President Hassan Rohani said Iran’s economic problems went beyond sanctions, blaming “unparalleled stagflation” on the profligacy and mismanagement of his predecessor, Mahmoud Ahmadinejad.
In office from 2005 until August, Ahmadinejad presided over a period of unprecedented revenue growth due to high oil prices but, analysts say, squandered much of it on subsidies that pumped money into the economy and drove up inflation.
“The stagflation in 1391 was unparalleled,” Rohani said, referring to the Iranian year that ended in March. During that year, the economy contracted by 6 percent, while inflation rose above 40 percent, he said.
Rohani’s speech came as Iranian Foreign Minister Mohammed Javad Zarif said Iran would pursue construction at the Arak heavy-water reactor, despite a deal with world powers to shelve a project.
The International Monetary Fund expects Iran’s economy will shrink 1.5 percent this year in inflation-adjusted terms, after an estimated 1.9 percent contraction last year which was the biggest since 1988, when Iran’s eight-year war with Iraq ended.
Despite receiving 600 billion dollars in oil revenue over the past eight years, Rohani said the legacy of Ahmadinejad’s two terms was around $67 billion dollars of debt. Iran’s nominal GDP was $549 billion in 2012 and will shrink to $389 billion in 2013, according to the IMF’s October outlook.
“These facts show the conditions we inherited from the previous government and in what conditions we must grapple with the problems,” Rohani said in a speech late on Tuesday to mark his first 100 days in office.
Rohani secured a landslide election victory in June promising a policy of “constructive engagement” with the outside world would help ease international sanctions on the Islamic republic imposed over its nuclear program. Iran denies seeking to develop a nuclear weapons capability.
An interim deal with six world powers clinched in Geneva on Sunday promises to bring some $7 billion-worth of relief from those sanctions, but most of the measures remain in place and Rohani said it would take time for the economy to improve.
Nouriel Roubini, chairman of Roubini Global Economics and an economics professor at New York University’s Stern School of Business said that at this stage, the sanctions lifted would not make a big difference.
“It will still be an economy severely constrained by the fact that most of the most important sanctions are still there and, rightly, the US and great powers are cautious,” he said on the sidelines of a financial conference in Dubai.
“They want to see that Iran is not bluffing.”
US and EU sanctions on Iran’s oil, shipping and banking sectors halved Iranian crude exports, helped fuel inflation and unemployment and drive down the value of the rial, which gained about 3 percent following Sunday’s deal.
“I don’t want to say that all the economic problems are related to the sanctions. A major part of the problem is related to mismanagement,” he said.
The uncompleted Arak research reactor emerged as one of several big stumbling blocks in the marathon negotiations. The agreement is intended to buy time for talks on a final settlement of the dispute.
According to the agreed text, Iran said it would not make “any further advances of its activities” on the Arak reactor, under construction near a western Iranian town with that name.
“Capacity at the Arak site is not going to increase. It means no new nuclear fuel will be produced and no new installations will be installed, but construction will continue there,” Zarif told parliament in translated comments broadcast on Iran’s Press TV.
Nuclear expert Mark Hibbs of the Carnegie Endowment think-tank said Zarif’s statement seemed to be an attempt to reassure anti-Western hardliners in Iran that the Arak project will survive diplomacy with the powers.
“It doesn’t matter whether Iran is doing excavation work or civil construction work around the reactor,” Hibbs said.
“What matters for now is that there is no fuel production and testing, that there is no installation at the reactor. Freezing much more than that might be seen by hardliners as total suspension of the project and therefore unacceptable.”
Rohani said reducing inflation was a priority. Inflation had fallen to 36 percent by the end of October and the government aimed to bring it below 25 percent by the end of the following Iranian year – March 2015 in the Western calendar.
The government would also reform the banking system but reforms of Ahmadinejad’s expensive subsidy program, under which most Iranian families receive state handouts, would have to wait until a second phase.
Rohani also said his government aimed to promote agriculture in order to reduce Iran’s dependence on imports: “When you are in a struggle against the world, you have to rely on yourself. You can’t confront the world with slogans”.