Economic growth stagnates in Iran

The remainder of Ahmadinejad’s presidency is likely to be characterised by run-ins with a conservative parliament and a deteriorating economy due to sanctions. Published in MEED, 25 June 2012

When elections for Iran’s Majlis (parliament) were held in early March, it quickly became clear that the authority of President Mahmoud Ahmadinejad had taken a hit. Following run-off elections in early May, supporters of Supreme Leader Ali Khamanei are now thought to control 221 of the 290 seats in the chamber.

As a result, Ahmadinejad’s government is likely to struggle to get its bills through parliament. Negotiations over this year’s budget have provided a taste of what might be to come. With the economy continuing to suffer from the impact of sanctions, it adds up to an unpromising picture for Iran.

Parliamentary opposition

The government presented its budget to the Majlis on 1 February, well ahead of Nowruz, the Iranian New Year, on 20 March. It included plans to save $110bn by freeing up fuel prices, which are currently heavily subsidised. However, MPs balked at the sharp price increase this would involve.

“The Majlis seeks a gradual implementation of the subsidy targeting and is opposed to any rush,” said one MP, Mesbahi Moqaddam, in remarks quoted by the official Mehr news agency in late April.

It was not until 13 May that a compromise was found, when parliament approved a cut in fuel subsidies that will allow the government to save $54bn. More such battles can be expected for the remainder of the president’s time in office. “Ahmadinejad’s supporters were removed from the parliament, so we’re going to see more resistance to his plans,” says one political analyst. “It’s similar to the situation that [moderate president Mohammed] Khatami faced in his final years in office.”

The domestic politics add to the strain on an economy already hampered by international sanctions, which have been steadily tightened by the US, the EU and others. Measures brought in by the US in December led to a sharp fall in the value of the rial against the dollar, pushing up the price of imports and forcing the Central Bank of Iran to raise interest rates. The constraints on economic activity are evident in the meagre growth of Iran’s gross domestic product. According to the Washington-based IMF, the economy will expand by 0.4 per cent this year. Within the region and North Africa, only Yemen and Sudan are expected to fare worse.

Overall, the government’s finances are in a tight position, with the IMF estimating that Iran needs oil prices to average $117 a barrel this year for the budget to break even. That is at the upper end of most economists’ predictions for oil prices and Tehran could well run a small budget deficit as a result. The government has been trying to trim its spending and raise revenues, helped by the subsidy cuts it implemented in December 2010. The budget for the current year proposes IR5,100bn ($417bn) in spending, down from IR5,390bn last year, according to the official Irna news agency. It also plans to raise tax revenues by 20 per cent.

The government is helped by the fact that Iran’s economy is far more diversified than most in the region. Furthermore, while sanctions are certainly hurting, there are still willing buyers for its oil in China, India and elsewhere. Indeed, high oil prices have enabled the government to boost the value of exports. According to the World Trade Organisation, Iranian exports rose in value by 30 per cent in 2011 to reach $131bn.

Fundamental economic problems in Iran

However, there remain some fundamental problems. Subsidy reforms are contributing to high inflation, which is expected to be more than 20 per cent this year. Unemployment is also high and rising; the IMF predicts it will climb from 16.7 per cent this year to more than 20 per cent by 2015.

In addition, the IMF estimates that overall trade is falling. It says the volume of exported goods and services fell 2.5 per cent in 2011 and will drop a further 17.7 per cent this year, not least because of a $21bn decrease in the value of oil exports as sanctions bite harder. Imports dropped by 5.5 per cent in 2011 and will fall a further 3.5 per cent this year.

The prospects for the economy will only improve if and when there is a breakthrough in negotiations over the country’s controversial nuclear programme.

The next crunch point will come when Ahmadinejad’s term ends in June 2013. This should prompt another presidential election, but Khamanei has hinted he favours replacing the post of president with a prime minister. “I think they’d like to avoid a presidential election next year,” says another analyst. “The great thing about a prime minister is that he’s not elected by the public, but by the parliament.”

In effect, this will remove one more potential area of opposition to the regime’s more conservative elements. What it will mean for the economy is far less clear.