January 28, 2009


Anniversary blues in Iran: As Iran’s Islamic Republic celebrates its 30th anniversary, its oil wealth is in decline and the confidence of the past decade looks increasingly brittle. But whatever happens in the June election America needs a fresh approach (Christopher de Bellaigue, February 2009, Prospect)

When Ahmadinejad took over from the reformist cleric Muhammad Khatami, who had completed his maximum of two consecutive terms, the economy was sclerotic but functioning. Khatami had dipped liberally into a rainy day reserve made up of surplus oil revenues, called the oil stabilisation fund (OSF), but his government had also made modest efforts to wean the economy off its dependence on oil and encourage Iranians, impenitent property-speculators, to invest their riyals into manufacturing. Ahmadinejad attracted those Iranians who felt excluded from the Khatami boom or saw it as a drift to western nihilism. He was elected not only because of his piety and humble style of living, but also because of his promise to distribute Iran’s oil revenues among the people. Once elected, this is exactly what he did. Through the state-dominated banking system, he doled out huge sums in loans (worth billions in US dollars) to young people, newlyweds and small businessmen. As he toured the country, where he was received rapturously by the poor, he pledged billions more for infrastructure projects and job creation. The president drew on Iran’s soaring oil receipts to fund his largesse.

According to central bank figures, the government has spent $130bn worth of oil revenues in the past three years. Khatami’s government, by contrast, spent $97bn from the same source over its entire, eight-year life. Repeatedly, senior economists and opposition politicians have warned of the baleful consequences of Ahmadinejad’s policies—with reason, it is now clear. Inflation, which ran at just over 10 per cent when he was elected, is nudging 30 per cent. Iranians’ purchasing power has been eroded, particularly when it comes to housing and food, where inflation exceeds the headline rate. (The president’s decision to reduce petrol subsidies, which most orthodox economists supported, has also had inflationary results.) A policy of encouraging loans to aspiring home-owners created a property bubble that burst in the autumn, leaving many defaulters in its wake. Non-performing loans have risen sharply since Ahmadinejad came to power and now account for some 20 per cent of banks’ exposure. For the first time in a decade, the middle classes are becoming less prosperous. Meat, fruit and vegetables have soared in price; Iranians struggle to afford their seasoned stews and saffron rice. Pistachios, formerly a staple snack in middle-class homes, are now a luxury. “Today it costs $100 to gather the extended family even for a modest meal,” grumbles a trader in the Tehran bazaar, “and for someone making $400 a month, a good wage, that’s a big sum. If you accept an invitation it’s customary to return the favour. So people aren’t accepting invitations any more.”

Ahmadinejad has failed to diversify the economy—an objective so urgent, it was enshrined in a five-year plan for all governments irrespective of ideological orientation. On the contrary, argues Saeed Leylaz, a prominent government critic, Iran’s dependence on oil as a source of budgetary spending has increased more than sevenfold since he came to power. The recent collapse of the oil price, from a midsummer peak of almost $150 to about $35 a barrel in mid-January, is reminding Iranians of their vulnerability to ill winds from abroad. Ahmadinejad demurs: there is no reason why “an Iranian should catch a fever if someone sneezes in the west.”

He claims that he can govern effectively even if the price falls to $5 a barrel. The International Monetary Fund is not so sure; in August the fund stated that Iran would face an “unsustainable” current account deficit if the oil price fell below $75. This, surely, is the rainy day for which the oil stabilisation fund was set up, to maintain government spending at a time of low oil revenues. Yet the OSF, having been repeatedly plundered by the government, is almost empty. Even if oil prices bottom out soon, it seems inevitable that 2009 will bring Iran sharply rising unemployment, persistent high inflation, and an increase in the kind of public disgruntlement that led bazaar traders to shut up shop in October in protest at plans to introduce VAT. (The government backtracked and the shutters came back up.)

According to Tahmasb Mazaheri, a former Central Bank governor, “bitter days” are in store. For the rest of the world, the question is how economic pain will affect Iran’s ability to withstand growing international pressure to abandon its longstanding pursuit of self-sufficiency in nuclear fuel—a status that would allow Iran to make a nuclear bomb. Iranians’ sense of immunity is at last being threatened—and at the tail-end of Bush’s bellicose presidency, when one might have expected it to be strongest. Many recall the last time an oil price slump coincided with a period of strategic peril—during the long and bloody war that Iran fought in the 1980s under Saddam Hussein. Economic as much as military setbacks obliged Ayatollah Ruhollah Khomeini, the first supreme leader of revolutionary Iran, to agree to a ceasefire with Iraq in 1988, a decision that he likened to drinking a “poisoned chalice.” Now, Iran’s adversaries hope, the clerics may buckle again. [...]

Obama and his team may want to wait for the results of the presidential elections in June before exploring their negotiating options. Yet that would be a mistake, for no Iranian president, Ahmadinejad included, has controlled foreign and nuclear policy. In the Islamic Republic, which is built on anti-American sentiment, the delicate process of engaging the US without undermining the official ideology is a job for the largely unelected establishment—made up of Khomeini’s successor as supreme leader, Khamenei, a handful of top officials and other senior clerics and military leaders. This establishment will remain, whatever the poll results.

Indeed, the interests of both the Grand Ayatollah and America--not to mention the Iranian people--would be best served by publicly end-running Ahmedinejad and making it clear he's insignificant to the rapproachment.

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Posted by Orrin Judd at January 28, 2009 1:18 PM
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