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Iran's President Hassan Rouhani speaks during a session at the annual meeting of the World Economic Forum (WEF) in Davos, Jan. 23, 2014.  (photo by REUTERS/Denis Balibouse)

Rouhani takes on privatization in budget

Author: Amir Hossein Mahdavi Posted February 18, 2014

On Feb. 10, the Iranian parliament, or Majlis, approved the proposed budget for the year 1393 (March 21, 2014, to March 20, 2015). The numbers are not the most striking aspect of this budget. Rather, it is the punctuality of the administration's handing the budget to the Majlis on time that speaks volumes. This is refreshing and indicates the return of order to the presidential administration, in direct contravention of what happened during the eight-year presidency of Mahmoud Ahmadinejad. 

SummaryPrint Iranian President Hassan Rouhani, in a departure from the previous administration, has turned in his budget on time and has made conservative decisions in consideration of the difficult economic realities facing Iran.
Author Amir Hossein Mahdavi
Ali Reza Eshraghi
Posted February 18, 2014

The 1393 budget was drafted for one of the most complex situations in the 35-year existence of the Islamic Republic. Iran is simultaneously struggling with high inflation (40%) and economic recession (an economic growth rate of minus 5.8% and an unemployment rate that stands at 12.6%), a condition dubbed by economists as stagflation. In 1996, during the presidency of Akbar Hashemi Rafsanjani, inflation reached 49% but economic growth remained at 3%. In 1987, when Mir-Hossein Mousavi was prime minster, economic growth was minus 9%, with the inflation rate at 23%.

Looking at the numbers shows the $315 billion budget for next year represents a 7.6% increase compared with the current budget drafted by the Ahmadinejad administration. But considering the 40% inflation rate, the budget has shrunk notably. In its proposed budget, the government has assumed that it will not have enough funds for job creation next year. The current 12.6% unemployment rate, in the most optimistic forecast, will only go down by 0.2%.

The government will not have the resources to finance its development projects, either. Currently, there are 3,000 unfinished projects all over Iran. According to Mohammad Bagher Nobakht, the strategic planning and supervision deputy of the president's office, the government plans on finishing 250 projects that are 80% completed.

With such complexity, it is obvious that the Rouhani government cannot fix everything and has no choice but to prioritize. This is the only matter that everyone can agree on. A team comprised of neoliberal and institutional economists who devised the budget plan agreed that the strategic priority must be reducing inflation (to 25%) and not increasing economic growth or cutting unemployment.

Such a strategic choice is a good indicator of the orientation of the Rouhani administration concerning the fate of the nuclear case. The problem of recession largely stems from unilateral and international sanctions, and the government knows it does not have the resources to pull the economy out of it and to create jobs. The problem of inflation, according to Masoud Nili, the president’s economic adviser who had a prominent role in drafting the budget, is “due to domestic fiscal and monetary policies.” This is why the government has focused its resources on reducing inflation, because it can control its causes, instead of wrestling with the problem of economic recession, which depends on the will of international players.

In its rhetoric, the Rouhani administration has shown a lot of hope about resolving the nuclear issue and sanctions relief. To a great extent, it relied on the interim nuclear deal clenched on Nov. 24, 2013, between Iran and the P5+1 (the five permanent UN Security Council members and Germany). This is not a dangerous gamble, but it still is a gamble that the Rouhani government is willing to take. Even though the interim deal only lasts for six months, the Rouhani administration, as Foreign Minister Mohammad Javad Zarif said, hopes to extend the deal for another six months (until January 2015, which would take it through almost all of the upcoming fiscal year). That is why the government has predicted a 22.2% increase in income from oil product sales in the budget.

The Rouhani administration has also counted on the actual and psychological positive effects of a sanctions freeze and the reduction of international tensions on the domestic market. For example, the budget counts on a 20% hike in attracting monetary resources through the sales of public bonds (particularly to fund transportation and energy projects) and expects to bring in $2.2 billion this way. Such an amount would also allow the government to reduce the money supply. But government success in persuading the public to buy bonds and invest in the stock market will depend on the nuclear issue. If new sanctions are imposed and the public senses a worrying signal in Iran-West relations, the money flow will once again go toward investment in items such as bullion and the value of the dollar will increase against the rial.

The new administration has started efforts to further integrate Iran into the world economy. Rouhani, as the first key speaker at Davos 2014, the World Economic Forum, urged foreign investors to come to Iran. Also, the Oil Ministry has recruited three veteran diplomats (Ali Majedi, Mohammad Hossein Adeli and Hossein Kazempour Ardebili) to focus on getting European companies (such as Total, Shell and Eni) to return to the Iranian market. However, despite such efforts, the government in its budget plan has not counted heavily on attracting foreign investment. If the government manages to attract foreign investments, it would be an additional bonus. But if it fails, it will not have a significant impact on the budget.

If sanctions were lifted, it would be a good opportunity for an export boom in Iran. In the past two years, Iran’s currency, the rial, has drastically dropped in value against the dollar. As worrying as this sounds, this could provide national industries in many important products such as petrochemicals, cement and steel, with a unique opportunity to take over neighboring markets by offering competitive prices. If domestic and international political stability and the opportunity for international trade are created for Iran, the huge Iranian market with its cheap but expert workforce has the ability to experience economic growth up to 8%.

The most important economic and political direction of the Rouhani administration is planning for the strengthening of the “real private sector.” Traces of this can be seen in the new budget. This is a phrase repeatedly used by the economic officials of the new government to propel economic growth.

In the name of privatization, Ahmadinejad's government transferred many state companies to public organizations, military institutions and comprador economic foundations. The Rouhani administration has begun a fierce but quiet battle to prevent this form of privatization. As a first step, it has tried to stop the privatization process until a new implementation plan is formulated. This is why in the current budget government income from transferring state owned companies has a negative growth of 65%. 

If the administration succeeds in changing the privatization process, it will help the coherence and strengthening of a new economic upper class, which could have great influence in the political future of Iran.

Read More: http://www.al-monitor.com/pulse/originals/2014/02/iran-economy-privatization-budget-rouhani.html

Amir Hossein Mahdavi
Contributor, Iran Pulse

Amir Hossein Mahdavi was an economic editor at several Iran’s dailies. He is a research fellow at Crown Center for Middle East studies at Brandeis University, Boston where he is also graduated in master of Conflict Resolution. 

Ali Reza Eshraghi
Contributor, Iran Pulse

Ali Reza Eshraghi was a senior editor at several of Iran's reformist dailies. He is Iran Program Manager at the Institute for War and Peace Reporting (IWPR) and a teaching fellow in theDepartment of Communication Studies at the University of North Carolina at Chapel Hill.

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