Monday, May 01, 2006

Iranian's Plans for Economy Spur Widespread Concern

Nazila Fathi, The New York Times:
As President Mahmoud Ahmadinejad moves to make good on his campaign promise to distribute Iran's increasing oil wealth among its citizens, warnings are coming from across the political spectrum that his policies may be doing more to irritate political and economic tensions than to soothe them.

Concern is also rising over how any actions taken by the United Nations Security Council, which is beginning what is likely to be a lengthy struggle on containing Iran's nuclear ambitions, might be felt by the economy.

On Sunday, Iran again said it would ignore any Security Council resolution against its atomic program. Iran could face economic sanctions, or even military strikes, if it does not comply with the Security Council's demands.

For the time being, at least, oil prices topping $70 a barrel are likely to continue pumping billions into the government treasury. Iran's profits from oil rose last year to more than $45 billion from $15 billion, surging at a rate not seen since 1974, when the country's oil revenues tripled.

In a surprise move just before the spring holidays last month, Parliament reluctantly approved Mr. Ahmadinejad's proposed budget, despite fierce criticism from economists and others. Critics said that his plans for generous spending to create jobs and increase salaries were politically motivated and fiscally unsound. His budget relied on continued high oil profits, they said, and would be likely to invite inflation.

Signs that some see as troubling have already emerged. After Mr. Ahmadinejad lowered interest rates this month in a bid to decrease inflation, Iranians pulled their money from banks, rushing to buy gold coins. And while he is offering loans to encourage small business ventures in the hope of creating jobs, investor confidence seems to be wobbling, which could lead to a reluctance to invest in local industries.

Last summer, after news that Iran had resumed nuclear work prompted international concern, investors withdrew from the market and stock prices plunged. They have rebounded slightly since reaching their lowest levels to date in October, while inflation and unemployment have fanned domestic discontent. READ MORE

"The government has reached the conclusion that it needs to spend large sums of money immediately to keep its allies and the masses of people happy," Muhammad Sadeq Jannansefat, an economic analyst, wrote in the reformist daily newspaper Shargh last month as Parliament battled over the budget. He suggested that Mr. Ahmadinejad, who came to power in June on a populist mandate, was using the oil money to placate his supporters.

The government, Mr. Jannansefat wrote, "wants to distribute money and create jobs, no matter what the consequences are or what kind of jobs it is creating."

Ismail Jabarzadeh, an opposition member of Parliament, predicted that Mr. Ahmadinejad's policies could lead to an inflation rate of 20 percent in a country where inflation now stands at about 14 percent, according to estimates by the International Monetary Fund. "But political upheavals, such as the pressures on our nuclear program, can increase the 20 percent," he said in an interview this week.

Mr. Ahmadinejad defended his economic performance at a news conference this week, saying that his government had started to distribute "justice shares" of government industries among the poor in four provinces. Years of mismanagement, however, have left most state-run industries in disarray, and the shares of little value.

The president also said unemployment has fallen in the eight months since he took office, but a report by the International Monetary Fund in March stated that the figure has continued to hover at around 11 percent.

The president's policies center on injecting $40 billion into the economy this year through the central bank. Although the government did not release details of the budget, officials have said it calls for increased spending on charity groups to help bolster living standards. Mr. Ahmadinejad has also promised loans for housing and to help couples with marriage expenses. Part of the windfall will be spent on imports, which critics say will only weaken domestic manufacturers.

Economists warn that infusing the economy with such a sum of money will bring on Dutch disease, a term coined when profits from natural gas discovered in the Netherlands caused the manufacturing sector there to decline and inflation to skyrocket in the 1960's. It is a malady that often afflicts energy-exporting nations, and symptoms have begun to appear here.

Governments in Iran and elsewhere have long used sudden oil revenues to make short-term economic fixes and ease public discontent. But the most successful have also spent part of the income on long-term economic development, building dams and other infrastructure to help fuel growth. So far, Mr. Ahmadinejad has not specified spending on future long-term projects, although he has said he will finish projects that are already under way.

"Mr. Ahmadinejad does not care about the future," said Saeed Leylaz, an opposition economist and political analyst. "We have no control over oil revenues and cannot rely on it as a stable income. Once people get used to the money and their spending patterns change, they cannot return to their old lifestyle anymore."

Even now markets are filled with imported consumer goods once considered luxuries unnecessary in an economy striving to become self-sufficient.

More than a quarter of the population lives below the poverty line — which opposition economists define as a family of five with an income of less than $278 a month, although the government disputes those figures.

But wealthier consumers are turning away from locally made goods and to imported ones. Lili Abdollahzadeh, a homemaker in Tehran, said she had recently bought a Korean-made Samsung washing machine for $450 instead of the least-expensive domestic one for $350 because the imported machine was of better quality. The price of imported oranges and pears is half the price of locally grown fruits.

Ahmad Tavakoli, an economist and conservative member of Parliament, initially supported Mr. Ahmadinejad but is now among the president's most vocal critics. He has compared the president's policies with those of Shah Mohammed Reza Pahlavi during the oil boom before the 1979 revolution, saying that such policies contributed to the fall of the former government.

"Imports will lead to the decline of the manufacturing sector," he said in a speech broadcast live on state radio in March. "This is called the misfortune of oil, which is a misfortune caused by the decisions of rulers."