By Amir Taheri
October 18, 2010
No one knows what political epitaph would eventually describe Mahmound Ahmadinejad’s colourful tenure as President of the Islamic Republic in Iran.
However, judging by his Panglossian optimism, which borders on naiveté, one may suggest the following: ‘ He was undone by his illusions.’
To hear him tell it, the Islamic Republic is now one of only two powers offering mankind rival visions for the future. (The other one is the American ‘Great Satan’.) On his return from a recent visit to New York, he also claimed that he is more popular among ‘the American people’ than President Barack Obama.
(Don’t say: that’s no surprise!)
Many Iranians have decided to treat ‘their’ president as a stand-up comedian whose chief function is to provoke and entertain.
To some Iranians, however, fear that Ahmadinejad’s cocktail of empty boasts and dangerous provocations, which may end in war, has already led the country into what could be its most serious economic crisis since the early 1960s.
The annual economic report of the Central Bank of Iran (CBI), published this week, confirms that fear by painting a grim picture.
According to the report, Iran’s population rose from 70 to 73 million while gross domestic product (GDP) either stood still or actually dropped. This is the second year running that the bank gives no figures for economic growth, persuading most economists that the GDP has actually declined. There is ample evidence in the report to confirm that view. The value of the rial, Iran’s national currency, has dropped by around 20 per cent compared to a basket of leading currencies. In the past few weeks, there has been a rush on the gold market, recalling the old days when the glittering metal was regarded as the sole reliable sore of value. Surprised by the sharp rise in the price of gold, the gold bazaars in Tehran, and several other major cities, simply pulled down their shutters. The gold merchants were promptly accused of wanting to keep their gold to sell at an even higher price later.
The gold rush in Tehran is matched by the rush to withdraw deposits fro banks to buy foreign currency, especially the US dollar. This quest for liquidity has hit the hitherto buoyant property market very hard with average prices falling by 21 per cent during the past 12 months.
Government finances are so tight that some private contractors have not been paid for more than a year. Doctors working for state-owned insurance schemes have not received salaries since last March.
Government income in real terms has dropped significantly. For example, oil exports dropped by 13/3 per cent or over 600,000 barrels a day, the highest fall since the late 1970s when the country was passing through the chaos of the Khomeinist revolution. This means a net loss of income for the government at around $16 billion.
Partly to cover that loss, President Ahmadinejad has decided that his long cherished, but always postponed, plan for ending government subsidies should be implemented within the next five months. Many economists believe that ending the subsides, which cost the public treasury a whopping $20 billion a year, is long overdue. Most of the existing subsidies were introduced under the late Shah, a move seen by critics as an attempt by the regime to buy the silence of the poor masses.
That the Iranian economy is in recession is made clear by two figures.
The first is a seven per cent drop in imports to $55 billion with non-oil exports sanding at $21 billion. Because almost all of Iran’s non-traditional industries depend on imported raw material and parts, the figure indicates a significant slowdown. The second figure is a 40 per cent drop in private applications for new building permits. This means that the building industry, Iran’s most dynamic for over a decade, has suffered a major setback.
The CBI report contains two items of good news. The first is the fall in the rate of inflation to 11 per cent, although several independent studies still put it at 15 per cent. The second is government’s foreign currency reserves, built up to deal with sanctions imposed by the United Nations.
Ahmadinejad believes that the two above factors provide the ‘ ideal combination’ for ending the subsidies at break-neck speed.
The first subsidies to go concern 16 key items of mass consumption including water, bread, electricity, gasoline and bus fares in major cities. Cutting these subsidies alone would save the government around $12 billion a year. However, it would also increase the cost of living for the poorest families by around 20 per cent.
According to the Ministry of Industries, ending subsidies could also damage 23 major industries including iron and steel, chemical and pharmaceutical, construction and public transport. Some industries may be driven out of the market by cheaper imports from such countries as China and India. At a time that the Iranian economy is losing around 3000 jobs each day, the collapse of a major segment of the industrial sector could plunge he labour market into an even deeper crisis. Right now, unemployment rate in Iran stands at 15 per cent. The collapse of subsidies industries could push it to 20 per cent or more.
To be fair, not all of this is of Ahmadinejad’s doing. A good part of the current crisis is due to the global recession that has hit virtually all countries. However, there is no doubt that Ahmadinejad’s early profligacy is partly responsible for today’s tight finances. The UN imposed sanctions, for which Ahmadinejad is partly to blame, also bear part of the responsibility. Nor could one overlook the fact that Ahamdinejad’s policy of gratuitous provocation abroad has had a negative impact on the economy by persuading some Iranians that the country is heading for war and that the wisest course is to buy gold and foreign currency.
As is always the case, the poorest Iranians are likely to end up paying the bill for a wayward president’s questionable illusions.