Exposed: Is Rouhani’s Image as Economic Savior Crumbling?

December 9, 2015 Topic: Iran Region: Middle East Blog Brand: The Buzz Tags: RouhaniIranEconomy

Exposed: Is Rouhani’s Image as Economic Savior Crumbling?

"Despite his success with the nuclear deal, it increasingly appears Rouhani will be unable to deliver on a better life for most Iranians anytime soon."

Hassan Rouhani was elected president of Iran in 2013 with two missions: get out from underneath international sanctions and fix the economy. But despite his success with the nuclear deal, it increasingly appears Rouhani will be unable to deliver on a better life for most Iranians anytime soon. The knives are beginning to come out.

First, some numbers. Rouhani’s austerity measures did help reduce inflation from 40 percent in 2013 to 14 percent in 2015. These policies had a painful impact on most Iranians. The official Statistical Centre of Iran reports that Iran’s unemployment rate actually rose between 2013 and 2014, and in March, Iranian analyst Majid Salimi Boroujeni warned that the unemployment rate would remain between “10 and 12 percent” in 2015. To add further worry, ISNA news agency revealed in late October that inflation had only decreased 0.7 percent in 2015. The diminishing returns from Rouhani’s approach are even more worrisome in the context of expected low oil prices for the foreseeable future.

Second, Rouhani’s own allies are beginning to show signs of losing faith. While the president has received criticism from across the political spectrum for his unfulfilled economic promises, the most significant has been from his (ostensible) allies, the conservative pragmatists. On October 4, Mehr News leaked a letter written to Rouhani by four of his cabinet ministers, most notably Minister of the Economy Ali Tayyib Nia and Minister of Defense Hossein Dehghan, stating that “uncoordinated decisions and policies” of the executive branch placed the economy at risk for a serious recession. Rouhani has responded with a stimulus package intended to increase consumer demand through enhanced access to financing, including reduced interest rates on credit cards and card loans. However, analysts note that expansionary monetary policy will increase inflation, and undermine efforts to combat crony capitalism by encouraging Iranian consumers to purchase cars from quasi-state owned firms.

Criticism from Mohsen Rezaei, Secretary of the Expediency Council (which advises Supreme Leader Ayatollah Ali Khamenei and is charged with ensuring government policies serve Iran’s best interests), reflects the broader pragmatic-conservative concern that Rouhani’s platform fails to address structural problems in the Iranian economy, namely economic mismanagement and corruption. Rezaei charged that the government has “not been able to apply the necessary laws and [groundwork]” for economic reforms, and claimed that the Basij could help implement economic reforms by bringing “honesty and devotion” into the economy. Technocrats and Rezaei have found common ground on subject of uncoordinated economic management; Iranian journalist Alireza Ramezani argues that “almost every technocrat in Iran…urges the president to spend more time meeting with top economic officials and experts on a regular basis.”

Third, Rouhani is fighting moves by the elites to isolate him. On November 30, another member of the Expediency Council told Fars News that President Rouhani stopped attending meetings in protest of the Expediency Council’s involvement in writing specific provisions of Iran’s 6th Five Year Development Plan. The plan, which will establish Iran’s political, economic, and national security objectives over the next five years, is generally drafted by the executive branch, yet Rouhani has been marginalized in the process.

Iran’s conservatives capitalized on the incident to suggest that Rouhani has entered into a dispute with Ayatollah Hashemi Rafsanjani, Chairman of the Expediency Council and Rouhani’s political mentor. However, some of Rouhani’s political allies, including reformist daily Ghanoon rejected this narrative as opportunistic “fiction” from those eager to undermine Rafsanjani and Rouhani’s leadership.

While it is possible that relations between Rouhani and Rafsanjani are tense, Rouhani’s truancy implies a broader and more serious problem for his administration. The president’s conflict with the Expediency Council reflects the emergence of a coalition between the conservative pragmatists dissatisfied with Rouhani’s economic policies and broader economic vision and the Islamic Revolutionary Guard Corps (IRGC) and other more hardline principalists who were already worried post-nuclear deal liberalization will undermine their lucrative hold on major sectors of the economy .

Prospects for stagflation—a stalled economy plus rising inflation—are real. Rouhani had banked on riding the wave of popular support for the nuclear deal to give him the muscle to push through economic reforms and even bring in a moderate-reformist parliamentary majority in February that could solidify his political strength. The road to financial recovery would be tough for any Iranian President, but many expected Rouhani to exhibit the technocratic chops to find a way forward. If recent criticism is a signal of broader dissatisfaction and a growing split between Rouhani and the elites, the consequences for his presidency—and his ability to maintain consensus on adherence to the nuclear deal and de-escalation with the West—could be dire.

J. Matthew McInnis is a resident fellow at the American Enterprise Institute (where this first appeared). Jordan Olmstead​ is an Iranian Studies research intern also at AEI​.