Analysis: Economists skeptical on IMF's rosy assessment of Iran

Aug 10, 2011, 3:53 a.m.
Governor of the Central Bank of Iran Mahmoud Bahmani speaks with journalists during a news conference in Tehran August 8, 2010. REUTERS/Raheb Homavandi

By Robin Pomeroy

TEHRAN (Reuters) - Iran's government is basking in rare IMF praise as the first major oil exporter to axe energy and food subsidies, but gains for the sanctions-hit economy could be jeopardized by costly cash handouts and the risk of runaway inflation.

With bread, electricity and gasoline prices soaring after President Mahmoud Ahmadinejad's flagship economic policy slashed $60 billion of price supports, many experts say the IMF painted too rosy a picture of a country that will be among the hardest hit if oil prices plunge further as the global economy slows.

"Few people could dispute the need to reform Iran's domestic energy prices," the IMF said in its report, calling the $0.10 per liter subsidized gasoline price, at a time when global prices were around $2, "out of touch with reality, unsustainable and unjustifiable by any economic theory."

For years, Iranian politicians agreed that the subsidies -- a legacy of a statist revolutionary policy to spread the benefits of Iran's vast oil wealth -- were wasteful and perverse but it took the populist, West-baiting Ahmadinejad, already well into his second four-year term, to do something about it.

"On December 18, 2010, Iran increased domestic energy and agricultural prices by up to 20 times, making it the first major oil-exporting country to reduce substantially implicit energy subsidies," the International Monetary Fund said in its July report "Iran - The Chronicles of the Subsidy Reform."

Despite a sudden seven-fold rise in the cost of gasoline and bread prices doubling, the riots predicted by some analysts never occurred. Middle-class Iranians may grumble, but monthly payments of 455,000 rials (around $43) to every man, woman and child in Iran who applied, have softened the blow, particularly for lower-income families with many children.

"The successful implementation of the drastic price increases has created a unique opportunity for Iran to reform its economy and accelerate economic growth and development," the report said.

But many economists say the subsidy reform risks causing devastating inflation and that the government may not be able to keep up the level of cash payments needed to maintain people's spending power, especially if there is a drop in the oil price.

The IMF did not avoid the issue, saying in a separate report on the Iranian economy, inflation posed a "considerable" risk.

"... rampant inflation would result in a rapid erosion of domestic energy prices and of the targeted subsidies in real terms, and reduced incentives for enterprises to restructure, effectively reversing the early gains of the subsidy reform," it said in its "Staff Report" on the Iranian economy published this month.


Iran's inflation rose to 15.4 percent in the month to June 21, Central Bank Governor Mahmoud Bahmani said on July 27, showing a steady rise from a 25-year low of 8.8 percent in August 2010.

Iranians who have seen fuel bills and the cost of food soar after subsidies were slashed are skeptical.

"The statistics no longer serve any purpose because no one believes them," Iranian economist Saeed Laylaz wrote in the reformist Roozegar newspaper on July 25.

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