Internal and geo-strategic issues

Iran is at a crossroads in its history; 56.4 million voters are called to the polls to elect their new president.  These May 19, 2017 Iran’s presidential elections with a risk of having a high abstention rate happen in a background of a general situation that is much better than in the past, inflation is under control although unemployment is relatively high.  For these elections of 2017, it is mainly a duel between Hassan Rouhani, 68, reformer elected in 2013 and a 56 year old conservative Ebrahim Raissi, former Attorney general.  Whatever the results, after these elections, the prospects for growth in the medium and long term are dependent on the pace of reintegration of Iran into the global economy, the speed of the reforms as detailed in the new five-year development plan and especially how to apply, to implement and to boost non-oil segments by creating a level playing field between existing players and new entrants, (winners of the reforms of the future are not those of today) but also to work to improve the business environment and the efficiency of the labour markets but also to work to improve the business environment and the efficiency of the labour markets balancing flexibility and fairness and enter the workforce of the informal sphere within the real sphere.
According to the first partial results as per Reuters on May 20, 2017, the Iranian outgoing president Hassan Rouhani is said to be widely re-elected totaling approximately 56%.  The results will officially be announced on Sunday May 21, 2017.

Iran’s Geopolitics details

The Islamic Republic of Iran proclaimed on April 1, 1979 has a population that rose from 21 million in 1960 to 80 in 2016 with by extrapolation upto 84 million in 2020 for an urban population in January 1st, 2016 of 73.4% of the total population, life expectancy of 71.15 years and ranked second in 2010, behind Egypt in the MENA’s most populous countries.  

Iran has an area of 1,648,000 km² with a density of 48.4 hab per km², and Tehran as capital and Karaj, Tabriz, Isfahan and Mashhad as major cities. It holds the world’s fourth oil reserves with more than 160 billion barrels (13 / 14% of world reserves).  In general Iran is a strategic player that could help stabilize the tensions in the region with a definite impact on the supply of oil.

Iran which produced around 2011/2015 more than 2.5 million barrels a day can produce more than 5 to 6 million barrels per day today. These factors are in addition to a production outside OPEC of 67% market share compared with 33% for the OPEC, not counting all those newcomers on the world market.  It has also more than 34,000 billion cubic metres of gas or more than 16% of world reserves, not to mention that Iran if agreements are respected, will then access between 50 to 100 billion Dollars in foreign banks, which will increase its exports and attract foreign investment.

Iran has significant resources. It is located on the belt of the reserves of copper in the world and benefits from considerable reserves of other minerals, such as iron, aluminium, lead and zinc and as a country with borders it shares with 15 other countries, making it easily an emergent country, especially as it safely invested in human resources, the elite without which no country can develop.

According to the studies of the OECD and the IMF, its population has a literacy rate of 93% for the 19 to 40 years old.

The head of State is the Supreme Leader of the Islamic Revolution that is named for life by the Assembly of Experts and the President is Hassan Fereidun RUHANI since August 3rd, 2013.  The Supreme Leader is the Commander-in-Chief of the Armed Forces and controls all the army intelligence and security operations.

The head of Government is the president elected through universal suffrage for a term of four years. The Council of Ministers is selected by the president, with the approval of the legislature. The president holds control over the executive, but shares power in the areas which are the prerogatives of the Supreme Leader.

Parliament is made up of the Islamic Consultative Assembly, which is a legislature that is unicameral.  It has 290 seats, and its members are elected by universal suffrage for four years. Parliament needs to validate the laws by the Council of Guardians, which checks if the proposed laws do not contradict Islamic principles. The Parliament has real power in Iran, particularly regarding removal of a Minister.  The president may dissolve the Parliament directly, and can recommend the dissolution of the Supreme Leader.

The entire international community except Israel, had welcomed the lifting of the embargo against Iran once the International Atomic Energy (IAEA) Agency has certified on January 16, 2016, the steps taken by Tehran for not committing to produce a nuclear bomb.

After nearly a decade of diplomatic isolation, Iran has returned to the international community. Since his election in June 2013, president Rohani had expressed the wish to improve relations of Iran with the international community on the nuclear file degraded during previous presidencies, while trying to soothe its relations with regional powers including its relations with Sunni powers, especially Saudi Arabia.

According to many military experts, Yemen, at the tip of the Arabian Peninsula and preserve of Saudi Arabia’s via the USA, is not a strategic priority for Tehran, much less in any case to that of Iraq or Syria, where Iran is a major player in the current crisis.  At the regional level, it is an actor as evidenced by its priority, which is the struggle against ISIS.  Iran gave its support to the Iraqi regime, but also since the outbreak of the Syrian crisis a full support to Damascus. This is however a position that can evolve according to its strategic interests.

Socio-economic and financial details

With a GDP estimated in 2016 to be $ 412.2 billion, Iran is the second largest economy in the MENA region after Saudi Arabia. Per capita GDP in 2015 was 5306 US dollars.  The growth rate as compared to the previous period, was 4.6% in 2015, 4.5% in 2016, thus reflecting some dynamism and should be no less than 5.2% in 2017, 4.8% in 2018, 4.5% in 2019.

According to the IMF, inflation rate was 15.6% in 2014, 12.0% in 2015, 8.9% in 2016, a new figure for 25 years, under the effect of the tightening of monetary policy and a forecast of 8.2% in 2017. Unemployment was 12.20% in 2012, 10.60% in 2014, 11.67% in 2015 and 11.3% in 2016 after Q2 2016, 12.7%, its highest level for three years (or 3.3 million unemployed), is explained largely by the increase in the employment rate of the population, to 40.4% compared to 35.4% in January-March 2014.

Yet, there is the importance given to education where the number of students in universities increased significantly over the past 20 years.  In 2015, 4.8 million Iranians have begun university studies, representing almost 6.2% of the total population (from about 3.5% in France).

As to financial indicators, the Iranian Rial (IRR) was quoted at 14777,90 to the Euro in 2011, 15643 a Euro in 2012, 24456 a Euro in 2013, 34653 a Euro in 2014, 32188 a Euro in 2015 and in May 19, 2017 to 36335 IRR a Euro thus showing a strong depreciation of the Iranian currency.

The current balance in 2014 was 3.8% compared to the GDP’s of 0.4% in 2015 and less than 0.6% in 2016 with a forecast of zero in 2017, while the GDP / public debt ratio was 15.6% in 2014, 17.1% in 2015, 17.5% in 2016 with a forecast 17.7% in 2017.  The trade balance of Iran with a share of trade in GDP of more than 31% (World Bank, 2015) is structurally positive, oil exports have increased by 70% in 2016 trend which should continue in 2017 with a trade surplus of 1.8 billion US Dollars in  2016.

The main customers of Iran are China, Iraq and the UAE.  Besides oil and gas, Iran exports are mainly pistachios, carpets, petrochemicals, organic chemicals, aluminium and plastic materials.  Its three main suppliers are the UAE (that in fact play the role of Iran’s Center of re-export), the European Union and China. Iran’s imported goods are mainly machinery, iron and steel, electrical and electronic equipment and cereals.

The Iranian economy remains dominated by the public sector that controls much of the economy with a relatively fragile banking sector. Structurally, the economy is dependent on oil revenues, which account for nearly half of all State revenues.  So, the lifting of international sanctions in July 2015 allowed the resumption of trade and investment (FDI stock in 2015 has been $45,097 million), while exports of oil have found their level prior to the sanctions.

The agricultural sector, whose main crops are pistachio of which iran is the largest producer in the world, wheat, rice, oranges, tea and cotton all contributed to 9.3% of GDP in 2016, and employing 17.9% of the active population. Oil production, which has seen a drastic fall in 2012 following the introduction of international sanctions, has quickly picked up since their lifting, reaching in March 2017 its highest level in 7 years (3.8 million barrels per day).

The industrial sector employs 33.8% of the active population and contributes to 38.2% of the GDP. The textile industry is the second largest sector after the oil & gas. Sugar refining, the industrial preparation of food, petrochemicals, cement and construction are the other major industries. Traditional crafts, such as weaving of carpets, ceramics, silk and jewellery manufacturing, are also vital for the Iranian economy. The tertiary sector contributes to 52.4% of the GDP using 48.3% of assets.

Prospects for the Iranian economy

In order to diversify its economy, the Iranian Government has decided to launch a plan of privatization and open most of the sectors of its economy to foreign investment.

Thus, in 2016 the projects of FDI in Iran increased significantly. The Iranian Government through the country’s Central Bank intends, in accordance with the recommendations of the IMF, to conduct a recapitalisation of distressed banks. The State should implement new reforms to stimulate the private sector as the public sector no longer has the resources to create the needed jobs.

The Iranian authorities have adopted a comprehensive strategy of reforms based on the market, as declared in a document on prospects in the future 20 years and in the 6th five-year plan of development covering the period 2016-2021. So this plan revolves around three main axes: the development of a resilient economy, the scientific and technical progress, and the promotion of cultural excellence. On the economic front, the plan tables on an annual growth of 8%, with three main priorities for the next five years, e.g.: reform of public enterprises, financial and banking sector, distribution and management of oil revenues, greater budgetary rigour, the fight against waste and corruption.

Because of the important thing for the Iranian Government is to drive the economy out of recession, the goal is economic recovery.  Reducing unemployment and control of the inflation to maintain social cohesion, knowing that the economy is highly dependent for its funding on the oil revenues, the Government of Iran with the lifting of the embargo will as a consequence increase the supply of oil, which will allow it to boost its economy and intends to carry out internal reforms to increase tax term revenues.

Thus Iran plans privatizations and disposals of assets that show strong growth as compared to the current budget combined with the reduction of the State’s lifestyle (operating expenditures, salaries of civil servants, etc.).  So, the Government of Iran will be facing significant internal challenges that require major structural reforms at three levels:

First, review all un-targeted widespread subsidies, that are wasteful and source of rentier situations and diversions of funds, establishing another cause of this permanent bleeding in the Iranian economy that prevent the channelling of resources into the system of domestic production so as to drive effectively the development of the country.

It is in this context that the indirect subsidies, whose cost was estimated at 27% of GDP in 2007/2008 (approximately $77.2 billion), has been replaced by a program of direct cash transfers to Iranian households.

The second part of the subsidy reform, launched in the spring of 2014, provides a more gradual oil price envisaged before adjustment and a wider targeting of transfers for the benefit of low-income households. Nearly 3 million of higher income households have already been removed from lists of beneficiaries.  As expected, the poverty rate declined by 13.1 to 8.1% between 2009 and 2013 (based on a poverty line of $5.5 in parity of purchasing power in 2011.

This evolution according to the IMF is probably attributed to the establishment, by end of 2010 of a universal program of monetary transfers, prior to the removal of subsidies. The program seems to have more than offset the expected increase in the less affluent and contributed household energy bills, doing so to improve the purchasing power of the poorest 40% of the population. This approach would have led to a reduction in the expenses of the targeted subsidies organisation (TSO) of 4.2% of GDP in 2014 to 3.4% in 2016.

Second, whilst ensuring its security protection, limit the huge spending on the military because of the regional tensions including the nuclear project for military purposes as per the agreement for nuclear power for civilian use, the colossal ballistic program and interventionist policy at the international level that require significant financial aid are believed to be no more;

Third; it involves adjustments at the level of the Iranian authorities power, the limitation of that of the Pasdaran whose control is an essential part of the Iranian economy, without being subject to the law on taxation, monopolizes all economic activity with colossal revenues in the sectors of oil, gas, petrochemical, telephony, computer, automotive, steel, cement, food, pharmaceuticals as well as roads, banks, insurance. According to analysts, the Pasdaran are among the largest cartels of the world and control more than 50% of imports and one-third of Iranian exports

In summary, the agreement, signed in July 2015, has allowed the lifting of economic sanctions against Iran and the resumption of partnership with overseas while we are witnessing an ambiguous positron of the U.S. president, who seems to take this legacy without ceasing to criticize claiming that in April 20, 2015, Iran was not in breach of the nuclear agreement, but that he violated the spirit.  Anyway, the return of Iran into the community of Nations would help defuse the climate of tension that runs across the region and foreshadows a significant geostrategic and energy reconfiguration at the level of the Middle East.

Please address any comments to Dr A. Mebtoul