How Much is Iran’s Economy Recovering?

Iran_Rouhani_Economy

by Djavad Salehi-Isfahani

Iranian President Hassan Rouhani could not wait for the quarterly Economic Trends report published by the Central Bank of Iran (CBI) to be issued. It showed that from March 2013 to March of this year, Iran’s GDP increased by 4.6 percent. Impatient for the first good economic news since he took office last June, Rouhani jumped the gun by announcing the “end of the recession,” quoting a more modest growth rate of 2.2 percent from a projection made by his advisors. A week later, on Sept. 25 when the official CBI report was released, his opponents took advantage of the confusion and called the recovery into question. The powerful parliamentarian Gholam-Reza Mesbahi Moghaddam called the CBI report a “fairy tale.”

A fairy tale it is not, but the report does leave room for interpretation. As I show here, the economy actually shrank during spring 2014, by 5.1 percent, while improving relative to the very bad quarter in spring of 2013, just before Rouhani took office. Even industrial output, which is expected to lead the recovery, contracted last spring. But the GDP data are preliminary and unadjusted for seasonal variation, which makes them weak signals of economic recovery.

A more reliable sign of recovery is evident in the employment figures released by the Statistical Center of Iran (SCI), which showed that the economy added 392,000 new jobs during the summer, 60 percent of them in industry. This is particularly significant because industry does not have a noticeable seasonal variation and firms hoard labor during the recession. So adding 250,000 new industrial jobs is nothing to pooh-pooh, as some reports did.

The growth in employment brought the unemployment rate down to single digits—9.5 percent—for the first time in two decades. Skeptics have pointed out that the rosy employment picture is an artifact of how the SCI defines employed—having worked at least one hour in the week before the interview—but this is how the International Labor Office recommends measuring employment.

The news of an economic spurt following the easing of sanctions and improved macroeconomic stability should not come as a surprise. In the past year, Iran’s accessible foreign exchange reserves have increased thanks to greater oil exports and the release of $4.2 billion of Iran’s frozen money according to the terms of the Joint Plan of Action (JPOA) reached last November in Geneva. Imports of intermediate goods have also jumped, and output in the auto industry, which was singled out in the JPOA for sanctions relief, has increased by 70 percent.

The economic news raises a bigger question, though. How much is the recovery due to policies implemented by Rouhani that could therefore continue even if there is no final agreement next month, and how much is it due to the easing of sanctions following the JPOA, which could reverse absent an agreement?

It is hard to deny that Rouhani’s success in lowering inflation, stabilizing the exchange rate, and reviving the banking sector have pushed the economy forward. At the same time, reversals in auto production and imports of intermediate goods suggest that sanctions relief was the main reason for the recent economic spurt.

Either way, the positive economic news helps the Iranian president send an important message to his domestic supporters: Rouhani’s economic policies are working thanks in part to his foreign policies.

What the news means for Iran’s position in its negotiations with world powers over its nuclear program depends very much on the extent to which one believes domestic economic policy, as opposed to the sanctions relief, is responsible for the modest boost in output and employment. The recent pronouncements from Tehran that play down the cost of failure to reach a deal with the P5+1 (France, Germany, UK, China, Russia, US) suggest that the government believes, or wants others to believe, that domestic policy is the engine of the recent growth.

There is nothing in the data to support this interpretation of the short-term economic trend. Iran’s economy started its serious decline in 2012 when it was hit by trade and financial sanctions. Despite a vigorous response from Iranian firms to evade the sanctions, the goal of a new equilibrium with alternative sources of supply of spare parts and new technologies—from domestic sources or any country that is willing to defy the sanctions—is far from realized.

If a deal is reached in the next few months, growth will no doubt accelerate. If not, the government faces a tough choice. One course of action, which is increasingly likely, is to extend the negotiations and hope for the recovery to continue. Another more drastic course of action is to declare the talks dead and prepare the economy for a long-term reorientation away from the West, as envisaged in the “Resistance Economy.”

Optimism about a nuclear deal is good for growth but it also delays the adjustment that is necessary if the talks fail. For Iranian firms to commit to a long-term redirection of production away from Western suppliers, they need a clear signal about the future of Iran’s relation with the West.

It is important to note that while taking the second course may mean slow or even zero growth for several years, it is not synonymous with economic collapse. Reorientation will be costly and painful, but not impossible.

Two major unknowns overshadow this tough choice: First, who will those who will bear the huge cost of re-orientation blame for the failure of the talks, and what will that mean for Rouhani’s political future? And, second, how does the falling price of oil affect this choice?

To answer the first question one needs a crystal ball, but the second is a good subject for another blog post.

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Djavad Salehi-Isfahani

Djavad Salehi-Isfahani conducts research on the economics of the Middle East and is currently a professor of economics at Virginia Tech. He is a nonresident senior fellow at the Brookings Institute and is also serving as the Dubai Initiative fellow at the Belfer Center for Science and International Affairs at Harvard University's John F. Kennedy School of Government. This fall he is the Kuwait Foundation Visiting Scholar at the Belfer Center of Harvard Kennedy School. He has served on the Board of Trustees of the Economic Research Forum (2001-2006), a network of Middle East economists based in Cairo.

4 Comments

  1. So change is now an oracle, knowing exactly what’s going on in the minds of the Iranian Mullahs? Delusional Grandeur-denial too or last minute words to satisfy the puppet masters? I’m sure we will never know the reality, but one has to reaffirm ones bona fides from time to time.

  2. Iran’s mullahs are banking heavily on being able to get a nuclear agreement to lift sanctions and let the flood gates of investment pour in. It’s an all-in strategy which seems to be moving closer given Obama’;s decision to tie the success of any foreign policy legacy to Iran’s ability to live up to its commitment. A weird decision for an American president, but unfortunately if he is wrong, the consequences would be devastating for regional peace for generations.

  3. The key statistic is public perception in Iran.
    Does the public feel better off or not?
    Is the public more or less optimistic about the future?
    Is public spending rising or falling?
    These indicators ultimately determine popular support.

  4. Interesting & informative too. I wonder, are the worlds financial institutions tiring of maintaining their profits on war making, which at some point, causes diminishing returns? All things considered, if peace were to come to the M.E. through a resolution of this nuclear issue with Iran, the potential profit[s] of rebuilding all the destruction, wrought by waging war upon the various countries, could be mind boggling. Seems to me, that this would trump any further, the warmonger profile that is prevalent today. Considering the outcome of continuing the present course, which has produced “failure to achieve with chaos” in all the countries affected, to continue down this road, invites a far greater failure for humankind as well as worse destruction of the infrastructure of the world. Though some of the present warmongers may have a death wish, I find it ludicrous that the financial backers will allow them to kill the “Goose that lays the golden egg[s]”.

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