Two days after being endorsed for his second term by Supreme Leader Ayatollah Ali Khamenei, President Mahmoud Ahmadinejad was today sworn into the presidency for another four years before parliament. Having faced two months of unprecedented street protests and political opposition to his widely disputed re-election, the inauguration ceremony marks a period of uncertainty for the president who in recent weeks has also antagonised leading conservatives over controversial cabinet reshuffles. Speaking before the gathered assembly this morning Ahmadinejad said he would ''protect the official faith, the system of the Islamic Revolution and the constitution'', reportedly also promising to ''protect the freedom and dignity of individuals''. Although taking the opportunity to defend the election results and slamming foreign powers for disrespecting Iran’s legitimate rights and democratic system and appealing for national unity, Ahmadinejad’s speech was relatively low-key, reflecting perhaps for the first time an understanding of the sensitivities to his rule not only from opposition on the streets but from an increasingly observant parliament. As the president spoke parliament was heavily guarded by thousands of security force personnel put in place to prevent further anti-government protests.

On the political front the coming weeks will be crucial for the Ahmadinejad as he has a two-week window to present before parliament his new cabinet line-up. If Ahmadinejad’s recent actions are indicative of his future choices he may face a though time getting the conservative dominated parliament to ratify his new cabinet. Ahmadinejad crossed even many of his own key backers when he recently failed to promptly dismiss his pick for the post of First Vice President Esfandiar Rahim Mashaie after effectively receiving orders from the Supreme Leaders to do so.The crisis nearly lost Ahmadinejad a vote of confidence by parliament on his whole cabinet as rumours had it at the time that a total of four cabinet members had resigned. This would have meant that over half of Ahmadinejad’s 21-seat government would have been replaced over the past four years, leading to an automatic confidence vote. In the end Mashaie (a close friend and relative of Ahmadinejad) resigned from his post, although promptly appointed by the president to as a key aide, Intelligence Minister Gholam Hossein Moheseni Ejeie was sacked while Minister of Culture and Islamic Guidance Mohammad-Hassan Saffar-Harandi resigned only to have his resignation rejected. As it is, a crisis with parliament was averted. However, going forward parliament will be an important bulwark against the president to ensure that he remains close to the Supreme Leader whose own legitimacy was severely tarnished by his unequivocal support for the president’s re-election. Compounding this greater scrutiny is of course the ongoing protests on the streets seen on Monday when Ayatollah Khamenei officially endorsed the president and on Thursday last week when protesters gathered to mourn their dead. The protest movement in turn continues to have the support of presidential candidates Mir-Hossein Mousavi and Mehdi Karroubi and former reformist president Mohammad Khatami, while powerful cleric Ayatollah Ali Akbar Hashemi Rafsanjani continues to be a critical player in the election-opposition.

Economic Challenges

As Ahmadinejad is sworn in to a second term as president he will be confronted with myriad economic challenges. Ahmadinejad's first term in office was dogged by widespread criticism over his handling of the economy, criticism which was emboldened by his frequent re-shuffling of key cabinet positions and central bank leadership; given the immense challenge his authority has faced in the weeks following the 12 June election it is unclear how the embattled president will proceed on the economic front.

Iran is one of the hardest-hit economies in the Gulf region this year, having squandered much of its oil earnings on inefficient state-led projects and a surging import bill. UN and Western sanctions over the country's controversial nuclear programme have exacerbated the economic strains of weaker global crude prices, OPEC imposed production cuts, plus a depressed housing market and stock exchange domestically. Despite being the second-largest oil producer in OPEC, Iran is the only oil-producing country in the region not to announce fiscal or monetary stimulus measures since the global credit crisis emerged, and is expected to experience a severe recession this year. Although global commodity prices remain well off their 2008 averages despite a recent rebound, Iran's domestic inflation remains in double digits and ranks among the highest in the world. The country is also facing persistent double-digit unemployment, particularly among the country's well-educated youth, and much-needed foreign investment continues to be driven off by Iran's tense diplomatic relations with the international community.

Although Ahmadinejad has promoted reform legislation to realign spending and income, including the institution of a value-added tax to boost non-hydrocarbon revenue and subsidy restructuring to eliminate the burden of generous petroleum subsidies, these measures were met with stiff public and legislative opposition during the president's first term. Although the president's economic team has vocally supported the implementation of these measures in the weeks since his re-election it is unclear whether Ahmadinejad will be willing to risk further damaging his popularity by pushing forward with the unpopular initiatives and how much support he holds among the members of the Majlis to do so. The president looks set to push forward with the widespread privatisation of the country's state-run industries although potential investor interest was likely damaged by the post-election protests. Consequently, given the president's proclivity for costly populist policies, IHS Global Insight expects inflation to remain robust in the near term and economic activity will be slow to recover.

Outlook and Implications

Ahmadinejad’s government faces key challenges ahead on the political and economic fronts. The government’s foremost priorities will be to restore some credibility and legitimacy and to reassert its authority over a dissident protest movement in order to have enough leeway to deal with legislative issues both political and economic. Meanwhile, although it has domestically fallen to the back of the priority list, Iran’s nuclear programme looms ever large on the international agenda. Fears that the government’s broken legitimacy and the critical lack of negotiating impetus on Iran’s side will complicate future talks are certainly justified. The way forward will by no means be an easy ride for Ahmadinejad particularly as the Supreme Leader may want to re-assert his own traditional role as a neutral powerbroker and a magnanimous ruler over the often-obstinate president going forward. His public letter calling on Ahmadinejad to dismiss Mashaie and his lukewarm body language at Monday’s endorsement, preventing the president from kissing his hand, could be signs to that end. On the other hand, Khamenei’s own image is now closely linked to that of the president and for that reason his support for Ahmadinejad will remain in place. Meanwhile, we can expect continued uncertainty in the near term as Iran’s political crisis is far from over.

Global Insight (Reino Unido)