Iran’s Economy in 2017: Time for Reforms

Iran’s economy is looking ahead to 2017 with both big prospects and hefty challenges in store.

The outgoing year saw the signing of a historic nuclear pact that lifted the sanctions, unblocked the country’s frozen assets, brought its crude oil exports almost back to pre-sanctions levels and freed the hands of the government to launch much-needed reforms in various sectors of the economy, not least the beleaguered banking sector.

The year 2015 turned the tide on a chorus of woes that had dogged the country for years: a growth rate that had tumbled to minus 6.8%, an inflation that had soared above 40% and a volatile currency market at the mercy of day-to-day swings.

All of this–if left unchecked–would have been enough to steer the country on a dangerous course reminiscent of the predicament Venezuela has found itself in.

Therefore, the current administration deserves kudos for its achievements on the diplomatic front and its initiative for reforming the economy.

However, while the government’s diplomatic accomplishments were much more tangible, the economic spoils have been slower to materialize. This has cast a shadow on the administration’s competence in handling the economy and even prompted critics to question the efficacy of the nuclear deal.

 What Might Have Been

A growing number of observers and private-sector leaders are unanimous that the government could have done more to improve the economy. 

Many pundits have exhorted the government to break away from years of misguided policies that falsely purported to support the poor and embrace the downtrodden. The continuation of direct payment of cash handouts, the persistence of foreign exchange controls to keep the rial overvalued and the lingering dual exchange rate regime have backfired but subsequent governments have found them difficult to ditch.

This week, the Central Bank of Iran announced that the economy had grown at a healthy rate of 7.4%. Based on this figure, experts have inferred that the GDP growth for the fiscal 2016-17 will be between 5.5-7%.

The better portion of this growth has come about as a result of ramped-up oil exports. If the country wants to ensure that this growth rate is not a fluke, it needs to change course.

Pursuing the goal of reducing dependency on oil revenues–enshrined in Resistance Economy principles–and ending worn-out populist strategies of the past–can be hugely beneficial. But at a deeper level, a change of outlook and a strong desire for reforms are needed for these aspirations to become a reality.

  Embracing the New

As the government of President Hassan Rouhani enters its final months in office, it should look at the May 2017 election as a time for undertaking structural reforms.

Working to tackle the demons of unemployment, low wage growth, poverty and recession would be half-baked efforts, as long as the grounds for vested interests and corruption remain entrenched. The economy has for decades become the playground of rent-seekers who benefit from special privileges and speculators who ride on the waves of market fluctuations.

Distributing subsidized foreign currency and granting preferential treatment to state entities are still fanning the flames of non-sustainability.

The year 2017 holds uncertainties of its own: from a White House run by Donald Trump to the unpredictability of global markets as the old order is battered, countries need to create buffers against possible disruptions. If the country wants to brace the new, it has to get rid of the old.

Only last week, Tehran Chamber of Commerce–the country’s biggest private sector assembly–voiced strong frustration over the counterproductive policies that have hamstrung domestic production. This burst of rancor at the end of the tenure of a government viewed as harbinger of positive change only four years ago should act as a wakeup call.

The economy needs a groundbreaking decision to turn things around–something in the spirit of the nuclear deal itself.