The Iranian government has set itself the priority of achieving political reform, believing that its victory over conservative forces in the February 2000 parliamentary elections gives it the authority to deal with what President Khatami has described as Iran's "sick economy." Despite good intentions, President Mohammed Khatami has done little to change the overall pattern of Iran's macroeconomic policy. While many observers hoped that the new president would speed up the reform process, he has been bothered by entrenched political opposition in the Majlis (parliament) and pressure from the powerful bonyad (religious foundations) and by external debt repayments. Pending the outcome of the political battle, the government has to deal in the short term with a chronically weak currency, high unemployment, and the arrival of 800,000 young people on the job market every year. The lack of economic opportunities and social freedom has led to growing discontent, especially among young Iranians, and may result in extended civil unrest and an increase in emigration. Returns in the June 2001 presidential election gave President Khatami the thumping victory which is needed to revive the economic, political, and social reform process.
A key factor in Iran's economic prospects is whether the country will be able to break its international isolation which will have to be overcome in order to integrate the country into the world economy and to bring much-needed foreign investment into the Islamic Republic. This depends in particular on the lifting of U.S. sanctions. Signals show that Iran's rehabilitation is a desired U.S. objective if the reformists carry out their agenda. Iran's further international and domestic economic progress, therefore, depends in large part on the outcome of the political contest between reformers and conservatives in Tehran. Economic development will also depend on the success of privatizing enterprises in the inefficient state sector, to which about 60 percent of the current budget expenditure is allocated in subsidies and other support. Finally, to have the financial means to cope with needed reforms Iran will try to keep oil prices stable on a high level.