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Iran needs more than sanctions lifted

On Wednesday, the Johns Hopkins School of Advanced International Studies and the Middle East and Central Asia Department of the International Monetary (IMF) fund hosted ‘After Sanctions: Challenges Facing the Iranian Economy.’ Masood Ahmed, Director of the Middle East and Central Asia Department at the IMF, gave a presentation on the condition of the Iranian economy during the past four years. He then participated in a discussion with Martin Cerisola, Assistant Director of the Middle East and Central Asia Department at the IMF, Nadereh Chamlou, an international development advisor, and Suzanne Maloney, Deputy Director of the Foreign Policy program at the Brookings Institution. Vali Nasr, Dean of the Johns Hopkins Paul H. Nitze School of Advanced International Studies, moderated.

Ahmed explained how the past four years have been difficult for Iran. The introduction of harsh sanctions in 2011 hit the Iranian economy hard. Oil exports declined by nearly 50 percent, the economy shrank, the exchange rate declined, and inflation increased.

Removal of sanctions will boost the economy immediately: production and the export of oil will increase, the cost doing business will decrease, and transactions will become easier. Maintaining this boost in the long-run should be the goal. Some chronic problems existed prior to the sanctions, so the economy can only make a full recovery if these are addressed properly. Concentrating on all facets of the economy is not just important for Iran, but for the countries it trades with. Primary trading partners India, China, Turkey, and Iraq stand to gain immediately from the removal of Iranian sanctions.

Iran has to adjust in order to sustain a strong economy. Iran will have to:

1. Live with the oil price fluctuations
2. Create a better macroeconomic policy framework
3. Construct a more conducive business environment
4. Revamp its productive structure

With lower oil prices comes a big loss of revenue and growth. Iran will have to become less dependent on oil price volatility. Other challenges include improving the business climate, restructuring banks, and creating more employment in sectors with the highest productivity. Currently, the most employment is in sectors with the lowest productivity. Iran has one of the least flexible labor markets, so finding a creative solution to unemployment is a pivotal reform Iran should take on. Overall, though, the fundamentals of the Iranian economy are strong. The country is resource-rich, its market size is beneficial, it has a highly skilled labor force, and the infrastructure is there and only needs to be modernized.

Nasr asked what sort of investment Iran’s economy requires. Ahmed replied that investment is most needed for modernizing, improving, and sustaining oil production. Cerisola said they need enough investment to sustain eight percent growth projections. Two hundred million dollars is needed for oil alone.

The panel then addressed reforms. Chamlou said the parliament asked the government to submit another version of a six-year plan because not enough substance was in the original plan. Iran is in need of deep-rooted reforms, and she hopes that outside pressure and investors will bring about these reforms. With the amount of investment that will come in, the government and business sectors will both have to alter their practices.

Maloney then discussed how President Rouhani would help Iran open up to foreign investment. He was elected because of his focus on both prosperity and national security. He has put together a fantastic team to lead Iran into a better economic position. The ideological divide in Iran will challenge Rouhani. His political rivals will look to make certain opportunities more difficult for him. But Rouhani does have an excellent ability to build alliances and seems to be savvy about the issues he takes on.

Ahmed believes the removal of sanctions will help the Iranian economy, but it will not solve all the problems. Managing expectation and fostering consensus is critical to success. Structural challenges are formidable and require extensive reforms. Maloney added that if Iran does not see the economy boom quickly enough, that it could see some political backlash.