When Hassan Rohani won Iran’s presidential election in June, he garnered more votes than his predecessor did when he swept to power eight years before. The 64-year-old lawyer, cleric, and former diplomat will take on an economy that under President Mahmoud Ahmadinejad was defined by falling oil exports because of international sanctions, accelerating inflation, a currency collapse, and stubbornly high unemployment.
Rohani didn’t outline an economic plan during the six-week campaign. He certainly needs one before he takes office in August. In December, Economy Minister Shamseddin Hosseini said oil revenue had dropped 50 percent because of the sanctions, according to the Tehran-based Khabar Online news site. The decline started in July 2012 when European Union sanctions went into effect.
It gets worse. The national currency, the rial, has lost more than half its value in the past year, pushing the official inflation rate to 32.3 percent in April from 14 percent two years ago. The International Monetary Fund forecasts a decline in gross domestic product of 1.3 percent this year, following a 1.9 percent contraction in 2012.
Controlling inflation is Rohani’s immediate task. Under Ahmadinejad, the money supply grew 20 percent, which added to the upward pressure on prices. Rohani could lower inflation by limiting the cash handouts paid to the population following the phaseout of food and energy subsidies.
The handouts, introduced in Ahmadinejad’s second term, were supposed to go to the poorest Iranians only, but for political reasons a large part of the population participated in the government program. Another way to fight inflation would be to curb the cheap loans to rural Iranians that were a hallmark of Ahmadinejad’s administration. Changing these policies would require approval by the Majlis, the Iranian parliament. That’s a politically sensitive task.
Rohani said in a June 17 press conference that capital held by individuals and banks inside Iran must be unlocked and provided to companies for the economy to recover. This contrasts sharply with the populist stance of Ahmadinejad, who pledged to spread oil wealth among the poorest. Ahmadinejad was blamed by his political opponents for failing to shield companies from the impact of rising costs. According to a five-year plan for ending food and fuel subsidies, the government was supposed to pay part of what it saved to the people and part to local companies, to make up for rising costs. Ahmadinejad paid back the people with cash handouts but neglected the companies. “Under Ahmadinejad, Iran’s economy was founded on populism,” says Vali Nasr, dean of the Johns Hopkins School of Advanced International Studies in Washington. “Rohani needs to change the tenor of that.”
Rohani headed the Center for Strategic Research, a government-linked think tank. The center also has connections with Ali Akbar Hashemi Rafsanjani, who served as president of Iran from 1989 to 1997. Rohani also served as nuclear negotiator under former President Mohammad Khatami, a moderate. Both men endorsed Rohani days before the June 14 vote. Rafsanjani is a wealthy, business-friendly cleric as well as a seasoned political player. He favors more market-based solutions to Iran’s many economic problems.
The Center for Strategic Research could prove a ready source of talent for Rohani’s economy-fixing team. Mohammad Bagher Nobakht, who heads the economic research department at the center, is the leading candidate to become the minister in charge of the economy and finance portfolio.
Rohani may decide to encourage more private-sector participation in the oil and gas industry, which is badly in need of investment. The aim would be to persuade wealthy Iranians to invest in this essential business, especially in refineries and other energy industry infrastructure.
However energetic a leader Rohani proves to be, Iran’s domestic situation remains “directly linked to its foreign policy,” says Mahjoob Zweiri, a professor of Middle East politics at Qatar University in Doha. “The key issue, which is to fix the economy or stop its deterioration, takes Rohani directly to the sanctions, the nuclear conflict, and the international community.” With Supreme Leader Ayatollah Ali Khamenei the final decision-maker on key affairs of state, Rohani’s power to alter nuclear policy, end the crippling sanctions, and reestablish normal ties with the West is limited. Come August, he will have a chance to test those boundaries.