IRAN FACES CRISIS AS OIL PRICES COLLAPSE

by Omid Memarian

(IPS) -- As the price of crude oil continued its tumble to less than $35 a barrel Friday, Iranian economists are warning that the fourth-largest oil producer in the world will enter an even deeper crisis should the price remain low, with many also blaming the government's economic policies.

President Mahmoud Ahmadinejad has repeatedly denied the worsening effects of falling oil prices on Iran's economy, which is now is facing a 30 percent inflation rate and more than 10 percent unemployment. However, this week he admitted that plummeting oil prices would threaten the country's fragile economy.

In response to a huge budget deficit next year, Pres. Ahmadinejad plans to cut spending, lift the generous fuel subsidies that have been in place for more than two decades and increase taxes. To keep this year's budget balanced, Tehran needs to sell oil at 90 dollars a barrel.

The Iranian government planned to base next year's budget on a price of $50-60 a barrel. However, Ahmadinejad has said that the government is "obliged to set it at $30 to 35," according to the Islamic Republic News Agency (IRNA).

For many Iranians, including economists, the question is what the government has done with the massive oil revenues earned over the past four years. Since Ahmadinejad came to office in 2005, the country has slid into a painful economic crisis.

Bahman Ahmadi Amouee, a prominent journalist and the author of "Iran's Political Economy After the Revolution," recently wrote an article questioning the way Ahmadinejad's government has spent some $238 billion of oil revenues since 2005. He said nobody knows where the money went.

"At the time of former president Mohammad Khatami (1997-2005), with much lower oil prices, unemployment and inflation were lower," Amouee told IPS in a telephone interview from Tehran. "[Today], with the massive amount of oil money, the inflation rate is 30 percent and unemployment is on the rise."

"The money could have been spent in the hidden part of Iran's economy, such as in projects related to nuclear development, the military and arms industry," he said.

The budgets for Iran's police, ministry of intelligence, military and nuclear program are not specified in Iran's annual budget and the government traditionally does not provide any detailed information about them.

"The statistics show that there has been no success for Ahmadinejad. They have spent the money in places that they were not supposed to spend," said Amouee.

Regarding Ahmadinejad's new economic reform plan, Amouee said, "The government program to eliminate energy subsidies will raise inflation to 50 percent."

Under Ahmadinejad's economic reform proposal, the government would replace subsidies with cash payments to individuals.

Ahmadienajd, who will run for re-election next June, came to office on a platform of improving the standard of living through fairer distribution of revenues, particularly from oil. However, he has repeatedly refused to listen to some of Iran's most prominent economists, who in two separate letters criticized his economic policies and asked for swift changes.

"If the economic turmoil continues for a year, each Iranian will lose $1,000 -- 20 percent of the annual income -- meaning that Iranians hurt more than Americans from the economy's worsening situation," Saeed Leylaz, an analyst and economist in Tehran, told IPS.

"The Iranian Parliament has not been able to get the crisis under control, and if the economic crisis in Tehran gets more serious, like the recent crisis in the Bazaar, it has the potential to become a social crisis -- it will weaken the government, which doesn't have any checks and balances on its activities," added Leylaz.

Ahmadinejad's economic reform plan includes a value added tax (VAT) program that will force Iranian businesses to hand over 3 percent of their sales revenues to the government. When the government announced the VAT in October, Iran's Bazaar traders, a powerful section of country's financial system, went on strike. Ahmadinejad was forced to postpone the VAT for two months.

"President Ahmadinejad has stopped repeating his idealistic economic slogans, simply because of his terrible record over the past four years," said Laylaz, adding that, "There is no place for critics in the media because they are under immense pressure not to criticize the government. It's fair to say 99 percent of Iran's media is dominated by Iran's national TV, which fully support Ahmadinejad. The reality of the Iranian economy is so bad that in a way people cannot believe it."

"I believe that the decline in investment growth will show its damaging effects after 2009, and will be seen in a higher unemployment rate and inflation," said Leylaz.

The UN Security Council has adopted multiple sanctions in response to Iran's insistence on pursuing its uranium enrichment program since 2006. However, many economists believe that it is the government's poor management and plunging oil prices that have most affected the economy.

"More than the sanctions' effect, it's the fall of oil prices that will affect the government," Musa Ghaninejad, a faculty member at the Oil Industry University in Tehran, told IPS. "If oil revenues remain high, the government could import goods with a higher price and go beyond the sanctions, which is what they have done in past years."

"But the decline in the price of oil is a more serious threat to the economy than the sanctions -- although sanctions increase the costs and damage the country's economy," he added.

The worsening economic situation is seen as the major threat to Ahmadinejad's re-election. Among the public, it is the most important issue, and there is little optimism that the president's economic plan will rescue the economy by the polls next June.

"The government's economic reform plan is just a trick. They want people to talk about the future, not the present, but I am not sure these tricks will help them," Saeed Shirkavand, vice minister at the Ministry of Economics and Finance Affairs under President Khatami's government, told IPS.

"People ask, what have been the government's achievements during the past four years? We are in an unpleasant situation in regard to the employment rate, GDP, inflation and other economic variables," he added.

"People are truly dissatisfied with the current economic situation and believe that the government's domestic and international policies are the root of all their problems," said Shirkavand.

"The contradiction in the government's economic policy is mainly because of their simplistic views about the economy," he said, adding that, "The president himself has repeatedly said that he does not think that economics is a science."