A Paltry Inheritance

People seen shopping outside Tehran's main bazaar on June 2, 2013 in Tehran, Iran. (Photo by Kaveh Kazemi/Getty Images) People seen shopping outside Tehran's main bazaar on June 2, 2013 in Tehran, Iran. (Photo by Kaveh Kazemi/Getty Images)

People seen shopping outside Tehran's main bazaar on June 2, 2013 in Tehran, Iran. (Photo by Kaveh Kazemi/Getty Images)

Tomorrow, Iranians will go to the polls to elect their next president. During the campaign, it has become clear that Iran’s troubled economy has been at the forefront of everyone’s minds.

Iran has had a tough four years, regardless of the yardstick by which they are measured. Those four years began spectacularly, with the contested 2009 elections that brought Mahmoud Ahmadinejad in for a second presidential term, as well as widespread protests over purported electoral fraud and the subsequent harsh government crackdown. While there were multifaceted grievances that provoked the 2009 protests, most of the focus has been on the political dimension of the crisis. This risks neglecting the deep-seated economic crisis that is quietly consuming the Islamic Republic from within, and which quite likely underlies many of the political grievances voiced by ordinary Iranians.

Whoever succeeds Ahmadinejad in the presidency will have to address the economic chaos—and fast. The next president will inherit a tangled mess of problems in almost every sector, as well as the burden of wide-ranging sanctions. Not all of the chaos can be blamed on Ahmadinejad, although his repeated denials that Iran is not experiencing an economic crisis have certainly delayed any solution to the problem.

Just how bad is it?

“Stagflation”—the combination of stagnation and inflation that has become a buzzword since the global financial crisis of 2008—is a serious problem in Iran, and is perhaps the best way to sum up the many problems facing its economy. Economic stagnation has been holding back many of the world’s economies over the last five years. Inflation, however, has mostly been caused by circumstances unique to Iran: poor management of the economy and Western-led sanctions.

The official inflation rate rose above 30% in March, according to the Iranian government’s statistics office, although the real figure is likely much higher. While the Western media have focused on sanctions as a cause of high inflation, the weak production base, monetary policy that does not support manufacturing and industry, and incompetent government intervention in the economy have also contributed to the crisis.

Iran’s imports from and exports to the rest of the world have been declining since 2009 as a result of falling oil revenues; crucially, oil revenue has fallen by 27% since 2011. Revenue from all exports decreased by nearly half (an estimated -48.3% change) between 2011 and 2012; imports fell more than a quarter in the same period. This decline is further evidence of the worsening of the recession in Iran.

All of this is unavoidably affecting domestic circumstances. Unemployment has risen significantly, to 12.5% in 2012; young people between the ages of 15 and 29 account for 70% of that figure even though they are roughly a third of the population. Ahmad Tavokkoli, a conservative MP for Tehran, pointed out that there has been “a fourfold increase in the price of gas, ninefold rise in the price of diesel, tenfold rise in the price of mazut [heating oil], fivefold rise in the price of natural gas and a two-and-a-half times increase in the price of electricity” due to a combination of subsidy reforms and general inflation. A property bubble in Tehran, fuelled in part by Ahmadinejad’s order to two banks not to reign in lending in the run up to the 2008 crisis, has seen property prices triple.

These are the official statistics, and as with much information that could cast Iran in a negative light, unofficial sources paint a much bleaker picture. The Ahmadinejad administration has most often addressed Iran’s economic problems by burying its head in the sand and denying the crisis. In contrast, the international press has reported shortages of basic commodities (including medicines), labor strikes and sharply declining living standards for ordinary Iranians. Despite widespread suspicion about their accuracy, even the Iranian government’s official figures indicate widespread economic problems.

Banking crises

Iran’s banks have been buffeted by multiple crises since Ahmadinejad came to power in 2005. Of course, ever-stricter Western sanctions have been imposed on Iranian financial institutions over the past ten years, barring them from participating in international financial markets or using foreign banking infrastructure. This has certainly had an impact on the profitability and stability of Iran’s banking sector, but, in addition, factors within Iranian control have prevented banks from being as successful as possible. Widespread fraud amounting to billions of dollars of misappropriated money was revealed in 2011; the scandal is still playing out. The global financial crisis of 2007/08 also hit Iran, just as it did the rest of the world.

The governor of Iran’s central bank acknowledged the unforeseen consequences of the 2007/08 crisis on Iran in early 2008—but by the end of that year, the official view had changed. Iran was described as a “rose garden” flourishing in the fire that was engulfing the rest of the world, and officials assured Iranian industrialists that the global crisis would have no impact on Iran.

But that “rose garden” soon caught fire. Striking small firms before moving on to larger ones, the crisis manifested itself in Iran in a massive rise in toxic debt. At first, some claimed that firms were filing for bankruptcy protection in order to receive financial aid from the government, but this perception was quickly altered, as it became known that many of the affected businesses were suffering from serious liquidity problems; many were actually insolvent. Bizarrely, while Iranian institutions hold both bad/uncollectable and toxic debt, a large amount of the toxic debt appears to have been owed by politically connected individuals who borrowed money against insufficient assets and then simply decided not to repay, even where there was a possibility of doing so.

When Ahmadinejad first took office in 2005, the total value of bad debt in the Iranian banking sector was estimated at IRR 40,000 billion (approximately USD 3.3 billion at current exchange rates). Five years later, the figure had risen tenfold, to IRR 384,000 billion. (Ahmad Tavakkoli, the former head of the Iranian parliament’s research centre, has estimated the actual volume of bad debt at IRR 560,000 billion in August 2009.) In June 2011, central bank governor Mahmoud Bahmani announced that the total had fallen from IRR 500,000 billion to IRR 420,000 billion, but even as the total amount of bad debt fell, the ratio of that debt to the total deposits held by Iranian banks increased many times over.

Then, in 2011, a massive IRR 30 trillion embezzlement scandal was revealed, mostly involving forged documents used to take out massive, unsecured loans. Soon after the scandal broke, President Ahmadinejad’s office was investigated by the parliamentary commission tasked with uncovering the fraud. Interestingly, Esfandiar Rahim Mashaei, a close fried of Ahmadinejad and a proposed candidate for the current elections who was rejected by the Guardian Council, was linked to the fraud, although he and his supporters deny his involvement. For a president who had come to power on promises of tacking corruption, the scandal was an embarrassment, as well as a major financial setback for his government.

Targeting subsidies

Unlike the banking crises that were dumped on him by chance, Ahmadinejad actively sought to reform the subsidy program the Islamic Republic instituted after the 1979 revolution. Various presidents have tried and failed to reform these subsidies essentially since they were implemented: Hashemi Rafsanjani’s proposed subsidies reform met with popular protests in the 1990s, and Mohammad Khatami’s initiative was blocked by the seventh parliament. It is Ahmadinejad who will be credited with finally reforming the subsidies program, having replaced direct state subsidies of petroleum products, foodstuffs, medical supplies and utilities with a complex system of cash payments in 2010. Unfortunately for both his legacy and for Iranians who are dependent on the program to meet their basic needs, his attempt has been regarded as a failure on many levels.

Ahmadinejad’s reform program was presented a way to “target” subsidies at those most deserving of state assistance. (The outgoing president was fond of pointing that 30% of the Iranian population, mostly in the middle class, received 70% of subsidies.) These so-called targeted subsidies were passed by parliament and approved by the Guardian Council in 2010, after two years of political wrangling. However, in the end the parliament forced the subsidies to be paid to all Iranians—meaning that they are not “targeted” at all. At best, Ahmadinejad’s reforms have merely changed the form in which citizens receive state assistance.

In a small measure of success, the subsidies were estimated to consume about 27% of Iran’s GDP in 2007, but this fell to approximately 20% in 2011 in spite of the contracting GDP. But the program has also been implicated in the country’s massive inflation, with prices for some basic consumer goods more than quadrupling in the years since the subsidy reforms, much higher than the more modest price increases built into the reform program itself.

It goes without saying that such price increases burden the Iranian population, who have become indirect supporters of Iranian industries as a result of the subsidy reforms. In addition, the government’s financial situation has already become so bad that the second stage of subsidies targeting never occurred.

Privatization, Iranian Style

Ahmadinejad inherited a privatization reform program from his reformist predecessors, and as a result of this program he will bequeath to his successors an economy that has been drastically restructured. Article 44 of the Iranian constitution, which divides the Iranian economy into public, private and “cooperative” sectors, has been significantly reinterpreted. Instead of adhering to the traditional, tripartite interpretation of Article 44, under Ahmadinejad’s guidance a fourth, quasi-state sector has been created. The chief executive of Iran’s Chamber of Commerce has described this as “unwelcome,” adding that the lack of monitoring of this new sector is adding to the problem.

The telecommunications sector is an interesting example of the privatization process and the creation of the quasi-state sector. In 2006, the Ministry of Communications began to sell off telecommunications companies through the stock market. It was a massive sale: 50% of the shares sold for a combined IRR 80 trillion, and all of the shares in the Telecommunications Company of Iran, the largest such company, that were floated in the market—a 51% stake—ended up in the ownership of an unofficial subsidiary of the Iranian Revolutionary Guard Corps, a powerful branch of the Iranian military. In spite of severe restrictions on the press, the government’s handling of the telecommunications sales was widely lambasted in the media. The Iranian press also reported that the head of the Competition Council felt that the TCI sale was of “unclear and ambiguous” legal standing, but took no action to prevent it.

Additionally, when Ahmadinejad took power in 2005, one of his first acts was to present a number of modifications to the privatization program to Supreme Leader Ali Khamenei. One important modification proposed by the president and approved by the supreme leader was to set aside 40% of the shares put up for sale for low-income Iranians and war veterans to purchase; in part, this became a means for the state to reward its supporters.

As a conservative, the outgoing president actually opposes privatization—but he was saddled with the privatization program, and under his watch it was administered both incompetently and as a form of patronage.

Shirking responsibility

In his 2005 campaign, Mahmoud Ahmadinejad portrayed himself as a competent technocrat who could quietly and effectively modernize Iran’s economy; his political coalition was even called the “Alliance of Builders” of Islamic Iran. After two terms in office, he has shown himself to be a less than competent president, having tried and failed to address some of the greatest issues facing his country.

As he leaves office in 2013, he is also leaving behind an economic quagmire that his successor will have to address. More strikingly, each of the candidates knows this: the economy has been a major focus in this campaign, and one of the marginal candidates even ran on a platform of “government of no inflation.” With only a day to go until the presidential elections, all that is left to discover about Ahmadinejad’s economic legacy is who will inherit the problems he has caused or allowed to worsen in his two terms as president.