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  • Iran Economy

    Here's an analysis of the Iran economy under Ahmadinejad.

    Spending Threatens Iran's Recovery
    17 Aug [Forbes] [Oxford Analytica] Ahmadinejad's populist initiatives and questionable data cast doubt on long-term stability.

    The populist polices of Iranian President Mahmoud Ahmadinejad's first term represented an extreme version of the self-inflicted harm the country suffered under his predecessors. While the focus in Iran is firmly on the post-election political struggle, the economic dimensions and consequences of the crisis are potentially significant.

    Economic Issues and the Election
    The economy was one of the most important issues in the election campaign:

    --In the months running up to the election, bumper oil revenues allowed Ahmadinejad to increase public expenditure--mainly in the form of increased pensions, salaries, subsidies and handouts of goods and cash--without running down foreign currency reserves.

    --The opposition attacked the public spending bonanza as a crude ploy to buy votes and alleged that Ahmadinejad emptied the large reserves of the Oil Stabilization Fund. It is hard to verify those claims, as the fund's holdings are not made public.

    --Opposition candidates (and much of the public) did not believe the figures put out by Ahmadinejad, and accused him of deception regarding the true state of the economy and state finances. There were marked differences between the economic and social data presented by the opposition candidates and those put out by Ahmadinejad.

    --In some cases Ahmadinejad has moved the goal posts: For instance, the definition of an employed person used to be someone who works at least 16 hours a week, but Ahmadinejad's government has reduced that to just one hour a week, allowing him to claim that the unemployment rate has fallen to 10% from the 13% he inherited in 2005.

    Economic Protests
    Since the suppression of post-election demonstrations, opposition supporters are finding new ways to protest. Some have started to avoid products produced by companies that advertise with the national broadcasting company (which is strongly pro-Ahmadinejad). ...

    Strife Impact
    But otherwise, economic life has more or less returned to normal, after the damage to property and disruption to business caused by the protests. Calls for a general strike came to nothing, and there is no sign now of such calls being revived.

    Current U.N. and U.S. sanctions raise business costs and discourage foreign investment from the West. Even if sanctions are tightened, they are unlikely to inflict significant additional damage, except in the improbable event that they targeted Iran's oil exports.

    Prospects
    Any major drop in world oil prices from current levels (for example, to $30 to $40 dollars from $70), coupled with the emptying of the Oil Stabilization Fund would quickly undermine the government's capacity to maintain both expenditure and foreign currency reserves, which seem to have held up so far). That would force Ahmadinejad to rein in spending or risk a collapse of the rial, especially if there were signs of problems repaying foreign debt.

    However, he is unlikely to adopt more prudent economic policies in his second term, instead responding to the wave of unrest and demonstrations by ratcheting up handouts and public expenditure even further. ....
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