The process to form a new cabinet in Iran has officially begun with President-elect Masoud Pezeshkian appointing former Foreign Minister Mohammad Javad Zarif as the head of the Strategic Council for Transition.
According to reformist daily Shargh, the council is tasked with shortlisting the candidates for ministerial and vice-presidential posts in the Pezeshkian administration. Iranian presidents usually have a “first vice-president” and several others in charge of critical government tasks.
Earlier, rumors said that Zarif was going to be the senior vice president in the new government, however, Zarif said last week that no one has been yet nominated for the post. Some of the reports during the past week mentioned Executives of Construction Party leader Hossein Marashi as a nominee for the post. However, Marashi's involvement in a variety of businesses may prevent him from joining the government.
Another potential nominee for the post is former vice-president Mohammad Reza Aref, who has faced heavy criticism from the press and politicians for his "inaction, indecision, and inefficiency" as the leader of the reformist faction in the Iranian parliament from 2016 to 2020.
Zarif has denied reports Pezeshkian is under pressure by other politicians including former President Mohammad Khatami to appoint certain individuals to posts in the new government.
Other reports quoted Mohammad Hashemi, a former state TV chief and a brother of former President Akbar Hashemi Rafsanjani as saying that five committees or work groups have been set up to work on the forming of the new cabinet based on merits.
With the committees in place, the President-elect does not need recommendations by anyone to appoint his ministers, Hashemi said, adding that Pezeshkian has asked every committee to nominate three individuals for every ministry. He will eventually take his pick from among those nominated.
Meanwhile, in letters to civil institutions and political parties, Pezeshkian asked them last week to recommend individuals for ministerial posts in the government. The letters have even been sent to conservative political parties, reports say. Some of the criteria for the nominations are lowering the average age of the cabinet, national rather than factional tendencies, as well as honesty.
So far, former Minister of Economy Ali Tayebnia appears to be the most likely choice for the post. He is widely regarded in the reform and moderate camps, and even some conservatives, as having the expertise to rescue Iran from its economic crisis. The economist from Isfahan was instrumental in nearly convincing the entire government during the Rouhani administration that joining the FATF conventions could benefit Iran's economy. However, his efforts were ultimately obstructed by conservatives in the Expediency Council and the Supreme Council of National Security.
FATF is an international organization formed by G7 member countries to protect the international financial system and its recommendations shape banking policies of most countries and businesses who want to protect their own integrity and reputations. Thus, Iran’s international banking is severely impacted by its status in the FATF blacklist.
Lists have been going around on social media of possible cabinet ministers, but none are reliable. Some users are however aware that some of those lists are meant to groom individuals and introduce them to the new president.
The challenge with Pezeshkian's call for young, liberal ministers for his cabinet is that many of the reform-minded and moderate young men and women from middle-class families have left the country. The instability of previous governments has likely left them with little hope of returning to work in Iran. This situation is partly due to the lack of respect for expertise and academic credentials in administrations filled with officials holding fake diplomas.
Forming a cabinet with the goal of addressing numerous longstanding issues is a daunting task, particularly in the absence of young, educated experts and given the poor track record of older politicians across the Iranian political landscape. Cabinets are not easy to change or reshuffle frequently, making this challenge even more complex.
During his campaign, Pezeshkian once asked, "We bring foreign coaches for our football teams. Why shouldn't we be able to seek help from foreign advisers?" His question, which sounded naïve, was met with nothing but frowning faces.
We consider two indicators to capture the economic shocks in Iran: the market exchange rate of USD to Iranian rial and the price index of the Iranian stock market. The importance of looking at both indicators is that the first one is the anchor of inflationary expectations in Iran, and the second one is the best indicator available publicly for capturing the private sector’s response to a shock.
The plots below capture these indicators for the days leading to and after the sudden deaths of the president and foreign minister Hossein Amir-Abdollahian. Based on these indicators, Iran’s economy did not experience any shocks.
Facing economic sanctions for most of the past decade, the Iranian economy is now more dependent on imports than before. This observation is in contrast with how Iranian authorities and some policy analysts in the US describe the Iranian economy as resilient against sanctions by tapping into domestic resources (e.g., Chapter 4 of the book How Sanctions Work by Narges Bajoghli et al., 2024). The term resistance economy coined by Supreme Leader Ali Khamenei is used in such contexts to prove the point. But, if the economy was truly more independent and self-sufficient, why do the economic indicators show considerably more sensitivity to internationally significant news compared to the domestic shocks? While Raisi’s death had little impact on the value of the Iranian currency, heightened tensions with Israel in April resulted in a sudden boost for the dollar in Tehran’s currency markets.
Promoting domestic production and becoming more self-sufficient require some fundamental conditions, such as a healthy private sector, protection of people’s rights, and institutional integrity. Since the inception of Islamic government in 1979, constitutional errors as well as repeated malpractices have compromised these basic prerequisites for improving the economy.
Among the constitutional deficiencies that directly lead to budget deficits and inflation is the lack of independence of the Central Bank of Iran (CBI) as the authority responsible for the implementation of monetary policies. The governor of CBI shall be assigned or removed by the president. In the most recent version of the CBI’s governing law, nine out of ten voting members of the Supreme Council, the body responsible for the IR’s monetary policies, are either directly or indirectly assigned and removed by the president. This creates a conflict of interest as the government’s budget is financed by the money supply under the control of the central bank. Lack of independence for CBI means that each administration could draft a fiscally unbalanced budget, and CBI would compensate for the deficit by printing more money. This is one of the reasons that all governments since 1979 have drafted budgets with considerable fiscal deficits that favor their social policies and ambitions, only to exacerbate inflationary forces.
Privatization is another example of constitutional errors combined with malpractices by corrupt actors. Article 44 of the IR’s Constitution specifies that all major industries shall be owned by the government. That led to approximately 80% state ownership of Iran’s economy after the revolution. Twenty-five years later, in 2004, the article was amended to distribute the ownership of infrastructure and backbone industries among the private sector, cooperatives, and the state. Despite all the efforts of every government since 2004, the latest figures presented by members of chambers of commerce and other officials, as well as the CBI’s research, suggest the government, along with the office of supreme leader, and the public sector constitute between 60-80% of the economy.
Given that privatization has remained on paper for almost two decades of official proclamations, we could safely assume it is not an objective actively pursued by the authorities. Looking at the preconditions and impunities that Ali Khamenei offered to a task force he initiated in 2022 for the same purpose captures the realities and his true intentions for privatization. He assigned the vice president at the time, Mohammad Mokhber, to lead the privatization task force. While the majority of the members of the task force, including Mokhber himself, have on-going criminal cases in the IR’s courts for corruption, they are provided with judicial impunity, no parliamentary oversight is allowed, and there will be no transparency on price discovery mechanisms or accepting bids from the public.
In such a context, no single president could change the course of the country or the public’s perception of the economic conditions. It appears that some of the candidates in the recent presidential race had come to terms with this lack of power. Take the president-elect, Masoud Pezeshkian, who in his televised debate simply stated that he is nominated to execute what the Supreme Leader will envision and order. He did not even try to present any economic plans during his campaign.
The economic mismanagement in the Islamic Republic (IR) does not originate from any particular administration, nor is it corrected by successive governments. Over the past forty-five years, the IR has consistently made errors that have worsened the livelihood of the people year after year. Such malpractices, rampant corruption, and constitutional barriers to economic growth have inevitably led to a loss of public trust in the institution of the IR.
One consequence of this distrust is that inflationary expectations are anchored to the market exchange rate of the USD rather than the Central Bank of Iran’s interest rate adjustments. Similarly, the economy does not react to domestically disruptive news in the same way it responds to internationally significant events. While public distrust renders almost all economic policies of the IR ineffective—regardless of whether the government is reformist or conservative—the international community's role becomes increasingly significant for the Iranian public.
Given its inherent weaknesses, Iran’s economy is more vulnerable to foreign sanctions. The economy is more than ever dependent on imports. The agricultural sector is threatened by serious drought and water mismanagement. The industrial sector is worse off than a decade ago due to chronic negligence in investing in fixed capital formation, and the private sector is rapidly declining due to unequal competition with IRGC-affiliated actors that have deep pockets and benefit from influence over state institutions. Therefore, sanctions that target oil exports and revenues are effective in limiting the Islamic government’s ability to project power in the region and engage in domestic repression.
