(Photo Credit: Kamyar Adl, Flickr Commons)
Over the past three decades, it has become commonplace to hear a newly elected Iranian president blame his predecessor for the economic hardships and shortcomings that the country has endured. The first two years of President Rouhani’s term is no exception. He and his team of economic advisors have repeatedly blamed former president Mahmood Ahmadinejad for the country’s economic ills, including record-high inflation rates, a severe recession, and the near bankruptcy of the banking system. But are these claims warranted?
Under normal circumstances, it would not be difficult to assess the economic legacy of an Iranian president, but Ahmadinejad’s presidency – particularly his second term (August 2009 -July 2013) – was anything but normal. This period coincided with a sharp escalation in economic sanctions against Iran. Any assessment of Ahmadinejad’s economic management, therefore, must carefully take into account the impact of the multifaceted economic sanctions imposed on the country by the United States, the European Union, and the United Nations.
Another important factor that must be taken into account is the abundance of oil revenues during Ahmadinejad’s presidency. During the first six years of his term (from mid-2005 to mid-2011), Iran enjoyed record-high oil revenues, significantly larger than those collected during Khatami’s presidency. However, a combination of economic mismanagement and escalating economic sanctions prevented Iran from taking full advantage of this windfall gain.
In 2005, Ahmadinejad launched his presidential campaign with an anti-corruption populist agenda that attacked the established political and economic elite of the Islamic republic. Thanks to this populist agenda and strong support from both the Islamic Republic Revolutionary Guards (IRGC) and Supreme Leader Ayatollah Khamenei, Ahmadinejad won the election. He began his presidency with full loyalty to the Revolutionary Guards (in which he served during the Iran-Iraq war) and the Supreme Leader. Many of his economic policies, in fact, reflected the economic vision of the Supreme Leader.
Under Ahmadinejad, the IRGC’s involvement in economic and political activities increased significantly. He appointed many former IRGC officers to key government positions in the ministries of defense, oil, and energy, and in various state-owned banks. Many large government contracts were also awarded to construction and engineering firms affiliated with the IRGC, such as the Khatam al-Anbia construction firm. Independent firms often complained about the unfair preference by the government for IRGC affiliates (and privatized firms belonging to those affiliates), but to no avail. These policies significantly increased the involvement of active and former officers of the Revolutionary Guards in business activities, and, in doing so, led to the militarization of Iran’s economy under Ahmadinejad. Since Ahmadinejad left power, President Rouhani has tried to reverse these policies, but he has achieved only limited success.
With the support and encouragement of the Supreme Leader, Ahmadinejad used a portion of the record-high oil revenues to provide low-interest rate loans to small and medium-size businesses, intending to create jobs and spur economic growth. Several central bank directors and officials opposed these policies, believing that they would trigger inflation and lead to a sharp increase in liquidity. Protesting government officials were replaced with Ahmadinejad loyalists, and huge financial resources were devoted to these loan programs.
Meanwhile, the industries that received these loans faced a number of challenges preventing them from successfully expanding their output and creating jobs. For example, the economic sanctions made it more and more difficult to import the machinery and industrial inputs that firms needed for many projects. Businesses able to maintain or expand their operations faced new challenges in export markets, such as the denial of access to international financial services, because of the sanctions as well.
Many of the firms producing for the domestic market faced the additional challenge of competition from cheap Chinese imports. The Ahmadinejad government tolerated a significant increase in imports of consumer goods and manufactured products, under the belief that people deserved to enjoy a higher standard of living because oil revenues had increased. To make consumer goods more affordable, import tariff rates were reduced, and the exchange rate was kept stable, which, in combination with high domestic inflation rates, made imports less expensive than domestic products. However, as a result, many domestic producers that had received generous loans to expand their output were not able to compete with cheap Chinese imports and subsequently faced financial difficulties.
As borrowers declared bankruptcy, the number of non-performing loans rose sharply and led to substantial losses for the lending banks. The situation worsened during the last two years of Ahmadinejad’s presidency, due to additional economic sanctions on Iran’s oil exports and financial transactions. Furthermore, recent investigations revealed the presence of immense corruption and nepotism in awarding these loans. Some borrowed funds were embezzled and some were wasted because of borrower inexpertise and incapacity. As a result, the effectiveness of these loans in creating successful enterprises and new jobs was compromised.
Iran’s financial stability also suffered because of Ahmadinejad’s populist housing policy. Ahmadinejad forced the Central Bank to lend large sums of money to commercial banks in order to finance a large, nationwide housing project, which involved the construction of millions of low-income housing units in the suburbs of major cities. In doing so, Ahmadinejad caused yet another sharp increase in liquidity, contributing to record-high inflation rates in the final year of his presidency and spilling over into the first year of Rouhani’s leadership. Managing this unfinished housing project and containing its adverse consequences were major challenges for Rouhani in his first two years in office.
Ahmadinejad took significant steps to redistribute economic opportunities and resources to two social groups: the poor and the IRGC, along with its supporters. He deserves credit for his intentions of lifting up the underprivileged, but his policies were implemented in an inefficient and sometimes corrupt manner. He was a self-assured and street-smart politician with a limited understanding of the complexity of economic institutions, and he routinely rejected criticism of his policies by experts – even from those within his own inner circle.
Ahmadinejad was also a daring politician, who, in 2010, implemented significant reform to Iran’s price subsidies for energy products. His plan involved a substantial reduction in the price subsidy for gasoline and other energy products that are distributed by the government. The money that the government saved from this effort was dispensed to all citizens through monthly per-capita cash payments. These payments were deposited in a special bank account for every household once a month. Ahmadinejad’s subsidy reform project, however, was twisted and manipulated along the way, and while it has survived to this day, it has fallen short of some of its initial objectives, such as reducing the fiscal burden of subsidies on the government’s budget. The monthly cash transfers, for example, were initially approved for low-income households only. Due to political considerations, however, the Iranian government decided to offer these payments to the entire population, increasing the number of beneficiaries and the cost of this project substantially.
Ultimately, Ahmadinejad’s economic policies caused significant macroeconomic instability in Iran; as a result, President Rouhani devoted the first year of his term to reducing the inflation rate, mitigating the economic instability that was left for him, and attempting to stimulate the Iranian economy. There are early indications that these efforts have been successful, but the country still suffers from economic stagnation and a high unemployment rate.
The economic sanctions associated with Iran’s nuclear program were finally lifted on January 16, 2016. Unfortunately, the lifting of these sanctions coincides with a record-low crude oil price, limiting Iran’s oil revenues in 2016 and posing new challenges for its struggling economy. Furthermore, Ahmadinejad’s populist economic policies will continue to cast a shadow on the country’s economy in the coming years. A recent report revealed that more than 60 percent of current Iranian public debt was accumulated during Ahmadinejad’s presidency, despite record-high oil revenues at the time. The Rouhani government is and will continue to be burdened with the large number of under-qualified civil servants that were hired during Ahmadinejad’s presidency. These large-scale hires have created a bloated bureaucracy out of many government agencies. The financial burden of these new public employees is significant, and the Rouhani government cannot terminate their employment. The monthly cash subsidy program initiated during Ahmadinejad’s presidency represents yet another costly legacy that the Rouhani government has now been forced to deal with. The heavy cost of these subsidies continues to reduce the governmental resources available to be allocated to much needed development and infrastructure projects. Reform on this front has been slow.
Overall, Ahmadinejad’s economic legacy can be characterized by three factors: populism, a poor understanding of economic logic, and close solidarity with the Islamic Republic’s Revolutionary Guards. Understanding his economic policies is important not only because of their ongoing impact on Iran, but also because it would be naïve to assume that Ahmadinejad and his supporters will cease to play a role in the future of Iranian politics. Some of his supporters are indeed still present in Iran’s governing bodies. While it is unlikely that Ahmadinejad will ever be reelected to the presidency, the same cannot be said about some of his allies.