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

Salehi-Isfahani said the estimates were all over-optimistic, absent a big increase in the oil price which would allow massively more public spending.

"Since the government has stopped publishing GDP data it is hard to say what is going on. But 1-2 percent growth is possible given the government's own investment activities."


Many economists say Iran's policy of pegging its currency close to the dollar was one of the biggest brakes on growth.

Despite an 11.5 percent devaluation on June 8 -- an attempt to eliminate the gap between the official exchange rate and the price most Iranians actually have to pay to buy hard currency -- Tehran's stated policy is to keep the rial stable.

While that should help check inflation, economists said it was having a ruinous effect on Iranian industry, which struggles to compete with cheap imports and to sell Iranian goods abroad.

"The mass of imported goods reduces the competitiveness of domestic production by 10 to 12 percent per year," Iranian economist Laylaz wrote in an article in reformist daily Arman on July 18.

According to Salehi-Isfahani, Iran's exchange rate policy "is really using oil money to finance private consumption and then expecting people to compete with the Chinese."

While the IMF praised the subsidy reform as a way to inject market economics into the Iranian economy, several politicians have voiced concern about the state of private enterprise.

Shahriyar Taherpour, a member of parliament's industry committee, was quoted in the conservative Qods daily on August 8 as saying: "According to some information, some 50 percent of private sector industrial manufacturing capacity is idle."

Under the subsidy reform, companies, like families, are meant to receive some government cash to help them cope with the sudden rise in costs, but it is not clear how widespread or effective the payments have been.

And many economists say there is a limit to the cash support Tehran can afford to hand out. Clawson has calculated that with 73 million Iranians receiving the 455,000 rials monthly payments, the new system costs an estimated $36 billion per year.

That is 35 percent of the $103 billion in oil and gas export revenues the IMF says Iran can expect this year -- a proportion that will rise quickly if the oil price continues to drop amid a renewed global recession.

"I don't think this universal payment can continue," said Mousa Ghaninejad, an Iranian economist interviewed in the reformist Etemad daily on July 4.

"People are telling each other the payments are going to continue forever. That's negative for our economy and impossible for the state."

Salehi-Isfahani agreed.

"What the government should be doing is to not allow oil revenues to directly finance consumption, as in handouts, but to spend it on infrastructure and education so Iranians are more competitive, not less, as a result of oil money.

"That would take a sea change in the mindset of Iranians, not just their government, that they are not entitled to have Dubai living standards just because they have oil. They have to become productive first."

(Editing by Stephen Nisbet)

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