(Bloomberg Opinion) -- After the assassination of its top nuclear scientist last week, the leadership of the Islamic Republic is expected to hold off domestic pressures for retribution, and instead hold out for some consideration from the incoming administration of President-elect Joe Biden. The regime knows any retaliatory strike — whether directly against Israel, which it blames for Mohsen Fakhrizadeh’s killing, or more symbolically against American or Arab targets — will greatly complicate its efforts to get out of the straitjacket imposed by President Donald Trump’s “maximum pressure” campaign.
Iran desperately needs access to money to shore up an economy devastated by the combined effect of Trump’s sanctions and the pandemic. For Tehran, the immediate access to capital is a precondition for any negotiations with the new dispensation in Washington. Biden, for all that he wants a return to diplomacy, can loosen the straps only so much: His own hands are tied by strong opposition at home and pressure from American allies in the Middle East.
The best he can do in the short term is encourage Iran's access to multilateral credit—specifically, from the International Monetary Fund. Opposition from the Trump administration prevented Tehran from getting the roughly $1.5 billion in special drawing rights (SDR) to which it is entitled as a member-nation, and a $5 billion line of credit to fight the pandemic. By signaling its encouragement, Biden would give the government of President Hassan Rouhani a chance to save the Iranian economy from the immediate danger of hyperinflation.
In turn, it would give Rouhani an opportunity to demonstrate, to the U.S. and the world, that it can use external finance for government spending that serves its people, rather than line the pockets of the Islamic Revolutionary Guard Corps and its extractive businesses and foreign activities.
The government will then have until the presidential election next June to demonstrate competence and a growth agenda to voters. This might just give any reformists who aspire to succeed Rouhani a chance to compete with the militarized economic model of the hard-liners in presidential politics. For a reformist agenda to have any chance of gaining traction at the ballot booth, the government must also start to rein in corruption and limit financial lifelines to the IRGC, and to privilege ordinary Iranian citizens instead.
It should start with a tighter monetary policy, and more forcefully regulate the stock market and the Iranian banking sector, specifically around contracting to companies connected to the military. An effort to provide stimulus to independent small- and medium-sized businesses would be the smartest way to favor citizens over the IRGC.
This would also address the concerns of those who oppose financial aid to the Iranian regime on the grounds that the funds would be used, not for public health or to support economic activity at home, but to finance nefarious activities abroad, including proxy militias and terrorist groups across the Middle East.
But the onus on keeping the money away from the IRGC need not fall entirely on the government. There is a way to put guardrails on multilateral funding; it’s called “conditionality,” and the IMF has employed it frequently over the years. The Fund can structure the debt to fund public health, enable small-business stimulus and encourage central bank independence and management of the currency.
The Fund documents its terms and history of restrictions on lending to its member states in the Monitoring of Funds Arrangements Database. It is not uncommon to find restrictions on credit facilities (as with, for example, a recent package to Sierra Leone), on “fiscal slippages,” or unplanned budgetary outlays, particularly to state-related enterprises, as well as increased supervision of central banks and their interaction with state-owned financial institutions. Because funds are dispersed in increments, conditionality can have real teeth.
Iran is entitled to access to financing through the IMF based on a quota, informed by a member state’s relative position in the global economy (its reserve position, its GDP and a measure of economic openness), This quota determines the member’s share in the allocation of special drawing rights, the IMF’s “currency” or units of account. The additional funds the IMF has made available to members are part of a Covid-19 relief package, including access to emergency credit facilities and debt relief initiatives.
Critics will argue that even if the external funding is spent legitimately, it will free up other funds for the IRGC’s mischief. The U.S. and other nations threatened by Iran will no doubt keep a close watch for any indications of increased spending by, say, Hezbollah in Lebanon or Iran-backed militias in Iraq.
But ultimately, the responsibility for economic recovery and re-entry to global markets lies with the regime in Tehran. A $5 billion IMF loan will not solve Iran’s economic crisis, but it would help put out some fires, and might just create the political space for a reformist agenda and resumption of negotiations.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karen E. Young is a resident scholar at the American Enterprise Institute.
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