Iran General NewsIran's oil party is over, economists warn

Iran’s oil party is over, economists warn

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ImageAFP: Iranian President Mahmoud Ahmadinejad will have a hard time meeting his election pledge of "putting oil money on people's tables" as crude prices tumble, industrial investment shrinks and spending on imports soars.

ImageTEHRAN (AFP) — Iranian President Mahmoud Ahmadinejad will have a hard time meeting his election pledge of "putting oil money on people's tables" as crude prices tumble, industrial investment shrinks and spending on imports soars.

Ahmadinejad swept to power in 2005 on a populist campaign of ploughing huge amounts of cash into local infrastructure and granting low-interest business loans to create jobs.

In the financial year 2007-8 to March, government coffers pocketed more than 80 billion dollars in oil earnings — half its total revenue and a dramatic 31 percent leap over the year for OPEC's number two exporter.

Oil prices surged to record highs in July of close to 150 dollars a barrel, a mouth-watering figure for the energy-dependent nation. But the price has since plunged to well below 70 dollars amid fears of a global recession.

"Iran's oil party is over," "OPEC approaching bankruptcy" and "Alarm tolls for Iran's economy as OPEC oil price drops," are some of the gloomy headlines in the local press.

Crude income accounts for 80 percent of foreign earnings, making the economy highly vulnerable to oil price shifts, and Iran is calling for a two million barrel per day output cut when OPEC meets on Friday.

Asked by reporters about his favoured price, Oil Minister Gholam Hossein Nozari was clear: "The higher, the better."

Iran sells about 900 million barrels of oil a year, so a 60-dollar price drop means the government will lose 54 billion dollars in income.

The budget for the year to March 2009 is 307 billion dollars, 25.6 percent up on last year, adding to concerns that the government's expansionary policies are stoking inflation now running close to 30 percent.

"Even though this year's budget was based on 40 dollars a barrel, when we did the maths, it turned out that if prices go below 60 dollars per barrel, the country will face a budget deficit," MP Hadi Haghshenas told AFP.

Estimates among MPs and economists for the deficit range from seven billion dollars to a whopping 30 billion dollars.

Economist Saeed Laylaz warned that lower oil prices would ultimately have an impact on Iranian wallets, despite massive subsidies on fuel and other basics such as water.

"If the oil price falls below 85 dollars a barrel for a long time, the government will have to make it up by collecting more taxes and this means more economic pressure on people," he told AFP.

Tax is the government's second biggest source of income but this month it faced nationwide strikes in major bazaars over an increase in value-added tax.

The protests led to a suspension of the tax, but the government has now drafted legislation calling for the staged removal of subsidies — currently estimated at 100 billion dollars — on fuel and water.

The legislation, which also calls for cash payments to compensate for the higher prices, has been interpreted by observers as an early campaign move by Ahmadinejad who is running for re-election in June.

Ahmadinejad has come under fire over his policies, and as a result several key economic figures have been sacked, including the central bank head and economy minister.

Economists have lamented a focus on encouraging consumption which has seen imports surge, rather than investing in domestic industry and saving for the future.

"The government could have been restrained in spending its petrodollars and avoided this rampant inflation by using the money for investment, not to encourage consumption," Laylaz said.

Imports topped 45 billion dollars in 2007, a worrying figure for a country that is under Western economic sanctions over its nuclear drive, making purchases from abroad even more costly.

Laylaz said the annual rate of investment growth had slid to three percent from 14 percent in 2001, a trend that was highlighted by power cuts in the summer.

"We should look after foreign exchange reserves and avoid unnecessary spending such as imports of luxury goods," new central bank head Mahmoud Bahmani said this month.

His sacked predecessor Tahmasb Mazaheri complained that the policy of creating employment by simply injecting money into the economy was "a mirage."

MPs have summoned Bahmani to appear before parliament to explain the budget deficit and report on the status of a government oil fund.

Saeed Shirkavand, a deputy economy minister in the previous government, said petrodollars should have been kept in the Oil Stabilisation Fund (OSF), which was set up during the 1997-2005 presidency of reformist Mohammad Khatami to guard against price fluctuations and to finance private sector projects.

"The new government however started spending every year's earnings in the same year and this has increased our dependence on oil money. This will bring serious problems," Shirkavand told AFP.

He said that instead of investing in manufacturing capabilities for example, the money was being used for short-term items such as petrol imports or foodstuffs — even apples and oranges.

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