Economist: Rouhani Inherited an Economy in Ruins

As President Hassan Rouhani prepares for yet another presidential race and seeks reelection in May, critics and supporters are reviewing his economic record.

Supporters refer to achievements such as a significant slowdown in Iran’s runaway inflation, stabilized forex market and increased oil output as a result of the Rouhani government’s successful foreign policy, notably the nuclear deal reached with world powers in 2015, which paved the way for the removal of sanctions against Iran’s economy.

Yet, critics refer to a lingering recession in Iran’s manufacturing sector and high unemployment rate as the downside of Rouhani’s economic performance.

Senior economist, Mousa Ghaninejad, defends the incumbent president’s track record, arguing that it inherited “an economy in ruins” from the previous administration.

“The government tried to gradually restore the ruins [created by the previous administration],” he told the Persian monthly Ayandenegar.

“The most important problem in the last months of the previous administration … was stagflation. Inflation increased significantly and the economy experienced severe contraction. GDP witnessed negative growth for two consecutive years.”

Iran’s gross domestic product shrank 6.8% during March 2012-13. It stood at a negative 1.9% the next year. But the figure rebounded to 3% during Rouhani‘s second year in office (March 2014-15).

“The positive growth did not mean the economic issues had been resolved. The problems were still in place. Part of them were the result of lingering sanctions and significant problems were associated with the flawed policies of Ahmadinejad’s eight-year tenure,” Ghaninejad said.

  Wallowing in Petrodollars

The previous administration enjoyed windfall oil revenues amid crude prices of more than $100 per barrel. In the Iranian year to March 2012 alone, the Islamic Republic’s crude revenues topped $110 billion. This coincided with high inflation rate hitting a record high of over 40%.

But despite the runaway inflation, the former government managed to keep the public economically content, regardless of the consequences.

Ghaninejad noted that by keeping the exchange rates low and taking resort to excessive imports, the previous government filled the market with cheap products so that consumers don’t feel the pinch of economic problems.

But this transient satisfaction came with serious repercussions for the economy. For one thing, the manufacturing sector was hurt badly because of the inability to compete with cheap imports.

“During March 2005-12 … Iran experienced record high oil revenues and record high imports, but almost zero new jobs,” Ghaninejad said.

Following a sharp fall in oil revenues, the Rouhani administration has not been able to spur the sluggish manufacturing sector it inherited from the previous government.

Oil prices fell drastically in 2014 to a record low of $30 in 2016, squeezing Iran’s hydrocarbon-dependent revenues. The country indulged in sky-high crude prices for a few years, adjusting its spending with abundant revenues. However, this posed a challenge when prices nosedived.

  Limited Access to NDFI

Rouhani has been criticizing the parliament for preventing the government’s access to Iran’s sovereign wealth fund, known as the National Development Fund, amid the ongoing financial crunch.

The parliament lately passed a bill that requires the government to deposit 30% of revenues earned from oil and gas exports in NDFI in the current fiscal year (started March 21), up from 20% last year.

However, despite shortage of liquidity, the administration granted $4 billion in loans to thousands of small- and medium-sized enterprises in the last fiscal year.

“The economy is in a better shape today compared to 2013. We can say … we are at the beginning of proper and balanced growth,” Ghaninejad said.

“If the government can manage to keep the inflation rate as low as it is, or even pull it down further, economic growth will significantly contribute to the wellbeing of the people in the next four years.”

According to the Central Bank of Iran’s latest report, the Iranian economy grew 11.9% during the three quarters of the last Iranian year (ended March 20, 2017).

Without taking the oil sector into account, the growth rate stands at 1.9%, the report shows.

The oil sector expanded 65.4%, thanks to ramped up crude production and increased exports following the lifting of sanctions.

The sectors of agriculture, industries, mining and services grew by 4.2%, 5.8%, 0.2% and 2.4% respectively while construction saw a negative growth of 17.1% during the nine months.  

The CBI data on Iran’s GDP growth for the three quarters came a few days after the Statistical Center of Iran released its own report for the corresponding period.

According to SCI, Iran’s economy during the nine-month period grew 7.2% including oil and 5% excluding it.

Industrial, agricultural and services sectors grew by 0.5%, 5.7% and 5.4% respectively, the SCI report showed.

Iran’s inflation rate dipped below 10% for the rolling year ending June 20. This was the first time the country was experiencing single-digit inflation in about a quarter century.

The average goods and services Consumer Price Index for urban areas in the 12 months ending March 20, which marks the end of the final month of the last Iranian year (Esfand), increased by 9% compared with last year’s corresponding period, the latest report released by the Central Bank of Iran said.

The report came after the Statistical Center of Iran put Esfand inflation at 6.8%.

Both CBI and SCI are in charge of releasing periodical statistics on macroeconomic indices, which often differ from one another.