Rouhani’s Rivals Making Pledges Iran Cannot Afford

EghtesadOnline: Iran is in the midst of an intense presidential election campaign with six candidates pledging how they would address the country’s economic issues through their respective policies. While incumbent Hassan Rouhani and First Vice President Es’haq Jahangiri are focused on justifying a continuation of their government’s economic policies, the other four candidates are presenting economic remedies that need to be scrutinized, especially through the lens of whether they would actually be feasible and also whether they present real solutions to the country’s complex economic issues

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10 May 2017

An article published by Al-Monitor has critiqued some of the campaign pledges of Rouhani’s main challengers—conservative cleric Ebrahim Raeisi and Tehran Mayor Mohammad Baqer Qalibaf—and offered some expert remedies that need to be the focus of the next government if the real goal is to address the core socioeconomic issue, namely unemployment. Excerpts follow: Evidently, any pledge of economic reforms, especially when dealing with ideas that will create a burden on the government budget, will have to be scrutinized based on the question of which financial resources will finance the plans in question. Hence, the first question is what the economic plan is rather than individual promises and pledges. A quick review of the pledges so far shows that none of Rouhani’s challengers (Raeisi, Qalibaf, former minister of culture and Islamic guidance, Mostafa Mirsalim, and reformist ex-vice president, Mostafa Hashemtaba) have a real economic plan but rather economic promises that in some cases are based on a populist discourse such as the increase in the present monthly cash handouts of 455,000 rials ($14).

Shortcomings of Pledges

Raeisi, the custodian of the holy shrine of Imam Reza (PBUH), has pledged that he would increase cash handouts to the three lowest income deciles of society threefold. Given Iran’s population of 80 million, Raeisi is suggesting to pay 24 million Iranians an additional monthly handout of $28. This would constitute an annual burden of more than $8 billion on the government budget, without a clear reference to where this money would come from. If Raeisi would have said that he will discontinue payments to the top six deciles and increase the cash handouts of the lower income classes, it would have made fiscal sense. But such an approach would also badly hit the middle class.

He may argue that within the remits of the Subsidy Reform Plan, the government could increase fuel prices in order to finance his plan. However, this would lead to a massive fuel price hike, generating an inflationary impact. Furthermore, providing additional cash handouts to lower income classes is both inflationary and would also shift the lower income strata as socioeconomic facts are fluid, especially if the government tries to favor some social groups over others. Consequently, such a plan would not only be unfeasible but would actually disillusion segments of society, according to Financial Tribune.

Promises of Economic Miracle

Qalibaf has made two significant campaign pledges that need to be understood within the realities of the Iranian economy. On the one hand, Qalibaf has stated that he will increase Iranian gross domestic product 2.5-fold. If he is planning to achieve that in a four-year term, then Iran would have to experience a 26% annual economic growth four years in a row or, in other words, an economic miracle. Experts agree that the trajectory of economic growth in Iran will be an average annual growth of 5-7% over the next few years, assuming the continuation of the Rouhani policies. Thus, Qalibaf’s pledge is nothing but an empty promise. Furthermore, the Tehran mayor has pledged to create 5 million jobs in his first term in office. Based on

economic analyses, the creation of one sustainable job requires an approximate investment of $50,000, which means that the creation of 5 million jobs would require an investment of $250 billion over the next four years. In a country where annual government infrastructure investment amounts to about $30 billion and annual foreign investment to about $10 billion, an economic revolution would be needed to achieve an investment of $250 billion in four years. Based on statistics, the Iranian economy has produced 2 million jobs in the past four years— well below what the economy needs to contain unemployment. There is no doubt that more jobs could be created, but that would require additional reforms.

Need for Reforms

Powerful conservative politician Ahmad Tavakkoli is among the outspoken critics of both Qalibaf and Raeisi. Apart from questioning their proposed resource allocations, he has reminded the conservative candidates that none of their promises would be within the realm of the powers of the presidency since parliament would in most cases have to approve the policy shifts. Thus, Tavakkoli suggests that it is better not to raise public expectations with promises that may not be realistic or may be rejected by lawmakers. Interestingly, even fellow conservative candidate Mirsalim has criticized Raeisi and Qalibaf, accusing them of using populist slogans in their campaign pledges. Having critiqued the feasibility of the mentioned

pledges, one key question is what needs to be done to create the needed jobs and sustain an economic momentum. The key fact remains that the main engine of job creation has been the private sector. Promoting the genuine private sector must thus be the essence of the next government’s economic policies.

Business Climate

Another core issue is the improvement of the business climate—a topic that very few of the candidates are talking about. All candidates refer to fighting corruption but fail to see that the current level of corruption is an extension of the failed policies of the past and that it can only be addressed if major legal, structural and political reforms are introduced—an issue that none of the candidates has paid attention to. One of the main sources of corruption is the continued two-tiered exchange rate system, which needs to be abolished. So far, only Jahangiri has pointed to the need for a new foreign exchange policy. Furthermore, one of the restricting factors for the private sector is the lack of financing solutions—a fact that will require serious reforms within the banking sector, including a greater degree of transparency in the financial services industry. In fact, the failure of Rouhani to address the shortcomings in the banking sector can be considered one of the main failures of the past four years. Evidently, there are many other reforms that will be needed to promote the true private sector, such as the need to review the labor code and regulations, and adopt export promotion measures to promote domestic industry and also create jobs.