Thu, Jul 8, 2021

Raisi’s proposed economic policy plan for Iran doesn’t make sense

IranSource by Ebad Ebadi

Economy & Business Iran Middle East Politics & Diplomacy

A supporter of Ebrahim Raisi displays his portrait during a celebratory rally for his presidential election victory in Tehran, Iran June 19, 2021. Via Reuters.

The June 18 Iranian election, in which Judiciary Chief Ebrahim Raisi was selected as president, had the lowest turnout since the 1979 revolution. The biggest challenge Raisi will face in his first term is the growing economic problems of the country.

After the US withdrawal from the Iran nuclear deal in 2018, the Iranian economy has deteriorated over the past three years. GDP growth rate dropped by 6 percent in 2018 and 6.8 percent in 2019, while the inflation rate increased to 34.6 percent and 36.5 percent in 2018 and 2019, respectively.  Much of the GDP decrease was associated with the huge drop in oil exports: $62.7 billion in 2018 to $29 billion in 2020. In 2020, amidst the coronavirus pandemic and ongoing US sanctions, the economy struggled with a high inflation rate of 36.5 percent, though the GDP started to recover and grew 1.5 percent after two years. However, the ongoing political and economic challenges leave the newly elected president with difficulties in the economy and labor market, not to mention the mismanagement and corruption.

Raisi cannot ignore the dwindling state of the Iranian economy. He must address major economic problems and start the reforms he promised. Raisi’s first campaign speech on May 27 focused on ongoing economic issues and the importance of good governance to revive the Iranian economy. On the campaign stump, Raisi concentrated his plans under seven broad promises. Though he did not explain his plans in detail, Raisi’s economic goals can be chiefly categorized into expansionary fiscal and monetary policies. Some of these include: giving low-interest loans to poor households in the lower half of income distribution; increasing government subsidies for health care and decreasing the share of households in medical and health expenditures from 43 percent to 20 percent; constructing four million houses; creating four million jobs and giving low-income people and graduates with tertiary degrees priority; and decreasing the rent from 50 percent to 30 percent. 

While these policies might sound good on paper, the reality is that some are unlikely to happen in the near future. For example, the promise to construct four million houses is reminiscent of a similar policy during the Mahmoud Ahmadinejad era known as the Maskan Mehr project. The project, which started in 2007, intended to construct 2.4 million affordable housing for first-time homeowners. After fourteen years, 2.2 million houses were constructed, leaving two hundred thousand houses to be completed in the next government. In 2014, the Hassan Rouhani government blamed the housing scheme as the main contributor to the country’s inflation because the Central Bank of Iran had to print more money to pay for the project. With that in mind, it is very doubtful that Raisi can deliver his promise to build four million more houses over the next four years. Thus, not only are some of Raisi’s economic policies unrealistic, they also contradict each other.

The Iranian government needs to have enough funds from selling government bonds, oil revenues, and/or tax revenues to accomplish the aforementioned promises. In Raisi’s proposed economic plan, issuing government bonds is only mentioned for hedging investments in the stock market and, in part, for the funds needed to cover costs for the business, without mentioning which industries are the priority. It’s worth noting that selling government bonds contributes to only 15 percent of government revenues according to the March 2021 budget plan, making it challenging as a reliable source of income for pursuing Raisi’s ambitious goals. Furthermore, while it is tempting to use oil revenues to fund these goals—especially if US sanctions are removed as part of the revival of the nuclear accord—the very notion of it contradicts Raisi’s push to make government revenues independent of oil. Hence, it is unlikely he could follow his expansionary policies without the use of oil revenue. Finally, the government could potentially increase tax revenues to provide funds for its projects.

Raisi is pushing for tax revenue increases on speculative activities while also decreasing taxes on production and manufacturing firms. Due to the large devaluation of Iranian currency over the past years, investors shifted to purchasing foreign currencies, cryptocurrencies, and gold instead of transferring their funds to producing activities. In 2019, with the hype created by the government, ordinary citizens and investors put their funds in the Tehran Stock Market, which crashed.

However, without proper infrastructures in the stock market and a tax system to identify speculative activities, it is unlikely for Raisi to increase tax revenues for the promised projects. If Raisi cannot provide the funds needed for his economic plan, it would result in a budget deficit that his government firmly stands against. In any case, his expansionary monetary and fiscal policies would raise inflation regardless. Raisi’s proposed economic roadmap also doesn’t address the devaluation of Iranian currency and the foreign currency exchange rate market. Over the past years, the significant devaluation of the Iranian currency resulted in capital outflows of $27.8 billion and directly affected people’s lives and businesses.

High inflation has become one of the utmost economic challenges in Iran over recent years. The annual inflation rate over the twelve months leading up to June 2021 has reached around 43 percent, calling for contractionary policies. Nevertheless, Raisi needs to take expansionary policies and increase government spending to achieve his economic goals. Though Raisi promised that he would reduce inflation to below 15 percent in 2023 and reach a single-digit inflation rate in 2024, increasing government spending will make that very difficult, if not impossible. 

Raisi’s economic goals lack a detailed plan and don’t address key challenges in the Iranian economy. But, with Iran slowly making strides with the vaccination process and the prospect of reviving the nuclear accord and removal of punitive US sanctions, the country will likely see a better economic situation in the future. Still, it is important for the incoming Raisi administration and hardline-dominated government branches to use their one-party views to make necessary economic reforms with comprehensive and consistent economic plans to address major economic challenges in Iran. Whether that will ever happen is hard to say.

Ebad Ebadi is a PhD candidate in economics at George Washington University. Follow him on Twitter: @ebadi_ebad.