IMF report highlights Tehran’s economic challenges

The IMF has conducted its first Article IV review of Iran’s economy since 2011, a further sign of Tehran’s desire for international rehabilitation. Businesses are already beginning to scope out opportunities in a post-sanctions Iran, though a nuclear deal – and economic recovery – are far from certain. Published in MEED, 20 February 2014

The International Monetary Fund (IMF) has issued a downbeat assessment of Iran’s economy and urged wide-ranging reforms, following a visit to Iran earlier this year.

A full report is due to be published in late March, but the fund’s interim review talked of “large shocks and weak macroeconomic management” in recent years. The IMF predicts the Iranian economy will shrink by 1%-2% in the current financial year, which ends on 20 March. It also points out that unemployment and inflation are high and some ambitious social programmes are “inadequately funded”.

Such predictions and observations will not come as a surprise to anyone in Iran. The economic malaise has been evident for years, and almost everyone recognises that the problems stem not just from international sanctions but also from mismanagement of the economy, particularly in the years when Mahmoud Ahmadinejad was president.

What is perhaps more significant is that the IMF report was written at all. The IMF only conducts such Article IV reviews when it is invited by the host government. This was the first time since 2011 that Tehran had issued such an invitation, offering further evidence of the country’s re-engagement with the rest of the world under President Hassan Rouhani.

Struggle ahead

The review could help to bolster Rouhani’s position as he tries to push through his economic reform programme. The president can now point to an international body that is arguing for many of the changes he has been pursuing. “Iran now stands at a crossroad,” said the IMF’s assistant director for the Middle East and Central Asia department Martin Cerisola, in a statement issued at the end of his team’s 25 January-8 February visit. “There is a need to begin advancing reforms to promote stability, investment and productivity. The new authorities should embark on a prompt and vigorous implementation of fundamental reforms.”

But Rouhani clearly has a battle on his hands as he tries to take on the vested interests of his opponents. The situation has already descended into petty squabbles at times, such as when a state television station refused to air a speech by Rouhani on 5 February. The president took to Twitter to complain. “Head of Islamic Republic of Iran Broadcasting, [Ezatollah] Zarghami, prevented live discussion w/ people on #IRIB1 which was scheduled for an hour ago,” he tweeted. The very public slap-down seemed to have the desired effect, and the broadcast soon went ahead.

Rouhani’s planned reforms are bound to lead to other, more serious, disagreements, and critics will be quick to pounce, as they did when problems emerged with the introduction of free food supplies to the poorest earlier this year. The government’s promise to make a renewed effort to deal with corruption could provide fertile ground for more disputes, as could changes to food and fuel subsidies, which currently cost the government $14bn a month.

Importantly for Rouhani, he still has the support of Supreme Leader Ayatollah Ali Khamenei. Without that, he would have little hope of succeeding with his economic programme and no chance at all of concluding nuclear talks with the US. But Khamenei is hedging his bets a little. The local Mehr news agency quoted him on 17 February as saying: “Some Iranians think the nuclear issue will be solved by negotiations, but I do not expect any outcome from the negotiations; however, I do not oppose the talks.”

Business opportunities?

The talks between the P5+1 group and Iran resumed in Vienna on 18 February. The interim deal struck in Geneva in November has already prompted numerous international delegations to make the journey to Tehran to see what opportunities there are, including a 140-strong group from France in early February. In his television address on 5 February, Rouhani predicted there would be many more like it in the coming months.

But it is still extremely hard to do business with Iran, notwithstanding the loosening of international sanctions. The US warns that it will strictly enforce all sanctions that remain in place, including the financial ones that make it hard, if not impossible, to move money in or out of the country. US President Barack Obama set out the US position clearly during a press conference with French President François Hollande at the White House on 11 February.

“Businesses may be exploring, are there some possibilities to get in sooner rather than later, if and when there is an actual agreement to be had,” said the US president. “But I can tell you that they do so at their own peril right now because we will come down on them like a ton of bricks with respect to the sanctions that we control.”

That sense of Washington wielding a carrot and stick simultaneously, partly in response to domestic critics who do not want any deal with Iran, is likely to continue in the weeks and months ahead. Few observers seem to think the chances of a permanent deal being struck are better than 50/50 and no-one wants to be seen as naive.

Yet, even as critics inside both Iran and the US try to undermine the possibility of a deal, Rouhani’s team have repeatedly offered signs that they are serious about finding a resolution. On 8 and 9 February, the International Atomic Energy Agency held what it described as “constructive” talks with Iran in which it agreed to provide further information on its nuclear facilities.

The difficulty that Tehran has is persuading its critics that such offers are made in good faith. Writing in the Financial Times on 17 February, Hossein Mousavian, a former spokesman for Iran’s nuclear negotiators, said “some officials in Washington and Tehran feel deceived by the other side and are sceptical of the prospects for the new talks. Allaying those doubts will require compromise – and not only from Iran.”

In the meantime, the country’s economic situation continues to be troubling. As the IMF’s Cerisola pointed out: “Prospects for [fiscal year] 2014-15 have improved with the interim P5+1 agreement but still remain highly uncertain.”