Walk down a bustling Tehran street these days you’d be forgiven for thinking things have never been so good: shops are brimming with stock and the city’s manic throng betrays little sign of malaise. Blessed with its abundant natural resources, the country’s coffers have grown in recent years and the windfall is now backing a surge in investment spending. On top of that, a new generation of privately owned banks is delivering strong results for shareholders.
Yet most Iranians know difficult times lie ahead. Iran’s standoff with the west over its nuclear ambitions has strengthened the hand of president Mahmoud Ahmadinejad. From a shaky start, he has managed to outflank opponents and build up his power base – confronting issues as diverse as subsidies and women’s rights. At times, this has set the president and his allies against Rahbar (Supreme Leader) Ayatollah Ali Khamenei and his clique . The latter were widely expected to exert their influence over the populist president, a relatively obscure Tehran mayor with proletarian visions who claimed a surprise victory over establishment man Hojateleslam Ali Akbar Hashemi Rafsanjani last summer.
The “Islamic Chavez”, as one local analyst calls him in reference to Venezuela’s President, is one of a new generation of populist leaders across the Middle East and Latin America, voted in with a brief to deliver the social justice widely perceived as lacking under previous elite leaderships.
credit crunch
But nationalist approaches and talk of sanctions are not the sort of things international banks like to hear, even from major oil and gas producers like Iran.
Already, export credit agencies and banks have cut off lines of credit, due to negative perceptions of political risk. This is despite the fact that Iran has always been responsible over payments and is flush with the proceeds of the oil price spike.
“The big risk is that by playing domestic political games Ahmadinejad will push even more of the wrong buttons internationally, playing into the hands of Iran’s enemies,” comments one Tehran analyst.
Many Iranians are deeply concerned by the potential fall-out of the nuclear stand-off, but the majority seem stoical after 26 years of effective isolation from the west. Indeed, many seem to have a developed grudging admiration, bordering on affection, for their president. The analyst observes that: “Ahmadinejad could now be re-elected for a second term – provided the nuclear standoff doesn’t go too bad for people’s day-to-day lives.”
For now, Iranians are benefiting from higher oil prices. According to the respected Central Bank of Iran vice governor (foreign exchange affairs) Mohammad Jafar Mojarrad, exports reached a record $40 billion in the last Iranian year (1383, ending 20 March), and will be around the same figure in 1384.
“Thanks to our implementation of reforms, the recent IMF report shows annual growth averaging 6%, but this will rise up to 8% – which may seem ambitious but is sustainable, based on recent trends; our studies show 8.5%,” Mojarrad tells Emerging Markets.
Oil prices are not the only driver for growth. “Private sector investment has been enhanced, growing at around 10%.”
The problem, comments a Tehran-based economist, is that “recent data suggest that after rising very promisingly, foreign direct investment has declined over the past year, first as Iranian investors battened down due to the election and then as the realities of the nuclear situation became clearer.” He observes that some German and other companies have put big investments on hold because, despite the potential profits, the political situation is unclear.
rebuilding confidence
Iranian officials know they have a big job on their hands to maintain and rebuild international confidence. The central bank and the government have largely maintained orthodox monetary and other policies, and intend to continue doing so.
Privatization is back on the agenda, under deputy minister of economic affairs Gholamreza Heydari Kord-Zanganeh – who also served in the previous Khatami government and is now Iranian Privatization Organization chairman. The organization is preparing a form of voucher privatization scheme – known as Justice Shares – and eventually, “we plan to offer all government shares to the public,” Kord-Zanganeh tells Emerging Markets.
For such policies to work, liberal reformers must resist the calls of Ahmadinejad and his allies for more populist policies to be implemented. Already, there are fears the Oil Stabilization Fund will be raided too often for the central bank’s anti-inflationary safeguards to hold.
Since his election, US analysts – several of the most influential of which have neo-conservative axes to grind – have been talking about a “white coup” engineered by Ahmadinejad to flush out liberals and other opponents.
Even the resilient central bank governor Dr Ebrahim Sheibani – a respected technocrat who has maintained Iran’s orthodox monetary policy – has tendered his resignation.
reformist push
For now, reformers remain in charge of economic policy, with such well-known faces as deputy governor Mojarred still at the central bank, and several ministers retaining key government positions. Ahmadinejad’s initial failure to have his way over economic appointments was highlighted when no less than three of his candidates for oil minister were rejected by the Majlis (parliament); eventually the president was forced to promote the experienced deputy minister Kazim Vaziri-Hamaneh.
But policy battles continue. The central bank is battling to keep control of interest-rate policy, under pressure from populists in government and the Majlis. “Politicians want to bring down rates to win votes. We want to keep the economy stable,” comments one senior monetary official.
Also wary are the new generation of private banks, who are winning significant amounts of business. The growth of institutions such as Parsian Bank and EN Bank, controlled by big industrial conglomerates with an eye on the bottom line while building business by providing unprecedented levels of service, points to positive change. But for this to continue, Tehran and its critics must engage in the sort of dialogue both sides are now shying away from.