Tehran remains hamstrung by sanctions

Published in MEED, 29 August 2017

As Hassan Rouhani starts his second term as Iran’s president – which officially began with his inauguration on 5 August – one task facing his administration looks more important than any other. Having secured the nuclear deal to lift major sanctions on the country during his first term, Rouhani now needs to ensure his country’s citizens feel the benefit.

Even as he tries to do so, he knows that tensions with the US under its unpredictable president, Donald Trump, are worsening, which will make the task even harder.

There have been many important improvements made to Iran’s economy since the nuclear deal – known formally as the Joint Comprehensive Plan of Action (JCPOA) – came into effect in January 2016, it is just that they have not been as extensive as many had hoped. Inflation has come down into single figures, the exchange rate has stabilised and cross-border banking ties have rebounded, with the number of international correspondent banking relations rising from just four in 2014 to 238 in 2016; such links are a vital element in facilitating both inward investment and payment for exports.

Some other metrics have remained stubbornly low, however. According to the Washington-based IMF’s most recent report on Iran, issued in February, GDP grew by 7.4 per cent in the first half of the fiscal year 2016/17, but growth in the non-oil sector averaged just 0.9 per cent. Over 2016/17 as a whole, growth is expected to be 6.6 per cent, before falling back to 3.3 per cent the following year. The IMF also noted the pace of job creation is too low to absorb the large number of new entrants into the labour market, and unemployment remains high at about 12.7 per cent.

 Just as worrying is the fact that while investment from international firms – mostly European and Asian – has picked up, there certainly has not been the surge in foreign direct investment (FDI) that many had hoped for. Total FDI for 2016 was about $3bn, “indicating that despite the removal of sanctions, it will take more time for FDI to recover to its historic average”, according to Tehran-based investment manager Turquoise Partners.

The mix of good and bad news has ultimately translated into widespread public dissatisfaction with the economy. That was recently highlighted in a survey by IranPoll for the University of Maryland in the US, carried out between 11 and 17 June. According to the survey, just 2.5 per cent of Iranians think the country’s general economic situation is “very good”. A further 33.1 per cent think the economic situation is “somewhat good”, but a clear majority take an opposing view: 29.5 per cent say the economy is “somewhat bad” and a further 33.9 per cent say it is “very bad”.

In addition, 50.2 per cent think economic conditions in Iran are getting worse, compared with 30.1 per cent who say they are getting better (7.7 per cent said things were staying the same and 3 per cent did not know or did not answer).

Economic difficulties are firmly at the top of peoples’ minds when it comes to the priorities for the government. When asked to name the most important issue the president should address, 35.9 per cent said unemployment and a further 16.6 per cent said youth unemployment. Other economic issues fill out the top five most-cited priorities, with 7.2 per cent naming the remaining sanctions, 6.1 per cent pointing to low wages and 4.9 per cent citing inflation and high costs.

How Rouhani and his ministers deal with these issues remains open to question, but it could well define his second term as president and the domestic legacy within Iran of the nuclear deal itself. He is certainly aware of the challenge, saying on 30 July: “Today, production, employment and the economic boost are very important issues for our country. We are preparing a serious supporting package for investors.”

A major problem has been the continuing sanctions on Iran by the US, which is curtailing the ability of investors to put money into the country and for Iranian firms to do business overseas. Given the hawkish stance adopted by the Trump administration’s Secretary of State Rex Tillerson openly called for regime change in comments to the House of Representatives Foreign Relations Committee on 14 June, it seems unlikely things will get easier in the near term. Indeed, in late July, the US Senate approved the Countering Iran’s Destabilising Activities Act, which imposes more sanctions on Tehran. The bill was signed by Trump just a few days before Rouhani’s inauguration.

This international environment makes it harder for Iran to open up new trading relations, even with countries that would be keen to do so, according to some observers. “Because of the volatile nature of US politics there’s always a risk of a snap-back in sanctions, so I think the whole idea of the opening of new markets is to be treated with caution,” says Khalid Howladar, founder of Dubai-based consultancy Acreditus, on the prospects for greater trade between Iran and some GCC countries. “There is the potential there, but you really need the political environment to stabilise.”

There was a further setback for Tehran in late June, when the Financial Action Taskforce (FATF) – an intergovernmental body that monitors anti-money laundering and anti-terrorism financing standards – opted to keep Iran on its list of “high-risk” jurisdictions alongside North Korea. Many in Tehran had hoped to be taken off the list; instead they had to make the most of the fact that the FATF’s range of counter-measures remain suspended while Tehran tries to implement an agreed action plan.

The global agency “lauds Iran’s banking standards and suspends counter-measures against Iran,” said Hamid Baeidinejad, Iran’s ambassador to the UK at the time, adding that the decision “ensures the expansion of banking, financial relations with Iran.”

Reforming and strengthening the banking sector is one of the key priorities for Rouhani’s government and the president has pledged to address this need. But the question remains as to whether his government has the strength to enact all the reforms that are required and whether Iran has the ability to continue opening up to the wider world, or whether pressure from the US will derail the country’s post-JCPOA potential.