AP, Cairo, June 7, 2010 – The sharp drop in oil prices recently poses serious problems for Iran at a time of mounting public discontent over the state of its economy and the possibility of more U.N. sanctions over its disputed nuclear program.
The declines in Iran’s biggest source of revenue strain an already stretched budget and hamper a key tactic used by President Mahmoud Ahamdinejad to keep popular support amid the economic woes – his distributions of some public funds to supporters and the poor. Critics have called the policy a ’charity economy.’
’So long as there is a relatively stable oil price – and the regime isn’t plunged into an economic crisis – it can withstand a lot,’ said Gala Riani, an Iran expert with IHS Global Insight in London. ’This is not a regime that has relied on political reform for its legitimacy.’
But oil prices have not been stable.
From a peak of nearly $88 per barrel last month, they have fallen to around $70 per barrel on worries that Europe’s debt crisis could impede the fragile global economic recovery and cut demand for crude. The government has based its current budget on oil at $65 a barrel, and the recent price drop cuts deep into revenue which Iran – the world’s fourth largest oil exporter – sorely needs to at least mitigate its economic troubles.
There are plenty of those around.
Unemployment, officially reported at about 10 percent, is widely believed to be twice that level. Inflation is falling, but Iranians still complain about rising prices. Existing U.N. and U.S. sanctions have placed a stranglehold on foreign investment – particularly Iran’s vital oil sector.
Lending to the private sector has also slowed sharply. A recent Central Bank report showed that loans to the private sector from the country’s currency reserve fund – oil revenue earmarked for investment in the country’s projects rather than use in the current budget – fell to $689 million in 2009 from $3.7 billion in 2007, the year before oil prices collapsed.
The lack of financing has also hit the vital housing sector. Another Central Bank report, for example, found that the number of permits issued to home builders in 2009 fell 30 percent from 2008 amid limited financial backing by the government, which is the main source of housing loans.
The president’s plan to phase out fuel and food subsidies to save money is sparking discontent and fears that inflation – officially also said to be at around 10 percent – could surge to near 50 percent.
So far, the opposition movement that has campaigned against Ahamdinejad following last June’s disputed presidential election seems to have made little move to harness the economic discontent.
But the anger is palpable.
Ahamdinejad got a taste last month when he was heckled with shouts of ’we are unemployed’ during a speech in Khorramshahr, where newspapers say the city’s unemployment is around 16 percent. The disruption was a rare public protest during what are normally tightly controlled appearances by the president.
Amadinejad is even getting a bruising from within his own conservative bloc that dominates the government. In mid-May, parliament speaker Ali Larijani criticized giving supporters access to loans.
’We want people to have a life with dignity, not a life on alms,’ Larijani said.
Amid the sanctions-related dearth of foreign investment, the Revolutionary Guard – a heavily armed paramilitary force fiercely loyal to the ruling clerical establishment – is stepping in to fill the void, negotiating to take over deals to develop several major oil fields.
Larijani also indirectly spoke out against that policy. ’We have to accept that the path which is being paved in the oil and gas sectors does not agree with the interests of the country,’ he said.
Even against the backdrop of economic tension, new sanctions called for by the United States and other Western powers over Iran’s nuclear program are unlikely to seriously hurt the government, analysts say. The West believes Iran wants to enrich uranium for weapons while Tehran argues its program is purely peaceful.
The latest sanctions build on existing ones by targeting arms sales, the county’s banking sector and open the door for maritime cargo inspections, among other elements.
’The really damaging ones were the ones we knew were not going to come up, like targeting Iran’s access to refined (petroleum) products,’ said Riani, arguing that the government has already had ’a long time to adjust’ to the earlier sanctions.
The proposed sanctions ’are really going to give Iran more of a headache, … but they’re not essentially proposals they can’t get around,’ she said.
While the U.S. Congress also wants to limit Iran’s access to refined fuels, such language is absent from the draft U.N. Security Council resolution, largely thanks to Russia and China objecting to sanctions that would entirely cripple Iran’s economy.
Even without a focus on fuel imports, on which Iran relies to meet domestic demand because of insufficient refining capacity, the oil factor remains a key problem.
Just as Iran looked poised to reap the benefits of crude’s rebound following last year’s price collapse, oil again dropped sharply amid concerns that Europe’s sovereign debt crisis would cut energy demand. The euro also lost value. Iran had been converting its roughly $83 billion in foreign reserves to euros to hedge against the dollar’s earlier weakness.
Compounding that decline, a sustained drop in oil prices could force the government to cut investments and spending in the energy sector and other areas, including the ’charity economy.’
But Tehran has not sat idle. Iran on Sunday began registering applications from self-employed and small businesses for a total of $200 million in low-interest loans to help create 200,000 new job opportunities. However, that will do little to boost the housing sector, a key growth engine.