Iran's Economy Struggles As Sanctions Take Hold

Iran's economy is struggling. Dramatically lower oil prices and mismanaged government policy, fueled by the growing bite of international economic sanctions, are causing deep problems for the country.

Inflation is pushing 30 percent. Unemployment is growing as the economy stagnates.

The state of Iran's economy will certainly have a huge impact this June, when President Mahmoud Ahmadinejad faces re-election.

Supporters of Ahmadinejad tend to dismiss growing criticism that his policies have been disastrous for Iran's economy. But every now and then, a few candid words pop up.

That happened recently in an editorial in the government-controlled daily newspaper Iran News. Oil prices have plummeted, the editorial reads. The government's policy is doomed to fail. Now it's up to the parliament, the editorial pleads, to minimize damage to the country's economy.

Government Policy Affects Economy

Heydar Pourian also speaks with candor about the economic problems caused in large part by misdirected government policy. Pourian is editor-in-chief of Iran Economics, a monthly magazine.

"First of all, the inflation has been one of the highest in the last 10, 12 years," he says. "It ruined actually any enterprises. I think the excessive expansionary fiscal, monetary and foreign exchange policy, actually, has ruined the economy; and we have to pay for it."

The causes are numerous. They include the vast subsidies the Iranian government pays to keep the price of life's necessities low — from gasoline and electricity, to bread and rice. When oil prices were above $100 a barrel — they reached $147 a barrel last summer — the government reaped an enormous windfall.

But that oil revenue was not used properly, says Ali Shams Ardekani, an economist and businessman.

"From the time that the price of oil went from, let's say $40 to $140, we did not benefit much, in terms of job creation, in terms of improvement on the street, on the railroads, on the transportation, on communications. Then the question is where the money has gone," he says.

Much of that money was used to maintain the subsidies; much of it went to support social welfare programs and promises that Ahmadinejad has made since he ran for president four years ago; some of it simply vanished. A report to the parliament that surfaced recently said that two years ago, more than a billion dollars in oil revenue simply never made it to Iran's treasury.

And although government officials don't like to admit it, economic and financial sanctions are having an impact, mostly on the poor, Ardekani says.

"The vicious policies of those who impose sanctions is mainly to create problems for the population, thinking that these problems will be transferred into problems for the government," he says.

Compensating For Sanctions

Trade sanctions haven't made most consumer goods unavailable, just more expensive.

To cushion the effect of sanctions, Ahmadinejad's government sought to expand the economy rapidly, through deficit spending and growth in the money supply — policies designed to stimulate small businesses and create jobs. What they did mostly was fuel speculation in real estate and spark increasingly higher inflation, which is now just shy of 30 percent, says Pourian.

"To compensate for the effect of the sanctions, it had to come with some expansionary monetary, fiscal and foreign exchange policies," he says. "The government responded in my view to the sanctions, but it may have overreacted."

Many analysts have reached the same conclusion — that Ahmadinejad's government mismanaged the economy.

Conservative analyst Amir Mohebian started out as an Ahmadinejad supporter. Now, he wants new faces running economic policy.

"We need planning and good programming and good management," he says. "Mr. Ahmadinejad tries to solve these problems, but I think that some of the managers, especially the specialist managers in this field, can solve this problem better than Mr. Ahmadinejad. It is possible."

In the meantime, Iran tries to work its way out of its economic ditch by expanding energy exports. Its oil output is limited by OPEC quotas, so it is focusing on boosting natural gas production and sales.

Hojjatollah Ghanimifard, vice president for investment in Iran's oil ministry, said that new contracts have just been signed.

"Especially during the past six months, we could conclude two huge contracts for production of the gas. And who is that with? Well, if you don't mind, because we don't want to make any problem for those companies who signed a contract with us, we do not mention their name," he says. "But as soon as the production comes out, and the market is going to be facing with more of the gas, they would notice who those companies are."

For several years, the oil ministry has pursued foreign investment in its oil and gas fields, only to be stymied frequently by the threat of U.S. sanctions on Iran's potential partners from Asia or Europe.

Iran's deteriorating economy will surely erode Ahmadinejad's prospects when he faces the voters again in June's presidential election.

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