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Opinion: Iran – Dark Clouds on the Economic Horizon | ASHARQ AL-AWSAT English Archive 2005 -2017
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Rouhani AP Photos 21/12/15

“You haven’t been paying the teachers for months and now you have stopped paying the salaries of the military as well”. This is how Islamic Majlis member Bahram Biravand addressed President Hasan Rouhani the other day.

The subtext of the statement is that while you can send teachers to prison when they protest about not receiving their salaries, it would be hard to do the same with the military- the regime needs security forces for its protection.

Biravand is not the only one to sound the alarm about the prospects of the Iranian economy. Earlier this month, over 100 Majlis members signed a letter to Rouhani warning about “the deepest recession in Iran’s recent history” and the threat of social unrest. Before the parliamentarians joined the chorus of complaint, four cabinet ministers including the minister of economy had also written to Rouhani to inform him about the rough patch ahead. The ministers later claimed they didn’t want their letter to be leaked. However, it was obvious that at least one of them had done the leaking.

Bad news often comes in series, and this week we had the International Monetary Fund’s annual report on the Iranian economy. The IMF trashed Rouhani’s Panglossian claim that 2016 will see a 3.5 per cent economic growth rate for Iran. Instead it forecasts either a negative rate of half per cent or a positive one of the same, which would be statistically insignificant.

According to estimates by the Ministry of Labor, the Iranian job market is losing an average of 1000 jobs a day. The IMF report confirms this by forecasting a jump in unemployment rates from 11.9 this year to 12.5 in 2016.

Perhaps the only positive news that the IMF report contains concerns the price of oil which is supposed to average at $52 per barrel. However, the current price hovers around $35 with a prospect of further decline. Even then, much depends on whether or not the embargo on Iranian oil exports will be relaxed. This year Iranian exports averaged around 1.24 million barrels a day. In 2016 this might increase to 1.81 million, provided there is enough demand.

The IMF also warns against the threat of spiraling inflation , largely because of the government’s decision to do a bit of “quantitative easing” of its own, which means printing money in the same way President Barack Obama has done in the US. The problem is that the Islamic Republic is not the same as the United States. The Americans can print government bonds at virtually no interest rate and be sure that someone, usually the cash-rich Chinese, will buy them. The Islamic Republic, however, has had to shelve plans for a government bond destined for the international capital market because no major Western bank agreed to underwrite even a part of it.

Iran’s income from oil exports shows a drop of over $20 billion in 2015 from the $55.4 forecast to $35.3 billion.

In theory, Iran’s foreign currency reserves appear healthy at $142 billion according to the IMF. The problem is that because of sanctions related to the nuclear issue much of that income remains frozen in bank accounts that Tehran cannot use. A good part of those reserves were built up under President Mahmoud Ahmadinejad as a result of sanctions. Good old Mahmoud was a very rich man; only he couldn’t spend his own money.

Obama has tried to help Rouhani, whom he regards as a moderate capable of curbing the powers of the “Supreme Guide”, by allowing the release of around $8 billion of Iranian frozen assets since the Geneva talks on the nuclear issue in 2014.

However, even if all of Iran’s frozen cash is released, and there is dispute over how much is involved, the economy would continue to suffer from deep structural defects that no amount of money could correct.

When the mullahs seized power in 1979 they went on a nationalization spree inspired by their erstwhile Communist allies who regarded the Soviet Union as the ideal model of human society. Within weeks, they nationalized almost everything, destroying a capitalist and managerial elite formed over almost a century.

The result was chaos. So, under an 8-point decree issued by Ayatollah Khomeini, the chief mullah of the regime at the time, they tried to back-pedal by allowing some former owners and managers to return in exchange for fat bribes in the name of “helping the Imam fund” or other projects to “help the musatzafeen (the dispossessed)”. However, having fled to exile, many owners and managers didn’t return. That allowed the mullahs and their bazaar partners to seize whatever they could. In 1988, the government estimated the number of private businesses seized from their owners at over 75,000.

In the meantime, various religious foundations transformed themselves into businesses, each securing a niche in the market. The overall picture became more confusing when the military and security forces also joined the banquet, setting up their own companies and securing monopolies over sectors of the economy and foreign trade. For example, the largest construction conglomerate in the country belongs to the Islamic Revolutionary Guard which was headed by Rouhani for almost a decade. The Commander-in-Chief of the IRGC sits on the board of directors of 23 companies.

At one of his more aggressive moments, Ahmadinejad even claimed that the IRGC ran the black-market in Iran and paid no taxes on over 200 companies it controlled. While no one knows what is going on in the so-called “foundations”, including the biggest of them working in the area of Imam Reza in Mash’had, large segments of Iranian foreign trade are controlled by powerful mullahs. One has a monopoly on sugar imports, another on much of the trade with China.

Ahmadinejad tried to democratize corruption by privatizing state-owned businesses worth $30 billion at half the price. The result was a bonanza for influential figures within the military security networks, leaving the “average Islamic citizen” only the crumbs.
While there is no doubt that Rouhani has made many mistakes, for example increasing the military budget by 21 per cent to garner political support, it would be unfair to blame him for the mess that the Iranian economy is in. He has inherited an un-reformable system, a peculiar cocktail of socialist and anarchistic economics. The cash that Obama plans to release may save the system for a while. In the long run, however, Iran cannot build a modern economy with a system based on rentier mentality, corruption and kleptocracy.