Iran seeks reforms to boost production and revive economy

When the entire economic team of Iran’s new cabinet paid a rare visit to the chamber of commerce, industries and mines last week, the country’s entrepreneurs and industrialists felt a rare glimmer of hope after eight years of steadily worsening economic news.

The politicians appealed to business leaders for help in boosting production as part of efforts to kick-start the country’s sanctions-hit economy, and promised reforms that would help them.

In a surprise move, Hassan Rouhani, the new centrist president, also turned to the elite revolutionary guards to do their bit for the country, even though the group could stand to lose out in any economic reform.

Since he took office last month, Mr Rouhani has made improving the country’s economy a priority. He has gathered a group of experienced technocrats, many of whom were sidelined by the previous government, to help.

He has also launched an international charm offensive ahead of a visit to New York next week in a bid to ease the sanctions over Tehran’s nuclear programme, which are partly responsible for the country’s economic crisis.

The economy has deteriorated rapidly since the imposition of US banking sanctions and an EU ban on Iranian oil imports over the country’s nuclear programme. Oil exports have dropped from about 2.5mbpd to less than 1mbpd in about a year. Inflation is at least 60 per cent according to economists’ estimates, and youth unemployment is at least 28 per cent, according to official figures that are widely believed to underestimate the true figure.

Matters are made worse by questions around the economic indicators published by the outgoing government of Mahmoud Ahmadi-Nejad. The new cabinet earlier this month urged parliament to revise the budget to take into account a 30 per cent decrease in projected revenues.

Mismanagement by Mr Ahmadi-Nejad’s government also contributed to the dire state of the economy. The struggling private sector spent his eight years in power buffeted by sanctions, deprived of access to imported raw materials and machinery, and starved of investment as the president instead gave cheap loans to the poor and allowed a rapid expansion of imports of consumer goods that all but crushed domestic production. Most Iranian factories currently either operate at extremely low capacity or are facing bankruptcy.

Even Mr Ahmadi-Nejad’s privatisation programme failed to stimulate the sector, as most state-owned companies were handed over to quasi-state-owned entities, some of which were affiliated with the elite revolutionary guards.

Mr Rouhani insists Iran’s problems can be overcome through “moderate” policies at home and abroad. He and his advisers have promised to ease banking and customs regulations, and to crack down on smuggling, which undermines domestic industry.

“The government’s economic team knows that it needs the private sector to put the economy back on track,” said Mehdi Fakheri, an adviser to the head of Iran’s Chamber of Commerce.
"Any structural reform will be a huge challenge for the government of Rouhani and we will see a lot of resistance"

- Iranian economist

However, the sector is currently “small and weak and on its own is not really capable of helping the government tackle its huge and extensive economic problems,” said one manager.

For any economic reform to succeed, Mr Rouhani needs the support of the powerful revolutionary guards, who developed their own huge economic interests under Mr Ahmadi-Nejad. Their ability to take ownership of projects and businesses without following proper procedures, and their alleged smuggling activities through jetties and other coastal facilities outside customs supervision may now be under threat.

In a clear move to reassure the elite force, Mr Rouhani said earlier this week that it could take over national projects that the private sector was not capable of implementing. Cleverly he also asked for its help in preventing smuggling, which he described as “a calamity to the economy” without clarifying which organisation was behind it.

Whether the revolutionary guards will acquiesce in what could be the rolling back of their economic privileges remains to be seen.

And, while Mr Fakheri said the business community was “cautiously optimistic” about the new government’s reversal of policies, analysts caution the private sector is also waiting for the beginning of a new round of Iran’s nuclear negotiations with major powers to see if sanctions are at least partly eased.

“Any structural reform will be a huge challenge for the government of Rouhani and we will see a lot of resistance,” said an Iranian economist. “Iran’s economy has lost its equilibrium and the private sector cannot do much in particular if major western companies remain absent.”

Copyright The Financial Times Limited 2013.