Raisi’s Roadmap for the Economy: More than a Fata Morgana?

Amir Alizadeh

Promising a “gateway to the green garden.” That is how liberal business magazine Tejarat-e Farda termed this year’s presidential election campaign on its front cover. The weekly journal described the candidates’ ambitious proclamations as nothing but “empty promises.”

There is no need to be familiar with the Persian idiom and knowing what it means to grasp the point made in that cover story. A quick glance at the gloomy image of a small door standing ajar amid an arid desert, presenting an illusory pathway towards an oasis, makes the message clear.

“How did presidential elections become a contest between misleading promises?” Tejarat-e Farda subsequently enquired, criticizing the lack of any mention of plans for structural reforms during election campaigns in Iran. As there are no parties in Iran and the candidates do not publish detailed election manifestos, voters do not know which economic views the aspirants espouse nor precisely which approach they advocate. In this election, political slogans and, in some cases, outright populist promises (once again) played a greater role than genuine economic programs.

In this context, it is vital to consider how much scope presidents actually have to initiate economic reforms, since the causes of Iran’s economic problems are political rather than administrative. Given the constraints on their power and authority, presidents can only exert influence in this realm to a limited degree. That was also one of the main reasons for the historically low turnout in this year’s presidential elections.

Ebrahim Raisi, who won the election, also made numerous promises during his campaign. Against that backdrop, he presented his Roadmap for the Economy, divided into seven categories: “Increasing production and exports,” “Reducing costs for families,” “Reform of budgetary structures,” “Raising incomes,” “Financial sector reform,” “Fiscal reform” and finally “Greater transparency.”

The explanations addressing these goals and the measures for achieving them are, however, couched in very general and vague terms. Nonetheless, the new president will be judged in light of these objectives. 

Budget Deficit

The chronic shortfall in the state budget is the “mother of all problems” for the Iranian economy. Most of the available solutions for this particular dilemma are purely political.

Raisi asserts that he will ensure “precise implementation” of the operational budget – without, however, stating exactly what he means by this. Irrespective of that, considerably greater efforts will be required to get to grips with the structural budget deficit. Sanctions would need to be lifted, foreign relations normalized, oil exports reinstated, subsidies reduced, tax exemptions for state-controlled foundations and organizations scrapped, and spending would also need to be slashed. Implementing all these measures requires resolute backing from the entire political establishment (which Raisi currently seems to enjoy – although this should not lead anyone to jump to hasty conclusions, as the example of Ahmadinejad’s fall from grace reveals).

According to official statistics, the budget deficit in the current Persian year will be approximately 3,200 trillion IRR (around 10.5 billion Euro with a floating exchange rate). That is about 40 percent of the total budget. The Central Bank of Iran’s foreign exchange earnings have averaged $45 billion annually over the past 20 years. However, in the last two years, after the reimposition of US sanctions, that figure shrank further, to just $9 billion per annum.  Iran’s oil minister has stated that the country’s oil revenues have fallen by over $100 billion over the past three years.

If sanctions are lifted in the coming months, injecting oil revenues into the Iranian economy would pose a further challenge for the new Iranian government. If not managed properly, a sudden upsurge in resources (likely to be around $50 billion per year) after over two years of the economy being throttled by sanctions could constitute a shock for Iran’s economy.

“Steering” the Monetary Supply

The chronic budget deficit is the proximate cause of another highly significant challenge: growing liquidity. In the last ten years alone, the money supply in Iran has increased more than tenfold.

Nevertheless, many Iranian companies do not have adequate funding. High inflation coupled with the devaluation of the currency mean that Iranians are more likely to invest in assets such as real estate, gold, or foreign exchange to hedge against loss of purchasing power. Raisi, like many other Iranian policymakers, repeatedly stresses that this money supply must be “directed towards production.”

However, it would be a mistake to view “steering monetary supply” as simply granting loans to the manufacturing sector. Many policymakers in Iran are convinced that there is a great need for investment in industry, as companies do not have access to capital. But there is substantial evidence to the contrary. The lack of demand for investment in production is the real problem, not a lack of financial resources.

That leads directly to a further problem for the Iranian economy. One important indicator of declining demand for investment is the way in which gross fixed capital formation (the value of assets acquired by domestic economic units for use in the production process for more than 12 months) has evolved in recent years. The growth rate of such gross fixed capital formation has been declining significantly since the mid-2000s. Since 2011, growth in gross fixed capital formation has been negative in most years and the real investment rate has sunk from year to year.

In fact, a very rare phenomenon has been observable in Iran’s economy over the past decade. During this period, the downward trend in new investment has reached a point where such new investment is lower per annum than the depreciation of existing assets. In other words, the depreciation of machinery and other assets has been greater than overall economic investment. As a result, the country’s net capital assets have shrunk over the past two years.

At his first press conference, Raisi simply stated that Iran is “one of the safest locations” for business and that his government would guarantee security for all entrepreneurs and investors. However, boosting investment demand involves much more than that. Simply “directing money into production” is not the answer. Instead, further measures are vital, such as effective inflation control, eliminating corruption, improving the business environment, removing red tape, or establishing a uniform exchange rate.

Inflation

Extremely high inflation is another chronic ailment that afflicts the Iranian economy, while simultaneously being a consequence of budget deficits and increased money supply. Figures from the Statistical Center of Iran (SCI) indicate that inflation was 43 percent in the 12-month period that ended on May 20th. That is the highest level in the last 26 years. Raisi’s roadmap pledges that in two years the inflation rate will fall to less than half of its level in the last Persian year, 1399. In other words, Iran’s new president has set the inflation target for 2023 at 18 percent. In addition, Raisi also intends to move inflation “toward a single-digit level” in subsequent years.

The 18-percent inflation target is already ambitious, as containing inflation, for example through a restrictive monetary policy, conflicts with plans to set the stagnant economy back on a growth track.

Automotive Sector

The Iranian automotive industry is a good example of the discrepancy between the candidates’ promises and the realities of the Iranian economy. It is the second-largest industrial sector in the country and still accounts for 13 percent of all manufacturing jobs. 

Raisi has pledged to break the monopoly of the three major Iranian manufacturers: Iran Khodro, Saipa, and Pars Khodro. However, during the election campaign neither he nor the other candidates took a clear position on the three-and-a-half-year ban on car imports. Iran introduced the import ban after the US imposed sanctions so that it could use its limited foreign exchange revenue in a more targeted fashion. It is debatable whether the monopoly can be disrupted unless that ban is lifted.

The second point in Raisi’s plans for the automotive sector is “fair pricing” – actually not part of the state’s purview in a market economy. The impact of government price controls to date became apparent in last year’s financial statements from the country’s three major automobile manufacturers. These indicated that the three corporations spent an average of IRR 1,220 million on each vehicle produced, although they earned on average only IRR 1,140 million per sale (circa 4,100 and 3,800 EUR). This substantial loss arose primarily due to the government’s pricing policy. The new president does not yet appear to have considered liberalizing the automobile market and opening up to foreign investment and transfer of know-how.

The next few years will show whether Raisi is able to keep his promises (even if only in part). At present there is little reason to believe that he will take the sweeping steps needed to do so. Instead, there seem to be good grounds to fear these promises will after all prove to be merely a “gateway to the green garden”.

Amir Alizadeh is Head of International Economic Relations and a member of the Executive Board of the Maleki Corporate Group consultancy in Frankfurt. Prior to this he was deputy managing director of the German-Iranian Chamber of Industry and Commerce in Tehran and editor-in-chief of the IranContact foreign trade journal in Berlin.

On Twitter: @amalizadeh