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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

Iran has told the IMF that it expects the subsidy cuts to cause inflation to spike to 22 percent and fall back to 7 percent "over the medium term." The IMF says inflation will rise to 22.5 percent this year, from 12.4 in the Iranian year 2010/11 and fall back to 12 percent in 2012-13.

"I agree that rampant inflation is a serious risk. It will undo the subsidy reform and much more," Djavad Salehi-Isfahani, an economics professor at Virginia Tech in the United States, told Reuters. But he added: "It is not a serious risk at this time because the government seems to understand it needs to lower inflationary expectations."

Patrick Clawson, head of the Iran Security Initiative at U.S. think-tank the Washington Institute for Near East Policy, also said Tehran was acutely aware of the inflation risk and would make great efforts to keep it down, but with policies that would suffocate chances of economic growth.

"If oil prices remain high, then it will be quite possible to keep flooding the country with foreign goods which will be a powerful check on inflation in the prices of goods, but that will come at the expense of making Iranian products less competitive and therefore throwing people out of work," Clawson told Reuters.

"My reading of the present government's policies is that it is not particularly concerned about the productive economy, so perhaps it will actually bring inflation down."

SANCTIONS AND SURGERY

Ahmadinejad's economic surgery came just as the United States and the European Union were tightening sanctions on Iran over its nuclear program.

Tehran has consistently said the sanctions are having no impact, but they have deterred Western investment in Iran's vital oil and gas fields and financial restrictions have caused problems for Iran to receive billion of dollars for its oil exports to major customers India and South Korea.

The IMF noted: "New international sanctions in 2010 have in practice increased the cost of doing business, limited FDI and technology transfer, and have affected international trade and financial transactions."

In his comments at the end of the IMF staff report, Iran's IMF Executive Director Jafar Mojarrad showed just how serious Tehran was taking the sanctions threat.

"Should these restrictions remain in place, Iran would have no choice but to cut oil and gas supplies to the interested parties, with possible spillovers to the energy markets," he wrote.

Salehi-Isfahani said sanctions were only partly to blame for Iran's economic ills.

"Sanctions have become a big part of the problem, but in the past government's own policies were a bigger problem. Iran's competitiveness has been seriously hurt by higher domestic inflation relative to the rest of the world. And now, (by) energy price increases."

The IMF said the subsidy reforms would slow economic growth, to 2.5 percent this year, from 3.2 percent in 2010/11. But it said the cash handouts would help to keep the economy moving and that growth would rise steadily to 4.5 percent by 2014/15. Iran is sticking with its target of 8 percent annual growth during the five-year period 2010-15.

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