How feasible is Khamenei’s economic doctrine for Iran?

Iran’s Supreme Leader Ayatollah Ali Khamenei has laid out his vision for how the country’s economy needs to be reformed in order to resist sanctions. His extensive policy speech on May 14 was more detailed than previous ones and also included admissions about the existence of “maladies” and the need for significant structural reforms. But what needs to be undertaken to achieve the goals outlined in Khamenei’s core statements?

In outlining the maladies Iran faces, Khamenei referred to “our dependence on oil.” This statement is correct, and the call to reduce dependence on oil export revenues is a reasonable approach, though it has been an objective in Iran for decades. At the current juncture, as Iran faces challenges in selling its crude oil due to US sanctions, one approach would be to allow for the establishment of mini refineries across the country — a proposal that is gaining momentum in expert discussions in Iran. However, as such entities would be best materialized through private sector investments, impediments to achieving this objective can be found in the second and third maladies identified by Khamenei.

Indeed, the second malady is the “unnecessary intervention of state organizations in the area of the economy.” The dominant presence of governmental and semi-state institutions (such as religious, revolutionary and military foundations) in economic activities is an inhibiting factor in the development of the country’s genuine private sector. As explained at Al-Monitor last month, “The feeling among private entrepreneurs is that there is a threshold up to which they can grow. Beyond that threshold, private businesses have to be taken over by semi-state institutions.” This shortcoming in the Iranian economy can only be addressed through serious political reforms to which Khamenei would have to commit in the process.

The third malady is that “various twists and turns and bizarre mazes and corridors in government organizations lead to damaging the environment of finance and business.” It is refreshing that the supreme leader has paid attention to the country’s deficient investment climate and extensive red tape. Yet it remains to be seen whether any serious steps will be taken to address this issue. Here, the steps that need to be taken are relatively well defined, but it seems that an incompetent bureaucracy married with interests of corrupt networks continue to impede serious reforms.

The inability to reform the business environment will also undermine the capacity to offer “structural reforms to the budget” — a request that Khamenei formulated in March 2019. He reminded the government and the Majles that they had two more months to “eliminate … the structural hurdles regarding the budget.” The task is clear, i.e., the government will need to promote transparency and accountability in the state budget positions in order to increase the efficiency of budget allocations and push back against corrupt practices. 

Khamenei also outlined the need for “restructuring the banking system,” acknowledging that it “requires some brave management.” The supreme leader clearly realizes that pushing back against the powerful networks that have abused the deficiencies in the budget and banking sector will require significant resolve. It would be more appropriate to see Khamenei pointing to the needed political shifts, such as an end to the culture of patronage in many business relations.

Regarding containing the economic impact of external sanctions, Khamenei’s advice was not to allow economic policies to depend on external decisions. “The economy should not be conditioned to the decisions of others,” sounds like a great statement, but it is easier said than done in an economy that is so intertwined with the global economy, both in terms of exports and the need for imports for local production. To achieve such a status, Iran needs to become a much more developed economy focused on import substitution, and achieve a much greater self-sufficiency in key industries. Furthermore, the country would need a clear economic doctrine that is driven by technocrats rather than by political appointees who have other agendas, including the continuation of a commission culture that compels authorities to sustain imports.

One of the highlights of Khamenei’s speech was when he carefully referred to the existing corruption in the economy without mentioning the word corruption. He asked the administration to “confront the destructive forces in various economic areas” and outlined: “Today, we are faced with smuggling, hoarding and very detrimental brokerage deals. We have received reports about the treasonous purchase of wheat, meat, public foodstuffs and the like and I have shared my concern with officials.” Again hinting at the complexity of such a process, he continued: “Of course, when you confront them, some noise might be made. Some individuals will cause a commotion and create an uproar. So, everyone should stand behind the administration and help it so that the punitive divisions of the administration can fulfill their function in the true sense of the word.”

It would be interesting to see whether this will be the starting point of a genuine fight against corruption within the state structures. These sentences leave no doubt that Khamenei is referring to corrupt state officials. The call for “everyone” to stand behind the administration is also a reflection of the past complaints from the administration that their efforts would be fruitless as long as other institutions fail to support the government. 

Khamenei also commented on the need to remove the “many” obstacles to boosting domestic production and referred to manufacturing as the “mother of all economic activities.” He cited the fact that many domestic factories were closing down because of “certain problems.” He also identified “liquidity growth” as a disaster for the economy. Experts agree that managing liquidity will only be possible hand-in-hand with the above-mentioned reforms in the budget structure and the banking sector.

Two more sectors received special attention in the speech: agriculture and construction. Khamenei correctly pointed to the significance of the agricultural sector in terms of employment. Incidentally, both sectors play a crucial role in creating jobs, and their development would help Iran emerge from its current economic stagnation.

In addition to some indirect allusions to the Iranian culture of “taarof,” or courtesy, Khamenei’s speech also had occasional references to ideological terms such as “jihadi management” or a “self-sufficiency jihad” or the “economy of resistance,” but his focus remained on the need for reforms and restructuring. As such, this was one of the most comprehensive outlines of Khamenei’s economic doctrine, which focuses on self-sufficiency, import substitution through boosting domestic production, putting an end to the dependence on crude exports and prioritizing the agricultural sector. He also reminded everyone that his reference to resistance “does not mean a military confrontation.”

All in all, it was important that the supreme leader referred to detailed reforms such as improving the business climate, pushing back against the interference of state institutions in the economy and banking reforms. However, it is valid to argue that a number of these reforms would not be effective in the absence of needed political reforms. As such, Ayatollah Khamenei would be well advised to show “courage” himself and clearly state what political reforms will be introduced to support the process. 

Interestingly, within a few days after the mentioned speech, President Hassan Rouhani asked for “more powers to push back" against an economic war being waged by the United States. Increased powers can certainly help the Iranian government push some of the needed reforms through the country’s complex power structure, but to bear fruits, this effort will require the cooperation of all key political power centers and the full endorsement of Ayatollah Khamenei, as key political reforms will be required.