Iran pins economic hopes on oil - just as price drops

http://www.businessday.co.za

The sharp drop in oil prices recently poses serious problems for Iran at a time of mounting public discontent over the state of its economy and the possibility of more U.N. sanctions over its disputed nuclear program.

The declines in Iran’s biggest source of revenue strain an already stretched budget and hamper a key tactic used by President Mahmoud Ahmadinejad to keep popular support amid the economic woes - his distributions of some public funds to supporters and the poor. Critics have called the policy a “charity economy.” “So long as there is a relatively stable oil price — and the regime isn’t plunged into an economic crisis — it can withstand a lot,” said Gala Riani, an Iran expert with IHS Global Insight in London.

“This is not a regime that has relied on political reform for its legitimacy.” But oil prices have not been stable.

From a peak of nearly $88 per barrel last month, they have fallen to around $70 per barrel on worries that Europe’s debt crisis could impede the fragile global economic recovery and cut demand for crude. The government has based its current budget on oil at $65 a barrel, and the recent price drop cuts deep into revenue which Iran — the world’s fourth largest oil exporter - sorely needs to at least mitigate its economic troubles.

Existing U.N. and US sanctions have placed a stranglehold on foreign investment - particularly Iran’s vital oil sector.

Lending to the private sector has also slowed sharply. A recent Central Bank report showed that loans to the private sector from the country’s currency reserve fund — oil revenue earmarked for investment in the country’s projects rather than use in the current budget — fell to $689 million in 2009 from $3.7 billion in 2007, the year before oil prices collapsed.

The lack of financing has also hit the vital housing sector. Another Central Bank report, for example, found that the number of permits issued to home builders in 2009 fell 30% from 2008 amid limited financial backing by the government, which is the main source of housing loans.

The president’s plan to phase out fuel and food subsidies to save money is sparking discontent and fears that inflation - officially also said to be at around 10% — could surge to near 50%.

So far, the opposition movement that has campaigned against Ahmadinejad following last June’s disputed presidential election seems to have made little move to harness the economic discontent.

But the anger is palpable.

Ahmadinejad got a taste last month when he was heckled with shouts of “we are unemployed” during a speech in Khorramshahr, where newspapers say the city’s unemployment is around 16%. The disruption was a rare public protest during what are normally tightly controlled appearances by the president.

Amadinejad is even getting a bruising from within his own conservative bloc that dominates the government. In mid-May, parliament speaker Ali Larijani criticized giving supporters access to loans.

“We want people to have a life with dignity, not a life on alms,” Larijani said.