losing the support of his conservative rivals who are deeply suspicious of this process.
Rouhani sees his election as a historic opportunity to move Iran closer to a more pluralistic and tolerant society and not merely to settle the nuclear dispute. Forcing him to choose between making peace abroad and keeping it at home, which more sanctions would do, will not yield a better outcome for Iran or the West.
]]>Talking to ordinary people in Neishabour and Tehran about Iran’s June 14 presidential election, economic issues seem foremost on their minds. But whom they will vote for is based on vague promises to pull the economy out of its deep crisis rather than well-defined economic programs.
Significant differences on economic philosophy divide [...]]]>
Talking to ordinary people in Neishabour and Tehran about Iran’s June 14 presidential election, economic issues seem foremost on their minds. But whom they will vote for is based on vague promises to pull the economy out of its deep crisis rather than well-defined economic programs.
Significant differences on economic philosophy divide a confused public about how to end economic stagnation and high inflation.
In the last three decades of the Islamic Republic’s history, Iranians have experienced both market-based economic growth and populist redistribution.
This election cycle would have been a good time to debate which of these two economic development strategies should be used in moving forward.
However, the decision by the Guardian Council to eliminate two important candidates, Ali Akbar Hashemi Rafsanjani and Esfandiar Rahim Mashaei, from the list of those eligible to run has sharply limited the value of this election as a space for vibrant public debate about the issues that are of greatest daily concern to most Iranians.
These two politicians could have represented the contrasting economic strategies and turned the election into a referendum on the past eight years of populist economics practiced by the Ahmadinejad administration.
Mr. Rafsanjani, the former two-time president, is well known for his preference for market-based economic growth as a solution to poverty and equity issues.
Early on in Mahmoud Ahmadinejad’s tenure, Mr. Rafsanjani rejected Mr. Ahmadinejad’s populist policy of cash distribution as “fostering beggars.”
His elimination from this election has deprived voters of a critical assessment of Mr. Ahmadinejad’s populist program that has inflicted serious damage on Iran’s economy.
A further blow to a meaningful debate on populism came from the elimination of Mr. Mashaei, who was Mr. Ahmadinejad’s close associate and in-law.
It would have been highly interesting, if not very informative, to watch him debate Mr. Rafsanajani on such important issues as the record of the government’s three ambitious populist programs — low-interest loans to small and medium producers, low-cost housing and cash transfers.
What this election should be about is how to achieve a key promise of the Islamic Revolution.
More than three decades ago, a vast majority of Iranians supported the revolution, expecting that it would divide Iran’s oil wealth more equitably.
Early on, Ayatollah Khomeini, the revolution’s leader, tried to limit these expectations by famously saying that “economics is for donkeys.”
But the failure by two previous administrations (Mr. Rafsanjani and Mohammad Khatami, each serving for eight years as president) to reduce inequality has kept the issue of income and wealth distribution at the forefront in recent elections.
Mr. Ahmadinejad came to power in 2005 promising to take the “oil money to peoples’ dinner table,” which he tried to do.
The last two years for which we have survey data, 2010 and 2011, show falling poverty and inequality, but the economy is in shambles.
Prices rose by 40% last year according to official figures, and the same surveys show unemployment at about 15% overall and twice as high for youth.
It would have been valuable for the public to learn if Mr. Ahmadinejad’s redistribution policies are responsible for the current economic mess, or something else, like incompetence in execution or international sanctions.
What the candidates have said in the short time they have had to campaign is that they will do something different. What and how is not clear.
The four front-runners, Saeed Jalili, Mohammad-Baqer Qalibaf, Hassan Rowhani, and Ali Akbar Velayati, have expressed their differences on how to deal with sanctions.
Sanctions loom large in voter minds, but few believe that whoever is elected will be able to influence Iran’s nuclear policy, which is being tightly directed by the Supreme Leader, Ayatollah Ali Khamenei.
What seems to distinguish these candidates most clearly at this point is social rather than economic issues.
They all promise to reduce inflation, increase employment and run a less corrupt and more efficient administration. The differences exist in emphasis rather than specifics.
Mr. Jalili is the most conservative candidate in the race and closest to Mr. Ahmadinejad in economic philosophy but has also been careful to neither defend nor criticize the latter’s policies.
He has defended Iran’s stance in the nuclear negotiations with the P5+1 group (the U.S., Britain, France, China, and Russia plus Germany), which he led in recent years, with the usual anti-Western rhetoric.
By saying the least of any candidate about the economy, he has clearly indicated that economic issues are not his top priority.
In the televised debates, Mr. Jalili made it clear that a more effective enforcement of cultural values was the right way to solve the country’s economic problems.
More specifically, he seemed to reject compromising with the West over Iran’s nuclear program in order to lessen the pain of Western sanctions on ordinary Iranians.
If Mr. Jalili is Mr. Ahmadinejad’s favorite candidate, Mr. Ahmadinejad has not said anything.
He has not made any public statement regarding the candidates so far, except to request time on national television to respond to their criticisms, which was denied.
Word on the street in Tehran is that Mr. Ahmadinejad secretly roots for Mr. Jalili because he believes a President Jalili would be the most likely to make him look good, not by defending his policies, but by taking the economy further into the deep end.
Mr. Rowhani, the only cleric in the race, is the most moderate candidate among the four front-runners.
In the eyes of liberal voters, following this week’s departure of reformist candidate Mohammad-Reza Aref (after an explicit request from the popular former president, Mohammad Khatami), Mr. Rowhani has inherited the reformist mantle of Mr. Khatami as well as Mr. Rafsanjani’s pro-business legacy.
Mr. Rowhani energized Iran’s young voters after the second televised debate in which he criticized the heavy hand of security forces in social affairs.
He appears to have gained the same lift that former presidential candidate Mir Hossein Mousavi achieved four years ago upon declaring he would end police enforcement of public chastity.
However, like Mr. Mousavi, Mr. Rowhani has not offered clear economic policies to address the youth’s more serious problems of unemployment and family formation.
A formidable challenge to Mr. Rowhani comes from Mr. Qalibaf, the current mayor of Tehran and a moderate conservative.
During a recent televised debate, they clashed over how the police should treat student protests, but they have not tried to distinguish themselves on how they would help university graduates get jobs.
If the election goes to a second round run-off between these two candidates, which now seems likely, there is a chance that voters will hear more about their approach to revive the economy.
But then the candidates may find it easier to appeal to voters’ emotions than to their pocketbooks.
Photo: The campaign headquarters of presidential hopeful Mohammad Baqer Qalibaf in the Iranian city of Neishabour. Credit: Djavad Salehi-Isfahani
]]>Economic issues are paramount on the minds of Iranian voters as they ponder the long list of candidates registered for president: who among them is likely to survive the vetting by the Guardian Council, and, of those, who offers the best plan to get Iran’s economy out of the rut it has [...]]]>
Economic issues are paramount on the minds of Iranian voters as they ponder the long list of candidates registered for president: who among them is likely to survive the vetting by the Guardian Council, and, of those, who offers the best plan to get Iran’s economy out of the rut it has been in for the last several years?
Since the last election in 2009, the economy has stopped growing, more people are unemployed, prices have skyrocketed, and the currency has lost more than half of its value. Not all of these are the fault of outgoing President Ahmadinejad — sanctions have tightened considerably since he started his second term in 2009. But for the last several months the economic debate in Iran has been dominated by both his conservative and reformist critics who charge that his populist policies have brought economic ruin.
Three large programs define this populist legacy of redistribution. The first was a large $40 billion lending program for small enterprises, known as the “quick-returns projects”, which started in 2006 and was already widely considered a colossal failure before the 2009 election. The 2011 census revealed zero net jobs added to the economy since the program’s inception. Meanwhile, the public banks that were forced to lend to these projects have been left with huge unpaid loans. This large expansion of credit that failed to bring much additional output spurred the inflationary spiral that would later define the Ahmadinejad presidency.
The low-cost housing scheme, known as Maskan Mehr, also turned out to be highly inflationary because it relied on public lending to low-income people, forcing the banks to increase their borrowing from the Central Bank by about $40 billion and adding even more to liquidity.
The third, and most controversial, is the subsidy reform program, which redistributed some $70 billion worth of energy subsidies — most of which benefited people in middle- and upper-income groups — more equitably by replacing them with cash transfers. It also proved inflationary because the amount of cash distributed exceeded the cost of the energy subsidies that had been removed by an estimated $15 billion per year. The last two programs are still ongoing and have come under sharp attack, from both reformists and conservatives.
There seems to be a widespread perception among Iranian voters that Mr. Ahmadinejad has failed to deliver on his promise, first made in the 2005 elections, to “bring the oil money to the dinner table.” But this does not mean that the public is ready to give up on redistribution. If there is a program that promises them what they are looking for – redistribution without inflation – they will support it. But such a program is not currently to be found among the plans of any of the declared candidates.
Mr. Rafsanjani’s dramatic entrance into the election fray last Saturday is in part motivated by the hope that after eight years of redistributive policies, a majority of voters are now ready to view the type of pro-growth and pro-market policies that he spearheaded as president from 1989 to 1997 with more sympathy. He has certainly already won the support of the left-leaning reformers who, ironically, heavily criticized his structural-adjustment policies then.
Mr. Mashai’s equally dramatic registration on Saturday (with President Ahmadinejad at his side) is to convince voters that with more time populists will deliver on their promises. They should be assured of sizeable support from lower-income people, especially those who have benefited from his cash transfers.
The subsidy reform has been putting 450,000 rials per person per month in individual bank accounts since January 2011. While the value of this transfer has declined due to inflation – when it started it was worth about $45 but is now worth less than half as much — it amounted to about 50% of the per capita expenditures of the poorest 10% of the population in 2011. With unemployment at record levels, they would find themselves in extreme poverty if this transfer is substantially reduced or eliminated. As much as half of the country’s total population are net beneficiaries of the cash transfer program because the energy subsidies they replaced were highly regressive.
Mr. Rafsanjani’s put-down of cash transfers in 2008 as “fostering beggars” is unlikely to endear him to the poor and the jobless. Convincing them that they would do better with real economic growth makes economic sense but will be a hard sell politically to this group. He may not need them, however, because the middle- and upper-income classes for whom the cash transfer matters little — for the top decile, it makes up only 5% of their expenditures — account for some 40% of the electorate.
Candidates from conservative factions, known as “Principlists”, have so far gotten away with simply pointing out what they are against – inflation, unemployment, and bad implementation of good policies by the current administration. They have been careful to stress their commitment to continue the two remaining programs – subsidy reform and low-cost housing – but manage them better.
But the arrival of Mssrs. Rafsanjani and Mashai on the electoral scene will force them to define more precisely how they plan to bring about economic growth while continuing the most important policies of the Ahmadinejad administration. If the Guardian Council, which has the final say on who can run, allows this election to become a three-way race between populist, pro-growth, and Principlist philosophies, the conservative candidates will have to say more clearly what they are for, not just what they are against. Without it, they are likely to find themselves squeezed between the two better-defined alternatives.
]]>by Djavad Salehi-Isfahani
The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry [...]]]>
by Djavad Salehi-Isfahani
The latest round of talks between the P5+1 (the US, Russia, China, Britain, France, and Germany) and Iran in Kazakhstan concluded on Saturday without any tangible progress. While details of the reciprocal offers remain unclear, what we have learned indicates that neither side is in any particular hurry to conclude the lengthy negotiations. In the meantime international sanctions, which have plunged Iran’s economy into its deepest crisis since the war with Iraq, will remain in force and may even be tightened. An important question now is whether the delay in resolving the crisis favors Iran or its Western foes, and the answer has to do in part with what one believes is happening to Iran’s economy.
Just before the talks restarted, a report in the New York Times entitled “Double-Digit Inflation Worsens in Iran” may have strengthened the belief of those in the US who think that time is on their side. If inflation — the most obvious, if not the most painful, effect of sanctions — has gotten worse for the sixth month in a row, then waiting a few more months might weaken Iran’s position. The article was based on new data released by Iran’s Statistical Center, which, when looked at more closely actually shows that inflation has been up and down in the last six months, falling as many times as it went up, though prices go only up (see a detailed graph of monthly inflation rates here). The persistence of high inflation has as much to do with sanctions as with Mr. Mahmoud Ahmadinejad’s insistence on making good before he leaves office and ahead of the June presidential election by pushing ahead with his unfunded (and therefore inflationary) promises of cash transfers and low-cost housing.
Iranian officials who were last year denying the impact of sanctions now praise them for helping Iran wean its economy from oil. Last month, Iran’s Minister of Economy, Shamseddin Hosseini, said that “Thanks to the sanctions [imposed] by enemies, a historical dream of Iran is being realized as the oil revenues’ share in the administration of the country’s affairs has been reduced.” The Minister for Industry, Mining and Commerce also added a humbling note, “What we had been unable to achieve on our own, sanctions have done for us.” He was referring to the huge inflow of cheap imports paid for by the oil revenues over which he has presided since 2009.
As these officials have discovered lately, oil money can stock the kitchens and living rooms of the average family while keeping their educated son or daughter out of a job. While imports increased eightfold over the last ten years, many local producers in agriculture or industry have either shut down or increased the import content of their production. Either way, jobs have been lost. Between 2006 and 2011, census figures show that Iran’s economy created zero new jobs, as the working age population increased by 3.5 million.
As I have argued before, the devaluation of the rial, which many saw as the reason why Iran restarted negotiating, is actually a reason why it may not be in such a hurry to resume its oil exports. A study last week that was surprising for its source — the Washington Institute for Near East Policy, which has always pushed for tougher sanctions on Iran — admitted that Iran is doing a good job of adjusting to reduced oil revenues. It shows how the balance of trade in non-oil items is improving and how the government budget is becoming less dependent on oil.
But adjusting to the financial sanctions is an entirely different story. After being cut off from the international banking system and with limited access to global markets, Iran is finding it extremely hard to turn its import-dependent economy around. If Iran could choose which of the two sets of sanctions to lose first, oil or financial, it would definitely be the latter.
]]>by Djavad Salehi-Isfahani
Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of [...]]]>
by Djavad Salehi-Isfahani
Four months after the collapse of the rial earlier this fall, Iran’s economy is still reeling from its effects. The rial lost 40% of its value in one week late last September, succumbing to accumulating pressures from free spending by the Ahmadinejad government, overvaluation caused by years of booming oil revenues, and international sanctions.
Financial sanctions imposed by the United States against third-party countries that trade with Iran have seriously disrupted Iran’s international trade, reducing its ability to sell its oil or spend the revenues from what it can sell. Sanctions have inflicted enormous pain on millions of Iranians, who have watched the boom of the last decade deteriorate into stagnation, inflation triple and critical items such as medicine disappear from stores. Iranians are meanwhile unsure who to blame, those who have imposed the collective punishment or their own government.
For the moment, there is no sign that what the West was hoping sanctions would do — soften the position of Iran’s leaders as a result of rising dissatisfaction — is actually happening. There are three reasons for this. First, the government has so far skillfully protected the poor from the worst aspects of the economic crisis. It has done so by offering cash payments (amounting to half the minimum wage for a family of four), and by keeping the price of basic necessities like food and fuel from rising as fast as inflation.
Second, those who suffer most — the salaried middle class — are least likely to pour into the streets in protest. And third, even those who believe that sanctions are the root cause of the current economic mess are not likely to ask their government to capitulate to Western demands.
Bringing inflation down and reviving investment are the two biggest challenges that the Iranian government currently faces. There are signs that inflation, after jumping to 4.5% per month (equal to an annual rate of 70%) during October and November, is coming down. Monthly inflation was 2.5% in December and fell to 1.7% in January 2013.
The moderation in inflation is no thanks to Iran’s free-spending president, whose two most important programs — cash subsidies and an expensive low-cost housing program — have been largely financed by printing money. The parliament has been trying to rein him in, and even tried to fire his Central Banker last month on a charge that he had raided the reserves of member banks, a move that had ironically helped reduce inflation.
But success in harnessing inflation will not shield the population from the worst effects of the sanctions. The government has done well in fighting them by finding alternative sources of supply for basic imports, and has successfully engaged in bilateral trade with several countries that are willing to withstand the wrath of Washington such as China, India, Turkey and Argentina, but it will have a very hard time getting private investment back on track with cumbersome arrangements for international trade.
Iran’s private sector is the main source of jobs for the country’s 20 million youth, and the only hope for its 4 million unemployed. The more realistic value of the rial after devaluation has done much to bring the productivity of these youth closer to their wages, which should boost their employment. But uncertainty surrounding the future of the dispute with the West will keep private money on the sideline and in liquid assets, waiting for a sign that normal times are about to return.
Remarks by US Vice President Joe Biden and Iran’s Foreign Minister Ali Akbar Salehi this past weekend that raised the prospects of direct talks between the US and Iran was perhaps a sign, for it immediately sent the rial up against the dollar by nearly 5% in the free market for foreign exchange. If this means that Iran’s private investors have not given up on the country’s future, it should serve as an inducement for Iranian leaders to do their best to reduce tensions with the West — even better, to resolve the nuclear standoff once and for all.
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The sharp drop in the value of the rial in the last two weeks has created much excitement in Iran and abroad, but mostly for the wrong reasons. In the parallel (or free) market for foreign currencies, the [...]]]>
via Lobe Log
The sharp drop in the value of the rial in the last two weeks has created much excitement in Iran and abroad, but mostly for the wrong reasons. In the parallel (or free) market for foreign currencies, the rial fell by 15% in one day this week, reaching its lowest value ever — 35,000 rials per US dollar — down by more than 50% compared to a month ago and 300% to last December when international sanctions tightened against Iran.
What all the related excitement overshadows is that this devaluation is not comparable to those in other countries where large devaluations caused severe shocks to the economy, such as those that swept through Asia in 1997-98. That’s because in those situations all prices were affected because all foreign exchange was traded at the same (rising) rate. This is not the case in Iran because nearly all foreign exchange is earned by the government, which has decided to sell most of it at a lower rate for the import of goods and services that it deems essential.
The rial devaluation that has created the media excitement is actually taking place in a narrow market that is shrinking in size and diminishing in importance. Iran’s Central Bank has classified a long list of goods into categories with priorities 1 through 10, leaving it to the parallel market to take of all other needs. Priorities 1 and 2 are food and medicine, receiving foreign exchange at the official rate of 12,260 rials per dollar, followed by other categories with lower priorities, which are mostly intermediate goods used in industrial production.
The government has been promising to do something for the import of these non-essential but important commodities, which account for about two-thirds of Iran’s imports, offering them some sort of preferential treatment. But the Central Bank was slow to respond and those producers who did not want to wait bought their currency needs in the parallel market, competing with speculators and people taking their money out of the country. The uncertainty about the sanctions, bewildering pronouncements from government officials in Iran, and hype over a possible Israeli attack, all combined to throw this market into chaos.
To protect Iran’s producers from what the government considers the consequences of “psychological war”, the Central Bank set up a “Currency Exchange Center” and invited licensed importers and exporters to trade their foreign currencies there, hoping that the auction rates reached there would be more stable and lower than the parallel market rate. When the Exchange Center opened just two weeks ago, the volume of transactions quickly jumped from $10 to $181 million per day, with most of the supply likely coming from the Central Bank. The Exchange Center diverted some of the supply of currency away from the parallel market, which I believe caused the rate there to soar.
Curiously, the Central Bank had predicted the opposite: that by arranging trade in the Exchange Center it would help lower the rate in the parallel market. This miscalculation added to the confusion and fear that the government did not know what it was doing. While the Exchange Center has produced a lower rate than the parallel market and can potentially shield producers from the worst psychological effects of sanctions and war, the shock to the parallel market has caused a serious political if not economic crisis for the government of Mr. Ahmadinejad.
Does all this mean that Iran’s economy is on the verge of collapse, as Israel’s Finance Minster reportedly said? The answer is no, because most of the economy is shielded from this exchange rate, though not from the ill effects of the sanctions, which will continue to bite for a while. Would it cause sufficient economic pain that would push the Iranian government to make concessions in its nuclear standoff with the West? The answer is not likely. The multiple exchange rate system, as inefficient as it is, will protect the people below the median income, to whom the Ahmadinejad government is most responsive.
But the government can ill afford to ignore millions of Iranians, mostly upper income Iranians, who are affected by the gyrations of the parallel market. Among them are millions of people who are seeking a safe place for their savings, parents who send money to their children for education abroad or need to travel there to see them. They are not all importers of luxury items or those who want to take their money out of Iran. In allocating its limited — perhaps shrinking supply of for foreign currency — the government has a difficult time balancing the needs of the lower middle class and the poor with those of upper income Iranians that it cannot rely on for political support.
- Djavad Salehi-Isfahani is a professor of economics at Virginia Tech and a nonresident senior fellow at the Brookings Institution.
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