Iranian investors watch the prices of shares at the Tehran Stock Exchange (TSE) after the banks reduced the profit share rates and Iran controlled the dollar with the new government in Tehran, Iran, January 4, 2014. (Photo by Fatemeh Bahrami/Anadolu Agency/Getty Images)[/caption]Despite real efforts to tackle its problems, Iran’s flagging economy continues to be the biggest challenge for President Hassan Rouhani’s government. During his 2013 presidential campaign he promised to resolve the country’s numerous financial issues, but seems to have underestimated the enormity of the task. Today, widespread and systemic corruption continues to plague the country’s financial sector, and a volatile currency exchange market threatens mid- to long-term investments.
Rouhani’s government of “prudence and hope” is fast approaching its one-year anniversary, but many of the economic campaign promises remain unfulfilled. During the June 2013 campaign, Rouhani pledged to focus on fundamental and institutional issues—a message applauded by the electorate. His aim was to reintroduce rational economic policy by welcoming back experts sidelined during the tenure of Mahmoud Ahmadinejad, the president’s conservative–populist predecessor. Other ambitious promises included the reduction and, eventually, removal of international sanctions, more effective distribution of cash handouts, better liquidity controls, a reduction of inflation, curbing the currency’s volatility, and fighting corruption.
Rouhani has certainly attempted to stay true to his promises by taking some crucial steps towards lifting the international sanctions, implementing a more rational distribution of public subsidies, and increasing the purchasing power of Iranian households. However, major problems remain.
Rouhani demonstrated his willingness to address the country’s weak economy during the first days of his presidency by announcing his decision to revive the Management and Planning Organization, a relatively independent institution responsible for preparing the country’s budget, which was dissolved by Ahmadinejad in 2007. Iran’s most qualified and brightest economists are back at work, but tackling deep-rooted and widespread financial corruption takes more than patience and audacity.
The tightening of international sanctions made it challenging for the Iranian government to conduct business legally and, as an unintended consequence, a significant portion of the country’s economy was forced underground. Emboldened by the lax regulatory policies of Ahmadinejad’s former government, a subversive web of politicians, entrepreneurs, security officials and judges began bending the rules and conducting disreputable deals. The current administration is in the process of untangling this web, but the issue may need a much more comprehensive solution than arresting a few offenders.
In an attempt to fight such corrupt networks, Iranian authorities executed Mahafarid Amir-Khosravi—a businessman convicted of embezzling 2.6 billion US dollars by forging documents to receive credit from seven Iranian banks—on May 24. The money was reportedly used to buy state-owned companies. The little-known businessman was more than likely executed as a symbol of the new government’s eagerness to mark an end to the previous government’s corrupt activities. However, such criminal activities are often highly organized and involve government officials. The theft of such enormous sums of money could not have taken place without the assistance of a network of influential individuals whose connections may be traced all the way to the inner layers of the country’s security and political apparatus. In order to truly address such institutional issues, one must search wide and dig deep, which will be much too costly for any government to attempt, let alone Rouhani’s cautious and judicious administration.
The Iranian currency exchange market has not been kind to the government either. The exchange rate of the rial against the US dollar is demonstrating small signs of improvement, but it is still volatile. In order to alleviate some concerns, Valiollah Seyf, the Governor of Iran’s Central Bank, announced last week that issues related to foreign exchange are rapidly improving and “the currency exchange fluctuations experienced during the past three months are not indicative of the fundamental economic policies.”
Before Rouhani’s election in May 2013, the free market exchange rate was hovering around 39,000 rial to the dollar. It fell to 29,700 to the dollar in January 2014, increased to 33,000 in May 2014, and it is currently around 32,000. Such instability is causing tremendous uncertainty in the market, and it discourages investment. Seyf predicted a year of “balance and stability” for the currency market by pointing out that stability is more important than low exchange rates. He is accurate in his assessment, but achieving such a feat remains a formidable challenge.
Rouhani’s top domestic concern remains the economy. The new administration is grappling with the pressing and arduous task of dealing with years of mismanagement and unlawful activities. Economic reforms and achieving market stability may be possible in the short- to medium-term, but without tackling fundamental issues, such as corruption, it will not be a long-lasting treatment for the country’s ailing economy.
All views expressed in this blog post are those of the author and do not necessarily represent the views of, and should not be attributed to, The Majalla magazine.
