Economic policy

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

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

Ebad Ebadi

Iran’s June 18 election, in which judiciary chief Ebrahim Raisi was chosen as president, had the lowest turn out since the 1979 revolution. The biggest challenge Raisi will face in his first term is the country’s growing economic problems.

After the US withdrawal from the Iran nuclear deal in 2018, Iran’s economy has deteriorated over the past three years. GDP growth fell by 6% in 2018 and 6.8% in 2019, while the inflation rate increased to 34.6% and 36.5% in 2018 and 2019, respectively. Much of the decline in GDP has been associated with the huge drop in oil exports: $62.7 billion in 2018 to $29 billion in 2020. In 2020, amid the coronavirus pandemic and sanctions In the US, the economy struggled with a high inflation rate of 36.5%, although GDP started to recover and grew by 1.5% after two years. However, current political and economic challenges leave the newly elected president struggling in the economy and the job market, not to mention mismanagement and corruption.

Raisi cannot ignore the declining state of the Iranian economy. He must tackle the major economic problems and initiate the reforms he promised. Raisi’s first campaign speech May 27 focused on ongoing economic issues and the importance of good governance in reviving Iran’s economy. On the campaign strain, Raisi has focused his plans under seven great promises. Although he did not explain his plans in detail, Raisi’s economic goals can be mainly categorized into expansionary fiscal and monetary policies. Some of these include: providing low-interest loans to poor households in the bottom half of the income distribution; increase government subsidies for health care and reduce the household share of medical and health expenditure from 43% to 20%; build four million houses; create four million jobs and prioritize low-income people and college graduates; and by reducing the rent from 50% to 30%.

While these policies may look good on paper, the reality is that some are unlikely to materialize in the near future. For example, the promise to build four million houses is reminiscent of a similar policy during the Mahmoud Ahmadinejad era known as Maskan Mehr Project. The project, which began in 2007, aimed to build 2.4 million affordable homes for new owners. After fourteen years, 2.2 million homes were built, leaving two hundred thousand houses to be completed in the next government. In 2014, the Hassan Rouhani government blame the housing program as the main contributor to the country’s inflation as the Central Bank of Iran had to print more money to pay for the project. With that in mind, it’s highly doubtful that Raisi can deliver on his promise to build an additional four million homes over the next four years. So not only are some of Raisi’s economic policies unrealistic, but they also contradict each other.

The Iranian government must have sufficient funds from the sale of government bonds, oil revenues and/or tax revenues to fulfill the above-mentioned promises. In the economic plan proposed by Raisi, the issuance of government bonds is mentioned only to cover investments in the stock market and, in part, for the funds necessary to cover the costs of the company, without mentioning which industries are priority. It should be noted that the sale of government bonds contributes only 15% of government revenue according to the March 2021 budget plan, making it a reliable source of income to pursue Raisi’s ambitious goals. Moreover, while there is a temptation to use oil revenues to fund these goals – especially if US sanctions are lifted as part of the nuclear deal’s relaunch – the very notion of this belies Raisi’s desire to give back. government revenues independent of oil. Therefore, it is unlikely that it will be able to pursue its expansionary policy without using oil revenues. Finally, the government could potentially increase tax revenues to finance its projects.

Raisi is pushing for increased tax revenue on speculative activities while reducing taxes on production and manufacturing companies. Due to the sharp devaluation of the Iranian currency over the past few years, investors have turned to buying foreign currencies, cryptocurrencies and gold instead of transferring their funds to productive activities. In 2019, with the hype created by the government, ordinary citizens and investors put their funds into the Tehran Stock Exchangewho crashed.

However, without adequate stock market infrastructure and a tax system to identify speculative activity, Raisi is unlikely to increase tax revenue for promised projects. If Raisi cannot provide the necessary funds for his economic plan, it would lead to a budget deficit which his government strongly opposes. Either way, its expansionary monetary and fiscal policies would raise inflation regardless. The economic roadmap proposed by Raisi also does not address the devaluation of the Iranian currency and the exchange rate market. In recent years, the sharp devaluation of the Iranian currency has led to capital outflows of $27.8 billion and directly impacted people’s lives and businesses.

High inflation has become one of Iran’s biggest economic challenges in recent years. The directory inflation rate in the twelve months to June 2021 reached around 43%, calling for restrictive policies. Nevertheless, Raisi must adopt expansionary policies and increase public spending to achieve his economic goals. Although Raisi promised that he would reduce inflation to less than 15% in 2023 and reach single-digit inflation rate in 2024, increased public spending will make this very difficult, if not impossible.

Raisi’s economic goals lack a blueprint and fail to address key challenges facing Iran’s economy. But, with Iran making slow progress in the vaccination process and the prospect of reviving the nuclear deal and lifting punitive US sanctions, the country is likely to see a better economic situation in the future. Still, it is important that the new Raisi administration and the hardline-dominated branches of government use their one-party views to make the necessary economic reforms with comprehensive and coherent economic plans to address major economic challenges in Iran. It’s hard to say if that will ever happen.

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

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