Since Hassan Rouhani took power in August after a surprise victory in Iran’s elections, the president has had to juggle domestic economic problems with international negotiations over the Islamic Republic’s nuclear programme and the associated sanctions against it.

On foreign policy, Rouhani managed to secure a historic breakthrough, reaching a deal with the P5+1 group of world powers that could become the cornerstone of a permanent solution to the standoff surrounding Iran’s nuclear programme.

Domestically, the new president took over an economy beset by several chronic problems – falling gross domestic product, high unemployment, rising inflation, a huge drop in the value of its currency and, more recently, falling oil revenues. These factors have led to a growing frustration and hopelessness among a large segment of the population.

Controlling inflation

When, Rouhani presented an update of his first 100 days in office in November, he pulled no punches about the dire state of the economy, highlighting a significant drop in inflation since he took power.

“From an economic perspective, we were in a state of stagflation – negative growth and extremely high inflation – [for the] first time in 50 years,” the president said in his 100-day report. “Inflation has decreased from 43 per cent to 36 per cent – still very high, but it’s an improvement. Our plan is to bring inflation below 25 per cent by end of next year, from a level of 43 per cent when we took office.”

It’s wishful thinking that the [Revolutionary Guards] would not play role in political life. It is not going to go away

Fariborz Ghadar, Centre for Strategic and International Studies

Central Bank of Iran governor, Valiollah Seif, has pledged to bring down inflation and control liquidity, with the institution planning to end funding for some housing and other projects. Rouhani has also agreed to separate monetary and fiscal policies to give the central bank more independence to carry out inflation-cutting policies, according to Iranian state media.

Rouhani emphasised Iran’s poor economic condition when he was handed the presidency by Mahmoud Ahmadinejad. He took aim at the previous administration saying “the richest government in our history was also the most indebted government, owing more than $67bn”.

According to Rouhani, the economy contracted by 6 per cent over the last year. The government aims to exit this recession by March 2014 and achieve 3 per cent growth in the Iranian new year, starting in that month.

Iran’s economy has been affected by a significant drop in oil exports after the US and EU introduced new sanctions against the country’s energy sector in early 2012. The Paris-based International Energy Agency estimates that Iranian oil exports averaged about 850,000 barrels a day (b/d) in November 2013 compared with about 2.5 million b/d in early 2012.

Although the P5+1 deal gave Iran relief from some sanctions, the measures enforced on oil exports remain largely in place. However, the deal is likely to suspend pressure from the US for Iran’s major oil buyers – including China, India, Japan and South Korea – to further reduce the purchase of Iranian crude.

With no relief in the energy sector forthcoming, the government looks to focus on other measures to improve the domestic situation.

Ali Tayyeb-Nia, Iran’s new minister of economic affairs and finance, gave a speech to the World Bank and Washington-headquartered IMF on 11 October outlining some of the government’s initiatives.

Economic reforms

“Reducing dependency on oil revenue and transferring the executing role of government in delivering public and infrastructure projects to the private sector are among fundamental economic reforms incorporated in the country’s strategic plans,” said Tayyeb-Nia.

“To achieve this main goal, the role of government, as a main regulator, should be gradually revised through creation of mutual dialog with non-governmental sectors and civil societies in order to set the ground for monetary and financial reforms,” he added.

Rouhani appears to have built a consensus among Iran’s political establishment, easing tensions between the three branches of government, allowing him to push through his agenda laid out before the election.

This freedom was enjoyed by neither of his two recent predecessors. During his second term, Ahmadinejad’s power was stunted by tensions with large sections of parliament, the Islamic Revolutionary Guard Corps (IRGC) and Supreme Leader Ayatollah Ali Khamenei. But the support of the Supreme Leader was instrumental to Rouhani’s ability to clinch the Geneva deal with the P5+1 powers in November.

This support was compounded by the positive reaction of Iran’s business community and economic commentators to the deal and the increase of the rial in the free market after it plummeted towards the end of Ahmadinejad’s second term.

“If you look at the internal Iranian political environment, there’s an awful amount of pressure on the populous,” says Fariborz Ghadar, senior adviser at the Centre for Strategic and International Studies in Washington, referring to public discontent over corruption, inflation and unemployment. “They want some kind of resolution to the economy, and this is number one on their list of concerns.

“If you put yourself in the shoes of the Supreme Leader, you don’t want to take that risk [of not addressing their concerns] even though you don’t trust the West,” Ghadar says. “The population has voted for the most liberal of five candidates that ran for election, even though a lot of liberal candidates were disqualified from running, and the Supreme Leader will be thinking that if he doesn’t do anything, something could really happen.”

Political division

However, tensions have flared up with the IRGC since the historic deal when, in mid-December, its commander, Mohammad Jafari, accused Rouhani’s government of being under the influence of Western ideas.

“The military, systems and procedures governing the administrative system of the country are the same as before, [but it] has been slightly modified and unfortunately infected by Western doctrine, and a fundamental change must occur,” Jafari was quoted by Iran’s Fars News Agency as saying.

“The main threat to the revolution is in the political arena and the Guard cannot remain silent in the face of that,” he added.

Rouhani has been trying to diminish the influence of the IRGC in national politics since he took over as president. In a speech at the IRGC’s national assembly in September, he said it should be “far from political currents” and “belong to the entire nation”.

The IRGC was set up shortly after the revolution in 1979 to defend the country’s Islamic system and provide a counterweight to the regular army. The organisation has since bloomed into an enormous influence on political, economic and military force in Iran. A division between Rouhani and the IRGC, which answers directly to the Supreme Leader, is one the president can ill-afford to widen given the organisation’s wide-ranging role in Iranian society.

“It’s wishful thinking that the IRGC would not play role in political life. It is not going to go away,” says Ghadar. “There has been quite a bit of change in the IRGC and the Supreme Leader has told them to tone it down. But you can’t castrate them overnight. They are huge players, so you have just got to deal with them.”

The IRGC, along with the hardline conservative sections of the Iranian parliament are potentially Rouhani’s biggest internal barriers in his attempt to reach a satisfactory outcome to the nuclear negotiations. It will prove a tough balancing act as he attempts to reach a compromise that pleases the broad political spectrum in Tehran, with some voices in parliament against any dialogue with the US.

US influence

Another major obstacle to reaching a wide-ranging agreement is US Congress, which is heavily lobbied by pro-Israel groups. While US President Barack Obama has been active in starting a rapprochement with Iran, he does not necessarily back the country’s legislative branch.

Obama, however, should be able to provide some relief to US trade partners in Europe and Asia, which have closer ties with Iran.   

One of the sanctions having the biggest impact is the measure to prevent Iranian banks – including the central bank – from accessing the Brussels-based Society for Worldwide Interbank Financial Telecommunication (SWIFT), which allows currency transfers between banks.

“Congress has very little to do with European trade, so if the US really wants to remove some of the sanctions, it can relieve pressure on Europe and Asia,” says Ghadar. “If that is removed, it will have a major effect, but Congress can still put a wrench in the whole thing.”

After a largely positive start to his presidency, Rouhani now faces a crucial year that could prove a turning point for Iran’s future, domestically and internationally. The president faces strong domestic pressure to turn around the country’s ailing economy, a pressure that could be lessened if Iran secures a deal to reduce sanctions.

Key fact

Inflation in Iran has dropped to 36 per cent from 43 per cent since Hassan Rouhani took over as president

Source: MEED