The Forum for Partners in Iran's Marketplace

October 2022, No. 101

Cover Story

Operation Foreign Policy or
Economic Surgery!

The important economic components that should be compared are GDP growth, inflation rate and exchange rate.

The 13th government is busy with measures it describes as ďcurrency reformsĒ or ďeconomic surgery;Ē an action that is praised by the government fans and its media, but it has caused concern in the society and is troublesome from the criticsí point of view.

Ali Majedi, an economist and former diplomat, believes that without an upturn in GDP growth and an upsurge in the foreign exchange income, any economic surgery would not only be ineffective, but may have unfortunate social implications. In this situation, the foreign policy discourse should be based on de-escalation, interaction and understanding, which requires the revival of JCPOA and acceptance of FATF by Iran. 

Many economists believe that economic surgery is not possible without foreign policy surgery. What is your opinion? Which one has priority: Economic surgery or diplomatic surgery?

In order to answer this question, I need to give a brief introduction on the division of the 40-year plus rule of the Islamic Republic of Iran. In the following, I will compare the foreign policy discourse and approach as well as three important economic components in the three periods that I will mention.

The important economic components that should be compared are GDP growth, inflation rate and exchange rate. These three components carry the possibility of increasing income. In my opinion, three periods can be explained in the 40-year history of the Islamic Republic of Iran: the first period from the victory of the revolution to the reform period; the second is the Reform Era; and the third is the post-reform period.

The first period is divided into two parts; the first part, namely the premiership of Mr. Mirhossein Mousavi; the second part, the rule of the late Ayatollah Hashemi Rafsanjani. During the first eight-year period, the country was involved in a war with Iraq, and there was no opportunity to explain foreign policy, and the country was focused on defending the cause of the revolution.

But in terms of economic components, GDP growth was negative. The foreign currencies were offered not in one but in two different rates. During the second four-year term of Mr. Mousavi, I was the deputy of the Ministry of Economic Affairs and Finance, and I knew very well that this situation was not in the interest of the country, but during the war, no special action could be taken. But the inflation was almost controlled and the most important concern of Mr. Mousavi was to reduce the economic pressure caused by the inflation and he was successful in this respect.

The exchange rate, as an important economic factor, has always been a problem for the country.

During the era of the late Hashemi Rafsanjani, shifting eastward was brought up and the political discourse in that period was inclined to the East. In terms of political discourse, there was a good capacity for relations with neighbors, especially the Arab states of the Persian Gulf, the turning point of which was the relationship with Saudi Arabia. But relations with the West, including Europe, were not very successful.

In relation to the mentioned basic components, the growth of the GDP was relatively successful; the late president was looking for a single rate currency and he was aware of the destructive effects of multi-rate currency. He even ordered the exchange rate, which had reached 500 tomans (for one US dollar), to be announced at 300 tomans (for one US dollar). But the economy and the exchange rate cannot be instructed and have their own mechanisms. In a short period of time, the multi-rate currency increased.

The second period was the eight-year reform era. During this period, the political discourse changed and the Dialogue of Civilizations and detente created a new space in the global scene. During this period, like all previous years, diplomatic relations were not established with America. Another important point was the expansion of relations with Europe. This political approach produced its economic results. During this period, we witnessed an increase in GDP growth, we had the lowest inflation rate, and although the exchange rate went up but the rise was minimal in this eight-year period. In addition to this, the currency became single rate in the real sense not upon the decision of the government. Therefore, the tension-causing foreign policy provided the basis for productivity of foreign investment and success in the economy.

In the third period that began with the presidency of Mr. Ahmadinejad; foreign policy took a different course. During this period, most sanctions were imposed against the country. Ignoring international structures such as the United Nations and making a mockery of the sanctions dealt the heaviest blow on the economy. During his eight-year term, which coincided with the highest foreign exchange income, the exchange rate went up, and once again multiple rates prevailed. GDP growth was negative and inflation was unbridled.

In the second part of this period, which started during the presidency of Mr. Hassan Rouhani, in light of his pertinent background of the nuclear issue and the shadow it had cast on the foreign policy and economy, they focused all their efforts on solving this issue and succeeded. JCPOA provided the basis for the development of economic relations in a way that in a year and a half since the approval of JCPOA, many business delegations from Europe came to Iran. But with the withdrawal and bad faith of the United States, the economy resumed its previous course. Unfortunately, the mistake that had been made since the time of the late Hashemi Rafsanjani was repeated this time and with the mandated exchange rate of 4200 tomans, the ground was opened for rent seeking and corruption.

But to conclude and answer your question, although one should not make hasty judgments and conclusions for evaluation, it must be said that without an increase in GDP growth and a rise in foreign currency income, any economic surgery will not only be ineffective, but may also have unfortunate social effects. In this situation, according to what has been described, the foreign policy discourse should be based on de-escalation, interaction and understanding, which requires the revival of JCPOA and acceptance of FATF. 

According to some experts, considering the current conditions of the Iranian economy, if the exchange rate is unified in the right way, there will be advantages in the long run. In other words, as the macroeconomic environment becomes more stable and less risky, the economyís access to currency will increase and positive expectations will continue. What do you think?

If you ask any economist he would tell you that a single rate for currency will prevent corruption and rent-seeking; moreover, the optimal allocation of currency resources for different goods will be done faster; it will be much easier to run the country; national savings will increase and finally, capital flight will be avoided. The exchange rate, as an important economic factor, has always been a problem for the country. Currently, this same currency of 4200 tomans (for one US dollar) has made us to resort to economic surgery today. 

What caused the adoption of a single rate for the currency to be successful during the reforms?

During the Reform Era, the type of interaction with the outside world, especially with European countries, made foreigners to have a different opinion on the economy of our country. The ďDialogue of CivilizationsĒ and the policy of dťtente caused our relationship with the outside world (minus America) to become relatively balanced. The reason is that during the reform period, we managed to have a single rate currency, control the inflation rate and attract foreign investment; that is why we started a balanced and tense based political relationship. The type of policy and approach of the reform government was a time of tranquility in the outside world and in relation to neighboring countries.

During this period, we did not have diplomatic ties with America, but we had a balanced and tension free relationship with the countries of the region and with Europe. These two things cannot be ignored. So if we implement a real detente we can achieve economic goals. It is wrong that we want to make economic changes and have nothing to do with the JCPOA. We have tried this several times and it has failed. You can create an economic transformation when the GDP and subsequently the incomes of the people increase. When your GDP is stagnant or has negative growth, inflation and unemployment will increase no matter what you do. If we want to have a successful economy, we must adopt a completely dťtente based foreign policy. When we work with the outside world, foreign capital will enter the country, subsequently, oil will be sold and the GDP will increase, and as a result, peopleís living standards will improve. 

Considering that dťtente in foreign policy means removing international obstacles on the way of development and attracting international resources for better development and strengthening of the country; Despite this, why is the detente policy not implemented? What are the obstacles facing this policy?

Two things must be done to relieve tension; we have to work with the West (minus America) like we do with the East. We should at least work with Europe. We have worked with Europe in the past. Some of these sanctions were imposed during the time of Mr. Hashemi Rafsanjani and Mr. (Mohammad) Khatami. During the time of Mr. (Mahmoud) Ahmadinejad, these sanctions became more widespread. So, if our relationship with the world improves and the JCPOA is revived and the world accepts it, America will not prevent European investments in Iran.

We worked with Europe during the reforms. Total Company invested in the oil field in Iran. But during Mr. Ahmadinejadís time, no country made any investment in Iran. During Mr. Rouhaniís time, the investment was supposed to start, but this did not happen due to Americaís bad faith and Trumpís withdrawal from the JCPOA.

Therefore, the JCPOA must be revived. It has been said many times, I gave a historical example. My advice is to look realistically at our 40-year-old policies and use these 40-year-old policies wherever they have been successful. Anyone can come and do it regardless of political divisions, which I have nothing to do with; of course it might matter, but thatís not my point. I am talking about the principle of policies, not people.


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