Iran’s economy under Rouhani: achievements and obstacles

Rouhani took office in 2013 when the economy was performing very poorly. International sanctions pushed the rial to lose one third of its value in less than two years during 2011-12.  The economy was also shrinking for the first time since 1994 and real GDP declined by a staggering rate of -6.8% in 2012. The inflation rate was over 30% and almost no new net jobs were created from 2006 until 2011. His predecessor, Mahmood Ahmadinejad, had promised to “bring the oil money to people’s tables.” He engineered the Subsidy Reform Program to reduce the hefty payments to energy careers and bread and distributed cash transfers which resulted in an upward shift in the standard of living of the poor. Although the standard of living, measured by real per capita expenditures, was increasing in 2005-11 period, it collapsed like the economy as a whole after international sanctions tightened in 2011.

Rouhani won the 2013 election by promising to “keep both the economy and centrifuges moving.” Putting the economy on track was not possible with the existence of sanctions. His administration negotiated an agreement with P5+1 to have nuclear sanctions removed from January 2016 in return for reducing nuclear activities. Negotiations proved lengthy and left Rouhani with only 16 months before the next presidential election. In this period, the economy was boosted by some measures as Iran re-integrated with the world. In the last 9 months of 2016 for which the most recent data is available, GDP grew by 7.2%.

Controlling inflation was another achievement of Rouhani. For decades, Iran experienced high inflation with the average inflation rate in the past 30 years set around 20%. Being a major concern for Iranian people, in every presidential election candidates made certain promises to keep inflation down and then failed to do so in practice. Rouhani have been successful on this matter and brought the inflation down and kept it around 10% in the last two years. As a result, there is no surprise that in the current election none of the 6 candidates talk about inflation as a major economic problem in their campaigns.

Another long-term economic obstacle is unemployment for which Rouhani is criticized like his predecessors.  Unemployment rate increased in 2015 and 2016, despite the economy growing, and this can be his Achilles heel in the upcoming election. The situation is more unfortunate for women and young people (15-29 years of age). In 2016, for example, unemployment rate for youth and women were 25.9% and 20.7%, respectively. These groups would have more doubt voting Rouhani for his second term. The increase in unemployment rate is due to the increase in participation. In 2013, Rouhani’s first year in office, participation rate was 37.6% and it increased to 39.4% in 2016. This means in each of these years 800,000 people entered the labor market. On the other hand, Rouhani has only managed to create 490,000 net new jobs per year in the same period. The composition of the people in the work force is also changing. In a ten year period, from 2005 to 2015, university graduates have more than doubled in the country. What remains for the upcoming president is to create jobs for the rapidly growing labor force full of educated and young people. Economists believe that high and persistent economic growth is associated with more jobs. After JCPOA implementation, Iran’s economy experienced rapid growth and it is expected for unemployment to decline if the path persists. However, the increase in GDP in 2016 was mainly due to the growth in the oil sector which requires less labor and more capital. Seeking private and foreign investment and directing them to the manufacturing and service sectors would have more impact on employment.

Standards of living did not improve in the first three years under Rouhani. Per capita expenditures have steadily declined since 2013. On the other hand, per capita income started to increase in 2014 after two years of decline but in 2015 it was still at the same level as 2011. The fact that income increased in 2013-14 but expenditures did not follow the same path indicates that households kept their consumption low as a precaution after years of recession. Given that there is no data available for standards of living in 2016 no inference can be made on what happened after JCOPA.

All said, the economy is on a more desirable track after 4 years with inflation, production and employment showing signs of improvement. These improvements, however, are not entirely discoverable in everyday life of people as income, expenditure and unemployment are barely better than their level before sanctions came in 2011. It is not trivial to determine what the Iranian people believe about the performance of the economy under Rouhani. Whether he had been successful, whether people believe the economy is on the right track and whether his achievements outweigh the shortcomings will now be decided by Iranian people on May 19, 2017.