Outcome of general elections may boost Iran’s economy

Outcome of general elections may boost Iran’s economy

Baku, Azerbaijan, March 3

By Farhad Daneshvar - Trend:

Moody's Investors Service has forecasted a boost to Iran's economy and foreign investment considering the outcome of recent elections held in Iran.

Last Friday, Iran (unrated) held general elections that saw a moderate, pro-government coalition of pragmatic conservatives, centrists, and reformists win 136 seats, Moody's said.

They only need to win 10 of the 64 second-round elections contested with the Principlist party (conservative hardliners) to win a majority in the 290-member parliament.

The outcome is credit positive for Iran because it provides the government of President Hassan Rouhani, a member of the Moderation and Development Party, a stronger political mandate to enact economic reforms that will attract foreign investment and support growth.

Although the direction of major policies (foreign policy in particular) is ultimately in the hands of Supreme Leader Ali Khamenei in Iran, the president can shape domestic economic and social policies with the support of parliament.

During the presidency of Ali Akbar Hashemi Rafsanjani in the early 1990s, an uncooperative parliament managed to either water down or directly block many of the president's economic reform initiatives, including his attempts to eliminate price controls (precipitated by the Iran-Iraq war) that were distorting the economy.

Iran's parliament has the power to draft legislation, ratify international treaties, approve loans, and examine and approve the state budget. Because of this, international observers widely viewed the general elections as a referendum on President Rouhani's economic agenda.

Much of Rouhani's economic reforms are outlined in the Sixth Five-Year Development Plan (2016-20), which he introduced in January to parliament alongside the budget bill for the fiscal year ending 20 March 2017.

Although details of the plan have not yet been released to the public, Moody expects policies to be more conducive to foreign investment.

When Mr. Rouhani presented the plan to parliament, he said that the country would need as much as $50 billion of foreign capital inflows every year to meet its 8% economic growth target.

Another important reform that Mr. Rouhani will be able to more easily push forward is the restructuring of Iran's international petroleum contracts, which is vital to attract foreign investment and revive the country's ageing oil infrastructure.

Under the old contract structure, foreign investors were paid a fixed rate of return on exploration and development of oil fields and were banned from owning any assets. Although foreign ownership of oil fields is still banned, the new structure will allow foreign investors to be involved in the production process as well, giving them access to long-term revenue streams.

Although parliamentary approval is not required for international agreements made with privately owned foreign companies, Principlists in parliament critical of the new general terms have been looking for legal ways to obstruct the new structure.

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