Berlin, 31 October 2008

Iran’s dependence on imports and oil revenues could lead to bankruptcy. And there is growing criticism by conservatives of Ahmadinejad’s economic policies.

In an interview with Roozonline, the economist Said Leylas explains why the financial crisis is hitting the Iranian economy to a far greater extent than it is the US economy. He puts this down to the fact that the Iranian economy is over-dependent on imports and oil revenues. Leylas recalls that President Ahmadinejad recently said that Iran could manage for at least two years without a single dollar, noting that this also meant, however, that Iran would go completely bust after two years because there would then be no currency reserves left.

Leylas remarks that none of the annual budget targets can be met since oil prices have not followed the expected trend. As a result of falling oil prices, the daily budget is now about USD 50 million lower than was planned for in the national budget. Leylas predicts frequent blackouts and a shortage of gas in the future, along with growing unemployment, rising inflation and increased poverty.

How inflation is being stoked

Even in the Iranian theocratic state, society is becoming more prosperous as a result of economic growth, driven by the accumulation of capital and technical progress. However, Leylas observes that the capital accumulation rate in Iran has declined steadily over the last three years. This means that less can be invested, even in electricity and water infrastructure and telecommunications. Thus, the real question is not who will go into government next year, since next year is in any case a lost year.

Leylas lists various factors that will stoke inflation: growing consumption of currency and central bank reserves as well as declining imports. In the past few years, imports have kept inflation under control, but now imports and oil revenues are decreasing at the same time. On top of this, the dollar is rising, as are customs and import taxes, which will result in a decline in market supplies and a rise in inflation.

Leylas has calculated that if the current crisis lasts only a year, Iran’s oil revenues will fall by about USD 60 billion, meaning that each Iranian will have USD 1,000 less on average.

Conservatives critical of Ahmadinejad

As First Deputy Speaker of the “Parliament”, Mohammad Reza Bahonar is not just well versed in economic matters. He has also made a name for himself in completely different contexts: when Queen Elizabeth II knighted Salman Rushdie, he made the following remark: „Rushdie has turned into a hated corpse”.

But Mohammad Reza Bahonar, the conservative politician, who unlike Ahmadinejad, champions a commercial capitalistic economy – with Islamic control of goods, of course – has now spoken out about Iran’s economic problems: he finds fault with the fact that Iran “no longer has substantial currency reserves”, according to the business newspaper Sarmaye on 27 October. As Chairman of Jameye Islamiye Mohandessin, the “Society of Muslim Engineers”, Bahonar said that he has always proposed that as long as oil prices were high, foreign exchange reserves should be saved in a special account.

Bahonar believes that only between USD 8 and 10 billion of national currency reserves will be left by the end of the Iranian year, i.e. by the end of March 2009. It is noteworthy that although Iran no longer sells its oil against the dollar, Bahonar calculates the currency shortfall in US dollars.

He is not alone in his criticism. Mostafa Pour-Mohammadi, head of a state regulatory authority, also thinks that with the approval of the Majles, the Iranian “Parliament”, more national currency reserves have been spent than the law allows. Pour-Mohammadi argues that the government can always ask the “Parliament” for help in the event of a budget deficit. He reproaches the government for having relied too much on high oil prices. It should be recalled that Ahmadinejad appointed him Interior Minister before subsequently removing him. Pour-Mohammadi is accused of being jointly responsible for the massacre of the massacre of the opposition in 1998.

Bahonar criticises the government because it has not kept its promise to reduce the national budget’s dependence on oil by 10 to 12% per year. Oil revenues currently account for more than 60% of the national budget. But if oil revenues are reduced by half, the economy will suffer enormously.

Even Hashemi Rafsanjani, one of the people responsible behind the Mykonos assassinations in Berlin, criticises Ahmadinejad. Rafsanjani fears that the country’s economy will be literally cast to the winds. He has even spoken of the risks of an “economic tsunami”, reported Tabnak on 26 October, warning that “the poor and the workers could lose out” because of the crisis.

Sarmayeh also reported on 30 October that class differences have grown enormously in the past three years.

Sanctions slowly biting in Iran

At the same time, sanctions are being deployed applied against Iran. Sarmaye reported on 27 October that even the smaller banks in Dubai are no longer permitted to facilitate business with Iran. Until now, Iranians who became Dubai nationals could export goods to Iran unhindered. This has now been further curbed as a result of the sanctions policy. Of the 12 regional banks, only two may still engage in export business with Iran, and this is heavily restricted. For some months now, the big banks have had to cease their business relations with Iran.

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Wahied Wahdat-Hagh is a Senior Fellow with the European Foundation for Democracy in Brussels.