Iran’s Economy after the Nuclear Deal

by Djavad Salehi-Isfahani

The critics of the Joint Comprehensive Plan of Action (JCPOA) signed last week between the Western powers and Iran cite the potential benefits of the agreement for Iran as the main reason why it is bad for the US and its allies in the Middle East. They’re wrong, however, that the extra economic resources flowing to Iran as a result of lifting sanctions will empower it to expand its influence, destabilize the region, and to undermine Western interests.

There are at least two problems with these arguments.

First, the critics exaggerate the numbers. Last week, Israel’s ambassador to the US, Ron Dermer, warned that, “in a few months, this deal would give Iran $150 billion,” which is “like $8 trillion flowing into the United States treasury.” His boss put the number at “$100 billion to $300 billion.”

Part of this windfall is supposed to come from Iran’s assets that have been blocked abroad. No one really knows the exact size of these reserves. In congressional testimony last January, David Cohen of the US Treasury put the size of the blocked funds at $100 billion. He used the same number in testimony in December 2013. This week several Iranian officials, including the governor of the Central Bank and the economy minister, floated a much smaller number—$29 billion.

Then there is the new money from increased oil sales. Iran should be able to increase its exports by an additional half a million barrels per day (mbd) to about 2 mbd, which would mean $5 billion in additional export revenues. Putting the two numbers together, my best guess for the new inflow of money for the remainder of the current Iranian year that ends on March 20, 2016, is less than $40 billion.

This is not a small amount. To put this in perspective, consider that last year Iran exported about $90 billion and imported $70 billion. So, the windfall is likely to raise foreign exchange revenues by anywhere from one-third to 50 percent. This is a sizeable increase, but it’s a far cry from the $150 billion quoted by Ambassador Dermer.

Beyond this year, as the stock of blocked funds diminishes, the importance of this source of new revenue will decline, and attention will shift to oil exports. The best estimates for increased oil exports for 2017 is one mbd, which at current prices would add about $20 billion to export revenues. If prices decline as Iranian oil enters the market, this estimate would be lower.

With good management of the economy and economic reforms, these streams of revenues will allow the economy to grow at 5-7% per year. Over the next few years, growth at the upper end of this range is barely enough to absorb the 3-4 million unemployed, most of whom are first-time job seekers.

Iran may well decide to spend some of its increased resources on its military. At present Iran has a very low share of defense expenditures to GDP, one-fourth that of Saudi Arabia and one-third of Israel. But the competition for using most of the funds on development will be fierce.

Following the tightening of sanctions in 2012, the Ahmadinejad government slashed the development budget by two-thirds (in real terms). During its last two years in office, development expenditures averaged a measly $5 billion per year. Reversing this policy was the first domestic priority of the Rouhani administration when it took office in August 2013. Despite the continuation of the sanctions and lower oil prices, in 2014/2015 it managed to increase the development budget to $12.5 billion, still far below the level that can make a difference given the high rate of unemployment, the long list of incomplete projects, and the estimated $50 billion it owes private contractors who do the actual work on government projects.

Rouhani’s mandate was first and foremost improvement in the economy. Solving the nuclear standoff with the West was always the necessary step to reach that goal. He will be facing voters again in elections for the parliament and the Assembly of Experts in February 2016, and in his own re-election in June 2017. Unless he is able to turn his diplomatic victory in Vienna into improved economic conditions at home, he is likely to lose one or both of these elections, and his astounding achievement in foreign policy would amount to nil.

During his election campaign, he famously promised to “let the wheels of the economy spin as do the centrifuges.” He has returned to this theme many times, for example in a major speech to an economics conference last January. “For years,” Rouhani said, “the economy has subsidized foreign and domestic politics, now is the time for politics to subsidize the economy.” Spending the fruits of the nuclear deal to improve the domestic economy is the case in point.

Rouhani has accumulated considerable political capital as a result of the JCPOA. He has no better place to spend it than on making sure that the bulk of the new funds go to fulfill his promise of economic recovery. This would not only help elect a parliament he can work in February 2016 but also assure him a second term.

Photo: Hassan Rouhani visits a milk factory (courtesy of ISNA)

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 Institution and research associate of the Iran Project, at Harvard Kennedy School’s Belfer Center for Science and International Affairs.


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