The June 18 elections in Iran, in which the justice chief Ebrahim Raisi was elected president, had the lowest turn out since the 1979 revolution. The biggest challenge Raisi faces in his first term in office is the country’s growing economic problems.
After the US withdrew from the nuclear deal with Iran in 2018, the Iranian economy has deteriorated over the past three years. GDP growth The rate fell 6 percent in 2018 and 6.8 percent in 2019, while the inflation rate Increased to 34.6 percent and 36.5 percent respectively in 2018 and 2019. Much of the GDP decline was linked to the huge drop in oil exports: $ 62.7 billion in 2018 to $ 29 billion in 2020. In 2020, however, the economy was in the midst of the coronavirus pandemic and ongoing US sanctions struggled with a high inflation rate of 36.5 percent GDP began to recover and grew by 1.5 percent after two years. However, the ongoing political and economic challenges present the newly elected president with difficulties in the economy and the labor market, not to mention mismanagement and corruption.
Raisi cannot ignore the dwindling state of the Iranian economy. He must tackle the major economic problems and initiate the promised reforms. Raisi’s first campaign speech on May 27th focused on current economic issues and the importance of good governance in revitalizing the Iranian economy. Raisi concentrated his plans on the election stump seven great promises. Although he did not explain his plans in detail, Raisi’s economic goals can mainly be classified into an expansive fiscal and monetary policy. Some of these are: low-interest loans to poor households in the lower half of the income distribution; Increase government subsidies to health care and reduce the household share of medical and health expenditure from 43 percent to 20 percent; Construction of four million houses; 4 million job creation and priority for low-income people and college graduates; and lowering the rent from 50 percent to 30 percent.
While these measures may sound good on paper, the reality is that some are unlikely to be implemented in the near future. For example, the promise to build four million houses is reminiscent of a similar policy during the Mahmoud Ahmadinejad era known as the Maskan More project. The project, which started in 2007, aims to create 2.4 million affordable living spaces for first-time owners. After fourteen years 2.2 million houses were built so that two hundred thousand houses had to be completed in the next government. In 2014, the Hassan Rouhani government accused the housing program as the main driver of inflation in the country as the Iranian central bank had to print more money to pay for the project. With this in mind, it is very questionable whether Raisi can keep his promise to build four million more houses in the next four years. Not only are some of Raisi’s economic policies unrealistic, they are also contradictory.
The Iranian government must have sufficient funds from the sale of government bonds, oil revenues and / or tax revenues to fulfill the above promises. Raisi’s proposed economic plan mentions the issuance of government bonds only to hedge investments in the stock market and, in part, as a means of covering the company’s costs, without mentioning which industries are in the foreground. It is worth noting that the sale of government bonds according to the. accounts for only 15 percent of government revenue March 2021 budgetwhich makes it challenging as a reliable source of income for pursuing Raisi’s ambitious goals. While it is tempting to use oil revenues to fund these goals – especially if US sanctions are lifted in the wake of the nuclear deal revival – the very notion of Raisi’s desire to make state revenues independent of oil. Hence, it is unlikely that it could pursue its expansionary policies without the use of oil revenues. Finally, the government could potentially increase tax revenue to provide funding for their projects.
Raisi urges an increase in tax revenues for speculative activities while lowering taxes on manufacturing and manufacturing companies. Due to the strong depreciation of the Iranian currency in recent years, investors switched to buying foreign currencies, cryptocurrencies and gold instead of transferring their funds to manufacturing activities. In 2019, with the government-sparked hype, ordinary citizens and investors poured their funds into the Tehran stock marketthat crashed.
However, without proper stock market infrastructures and a tax system to identify speculative activity, Raisi is unlikely to increase tax revenue for the promised projects. Failure to raise funds for his economic plan would create a budget deficit for Raisi, which his government is firmly opposed to. In any case, his expansionary monetary and fiscal policy would still increase inflation. Raisi’s proposed economic roadmap also fails to address the devaluation of the Iranian currency and the foreign exchange market. In the last few years, the Iranian currency depreciated significantly Capital outflows of $ 27.8 billion and had a direct impact on people’s lives and businesses.
The high inflation has become one of the greatest economic challenges in Iran in recent years. The annual inflation rate reached around 43 percent in the twelve months to June 2021, which requires a contractionary policy. Still, Raisi must pursue expansionary policies and increase government spending in order to achieve his economic goals. Although Raisi promised to bring inflation below 15 percent by 2023 and a single digit inflation rate In 2024, rising government spending will make this very difficult, if not impossible.
Raisi’s economic goals do not have a detailed plan and do not address key challenges facing the Iranian economy. But with Iran slowly making progress in the vaccination process and with the prospect of a revival of the nuclear deal and lifting of US sanctions, the country is likely to experience a better economic situation in the future. Still, it is important that the new Raisi government and hardline-dominated branches of government use their one-party views to carry out the necessary economic reforms with comprehensive and consistent economic plans to address the major economic challenges facing Iran. Whether that will ever happen is difficult to say.
Ebad Ebadi is a PhD student in economics at George Washington University. Follow him on Twitter: @ebadi_ebad.
Tue, June 29th, 2021
Legislators and government officials in Iran keep resorting to the same failed populist economic policy and not make any short-term sacrifices that will benefit the country in the long term. One such policy is price control, a favorite among the tools of Iranian politicians who have tried for the past few decades to control persistently high inflation rates, but obviously to no avail.