Iran budget gap set to widen as sanctions hurt oil exports

Bloomberg

By Dana El Baltaji

Iran’s budget deficit may widen the most since at least 2007, according to the International Monetary Fund, as sanctions by the U.S. and its allies curb the nation’s oil exports.

Iran’s budget gap may swell for a second year to 2.9 percent of gross domestic product, and widen further to 3.9 percent in 2013, IMF forecasts released today show. The economy will contract 0.9 percent in 2012 compared with 2 percent growth in the previous year, the fund said.

The U.S. and European Union are starving Iran of foreign currency by blocking sales of oil, its main export, and other transactions in dollars and euros. Israel has threatened to attack to stop Iran’s nuclear program if the sanctions don’t succeed in curbing it. Iranian leaders say they won’t bow to the pressure, even as the country’s crude output plunges to the lowest in more than two decades.

“Iran’s economic situation is bleak,” Anoush Ehteshami, professor of international affairs at the U.K.’s Durham University, said on Oct. 11. “They’re suffering from a shortfall in oil income, from an inability to trade freely, which means that any transaction has a premium, large or small. They’re suffering from a lack of foreign investment, and the banking sector has been so badly affected that it can’t facilitate economic activity.”

“And finally, there’s the currency crisis,” Ehteshami said. The rial has slumped as much as 40 percent against the dollar since August.

The IMF forecasts annual inflation to accelerate to 25.2 percent this year from 21.5 percent in 2011. Protests against the rising cost of living broke out in Tehran’s markets last week and police used tear gas to disperse them.

Iran’s current account surplus will decline to 3.4 percent of GDP from 12.5 percent in 2011, the IMF forecasts. The Economist Intelligence Unit estimates Iran’s foreign reserves will drop to $70 billion this year from $80 billion in 2011 as sanctions reduce oil exports. Ahmadinejad said in January that the country has $90 billion in reserves earned from crude sales.