Iran: Crippling sanctions tarnish Rouhani’s reform drive

Iran’s newly elected president Hassan Rouhani enters office amid deteriorating economic fundamentals, while a new set of sanctions scheduled to take effect in early August might push the economy to the brink.

The Institute of International Finance (IIF) forecasts economic hardship to rise and fundamentals to deteriorate in the event of stalled negations with the US and EU. Sanctions have reduced Iran’s trading firepower, fuelled inflation and reduced banking liquidity.

“The new sanctions penalize holders of a ‘significant’ amount of rials outside the country,” states the IIF. “These measures could lead to further depreciation of the parallel market rate. If the next government makes no concessions in the coming months, the economic situation is likely to worsen further in FY2013/14.

“Even in the unlikely event that discussions with the western countries take place and achieve progress, it will be some time before the sanctions begin to lift and the economic hardships begin to ease.”

Falling oil production and policy mismanagement have also intensified the economy’s abysmal economic performance in the past two years.

The rial’s deprecation is tempered by hyperinflation, after the rate of inflation reached 60%, according to the IIF.

“The sanctions have inflicted serious damage on Iran’s economy in FY2012/13, ending March,” it reports. “Based on incomplete data, we estimate the economy to have contracted by 3.5%, the 12-month CPI inflation surged to above 60%, the fiscal balance moved to a deficit of 2.9% of GDP, and the official reserves dropped by about $17 billion to $84 billion – still adequate at 10 months of import cover.”

Iran has the fourth-largest oil resources in the world, after Venezuela, Saudi Arabia and Canada. However, UN sanctions are estimated to have cut Iranian oil production by more than one million barrels per day of crude oil, amounting to lost revenue of $5 billion per month, according to the Centre for Global Energy Studies.

With Iran’s economy on the brink, the jury is out on whether Rouhani has the political capital to deliver on his pre-election growth promises.

“Rouhani’s campaign message of a more flexible approach in foreign policy and improved management of the economy appears to have resonated with the voters, who turned out in record numbers – 70% of the estimated 50 million voters,” states the IIF.

“The new president, who will take office in early August, will explore ways to reduce tensions with the US and the EU, and possibly to revive bilateral talks with the US on the nuclear issue, but his first priority may be to make changes in the management of the economy to improve the lives of ordinary Iranians.”

Rouhani’s first task when he steps into office on August 3 will be to present an economic programme that incorporates comprehensive market reforms, while simultaneously bringing the country’s oil production back to fuller capacity.

A new economic reform agenda should look outwards and further away from the policies of his predecessor Mahmoud Ahmadinejad.

The Washington Institute for Near East Policy says the reformist candidate might deliver on his conciliatory foreign policy promises, but it’s unclear whether this will be tolerated by Ayatollah Ali Khamenei, Iran’s supreme leader.

“Iran’s supreme leader allowed Rouhani to win the election, recognizing that he had run against current Iranian policies that have isolated the country and invited economically disastrous sanctions,” reports the Washington think-tank. “But it isn’t clear why Khamenei allowed such an outcome.

“Rouhani’s election could provide a safety valve for the great discontent within Iran. A president with a moderate face might be able to seek an open-ended agreement on Iran’s nuclear programme that would reduce tensions and ease sanctions now, while leaving Iran room for development of nuclear weapons at some point.”

However, Rouhani’s reform drive might be in vain when placed at the mercy of Ayatollah Khomeini.