Iran feels economic pain as oil prices fall

Hasan Sarbakhshian ~ Associated Press
A money changer sits next to various bank notes Thursday in Tehran, Iran. Recriminations abound in Iran as falling oil prices are hurting the Iranian economy.

TEHRAN, Iran -- Three weeks ago, a hard-line cleric close to Iran's president gloated publicly that the world financial crisis was God's punishment on the United States. The laughter, however, was short-lived.

Iran plunged this week into a bitter storm of political recrimination, largely directed at President Mahmoud Ahmadinejad, as officials and ordinary Iranians realized with shock that the Islamic republic faces a severe economic crisis of its own.

The reason: As oil prices plunge because of the global slowdown, Iran is caught in a classic crunch. Ahmadinejad's government failed to save enough of the billions in oil windfall it earned during the good years to now cushion the bad.

The same crunch afflicts Venezuela and to a lesser extent, Russia, as all three struggle with falling oil prices.

But in Iran, the economic crisis has quickly turned political. Economic woes are the key issue as Ahmadinejad -- already deeply unpopular and suffering from exhaustion, he said this week -- seeks re-election next summer in a tough vote. And they are shaping up as his weakness.

Critics say he has recklessly squandered Iran's oil windfall on costly, subsidized imports, from fruit and other goods to the gasoline the country must buy overseas because of a refinery shortage, while failing to take any needed reforms.

"The Iranian people got a golden opportunity in history. But it was buried under this government's wrong policies," said Mohsen Safaei Farahani, a former lawmaker and reformist economist.

Among the dire statistics made public this week: The government may have as little as $9 billion left in its hard-currency reserve, the rainy day fund set aside to bolster the currency, import goods or pay off debt, according to one official, an ally of the president, who gave that figure to newspapers.

Other officials immediately disputed that, saying Iran still had closer to $20 billion or $25 billion in the fund.

But the relatively low figures shocked the country, leading one state agency to send an investigative report to Iran's supreme leader, Ayatollah Ali Khamenei, and parliament Monday, accusing Ahmadinejad's government of financial violations. Among the accusations: His government unlawfully withdrew money from the fund.

Even if Ahmadinejad is not re-elected in June, it is unclear how much Iran's foreign policy would change. Khamenei, a hard-liner, has the final say in all state matters and strongly supports Iran's nuclear program and dislike for the United States.

But the combative tactics of Iran's current policy could alter, especially if a more tempered reformist is elected.

There is little question Iran should be swimming in money, according to an Associated Press review of Iran's economic statistics: The country has at least tripled its oil earnings in the last few years as prices spiked.

Precise government numbers are hard to come by. But Iranian economists contacted by the AP estimated the government earned more than $200 billion from oil exports in the last three years, during Ahmadinejad's tenure, or an average of $66 billion a year.

That compares with just $173 billion earned in the previous eight years, or an average of $21 billion a year.

OPEC put the value of Tehran's exports at $64.9 billion last year, up 22 percent from two years earlier and more than three times as high as 2001, when production was only modestly lower. But those figures were before prices soared to an all-time high above $145 a barrel earlier this year. Benchmark prices have since tumbled, with light, sweet crude for December delivery at $65.96 a barrel on the New York Mercantile Exchange.

With that kind of cash inflow, Iran could easily have built a $100 billion hard-currency reserve, said another economist, Mohammad Bagher Nowbakht.

Oil is by far Iran's most important product -- the world's fourth-largest oil exporter, the country depends on oil revenue for a whopping 80 percent of its government budget, the same economists estimated.

For Ahmadinejad, the hard currency dispute was just the tip of the bad economic news.

Tehran's stock index also plunged about 12 percent in a week, its lowest close in years. Soaring prices continue to hurt ordinary people, with inflation estimated at 27 percent or more.

Iranian economists warn publicly of a budget deficit next year if oil sells at below $60 per barrel. The International Monetary Fund is more dire, estimating Iran would need prices at $90 per barrel to stay in the black.

Ahmadinejad, under severe political pressure, named five top officials Monday to study the global financial crisis' impact even as critics called it too little, too late.

Former President Akbar Hashemi Rafsanjani, still a powerful figure, late last week publicly cautioned Ahmadinejad and the cleric who had gloated about America's crisis, Ayatollah Ahmad Jannati, to end their populist slogans and become more serious.

"The consequences of this crisis hit everybody," Rafsanjani said. "The first wave of the crisis are the low oil prices that have reached us. This is a big loss."

The president was already under attack from both reformers and conservatives, who brought him to power but now complain he spends too much time on fiery anti-U.S. rhetoric rather than managing the country.

Middle-class Iranians, who have seen their standard of living fall, often speak scornfully of his economic naivete. In July, he predicted oil prices would never fall below $100 per barrel.

Ahmadinejad said earlier this week that he suffers from exhaustion.

Yet he appears unbowed. In a speech Wednesday, he called the world financial crisis a U.S. creation, although he stopped short of outright calling it God's punishment.

"They say it is a global crisis. No, this crisis is your creation," he said of the United States, addressing a group in western Iran in a speech carried on state TV. "You plundered moneys and are in debt. Now you want to take money from the pocket of other nations again."

The crisis, he said, "is the result of your behavior, the result of you distancing from divine rulings, the result of trampling morality, the result of aggression and lying. The only solution is a return to morality."

Iran's economy was in some trouble before Ahmadinejad took office, but many economists blame him for making it worse.

They say Iran can only recover by ending expensive fuel subsidies and luring more foreign investment to develop oil and gas fields and build refineries.

But Ahmadinejad was elected in 2005 on a populist agenda promising to bring oil revenues to every family, eradicate poverty and tackle unemployment. In office, he handed lucrative contracts to cronies including former members of the hard-line Republican Guards, and tried to develop fields on Iran's own.

His efforts to inject liquidity into the economy to create jobs, something economists say they repeatedly warned against, led to higher inflation.

One independent economist, Mousa Ghaninejad, said Ahmadinejad encouraged spending oil revenues to subsidize imports. Iran imported more than $56 billion in goods last year, a 50 percent increase from three years ago.

The government did impose some limited fuel rationing -- a wildly unpopular measure. But fuel subsidies are still high and drain the country of hard currency.

Iran also spends large amounts on its nuclear program and sends money to groups such as the militant Hezbollah in Lebanon, including an estimated $1.2 billion to Hezbollah in 2006.

With money tight, it's unclear what will give.

If Iran does see a budget deficit next year, it would need to either trim spending, print more bank notes, or borrow money. The country is thought to have $28.6 billion in foreign debt already.

That makes many Iranians nervous, especially about the state of hard-currency reserves. Mohammad Nahavandian, the head of Iran's chamber of commerce, predicts dire times. The government's plans, he said, "will run into trouble."

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