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Iran, Long Seen As An Economic Basket Case, Wins Praise From IMF

  • Robert Tait

Iranian gasoline prices surged fourfold in December as the government started scrapping subsidies as part of a long-awaited overhaul of the economy.

Iranian gasoline prices surged fourfold in December as the government started scrapping subsidies as part of a long-awaited overhaul of the economy.

If you were seeking endorsement of Iran's economic policies, the International Monetary Fund (IMF) hardly seems like the ideal reference point.

The Washington-based institution is, after all, renowned for zealously promoting programs of public spending cuts and economic liberalization. Iran, meanwhile -- at least under President Mahmud Ahmadinejad -- has repeatedly forecast the imminent end of the global capitalist system.

Yet the IMF's latest report on the Iranian economy represents a surprising departure from expectation by lauding the Islamic regime's success in cutting inflation and praising the sweeping abolition of subsidies introduced by Ahmadinejad's government.

"Real GDP growth recovered to an estimated 3.5 percent in 2009/10 despite the drop in oil prices. The positive growth momentum continued in 2010/11," states the report, which was based on the visit of an IMF mission to Iran between May 28 and June 9.

It goes on to praise the "authorities' monetary policy" in bringing inflation down from 25.4 percent in 2008/09 to 12.4 percent in 2010/11.

On Ahmadinejad's subsidy reform plan -- which ended a range of lavishly generous subsidies on a wide range of items in December 2010, provoking bitter rows between the president and Iran's parliament -- the report is positively effusive.

"The mission commended the authorities for the early success in the implementation of their ambitious subsidy reform program," it writes. Price rises in areas like energy, public transport, wheat, and bread have resulted from the removal of $60 billion of subsidies, according to the report. But as a result, it adds: "The redistribution of the revenues arising from the price increases to households as cash transfers have been effective in reducing inequalities, improving living standards, and supporting domestic demand in the economy."

At Odds With Popular View

The report acknowledges that the abolition of subsidies could result in "transitory" economic slowdown and "temporary" spikes in inflation but is upbeat in saying "it should considerably improve Iran's medium-term outlook by rationalizing domestic energy use, increasing export revenues, strengthening overall competitiveness, and bring economic activity in Iran closer to its full potential."

The portrait seems at odds with the popular view of Iran's economy, which is commonly described in the West as sick, mismanaged, and under-performing. A recent report from the Heritage Foundation, a Washington-based conservative think tank, labeled Iran's economy "repressed" and ranked it 171st out of 179 countries in a league table for economic freedom.

The report's most revealing aspects, one analyst says, lie in what it omits to say about Iran's economic situation.

Anecdotal accounts from inside the country frequently depict an economy that is stagnant and lumbered with persistently high unemployment, leaving a population laboring under rising prices and depressed living standards.

Independent economists, too, question whether the IMF report paints an accurate picture.

Mehrdad Emadi, an Iranian economic specialist with the London-based Data Matrix Systems, says the fund is wrong about Iran's inflation rate, which he believes is closer to 30 percent. The discrepancy, Emadi believes, is because the fund's economists have had access only to selective data provided by Iranian officials.

"The data is entirely government data. They don't make any references to commercial sources," Emadi says. "Also, the data is not publicly available to even internal organizations -- organs like the parliament's budget commission. That does not necessarily mean the data is tarnished or not reliable. It just means that the data is not easily verifiable. Regardless of whether this was the U.S. government, the Iranian government, or the British government, if the data is not verifiable I feel uncomfortable about [these conclusions and analyses]."

Only 'On The Surface'

At the same time, the IMF may have taken the subsidy reform plan out of its proper local context, Emadi argues, by failing to identify the takeover of the Iranian economy by companies linked to the powerful Islamic Revolutionary Guards Corps (IRGC).

"The IMF institutionally, they really like the idea of markets being pushed towards real prices, taking out distortions, which subsidies are. On the surface, Iran is trying to do that," he says. "But it's really not, because Iran is moving from a model of general subsidies to a model of income support for firms and organizations which are going to be now connected to us [the government] -- i.e., through a Revolutionary Guard network of firms, which are going to be getting everything at preferential rates. The IMF is looking at the picture it is getting and is ignoring what I would call the widespread creeping of Revolutionary Guard firms into the economy at every level."

Shaking it up: President Mahmud Ahmadinejad
In fairness, Ahmadinejad's subsidy shake-up has been praised by other outside observers. In February, Suzanne Maloney, an Iran specialist at the Brookings Institution's Saban Center, called the reform a "serious and rational response" to Iran's economic problems with "the potential to spur a virtuous cycle of economic liberalization."

"Most powerfully, the reforms could create a sense of individual ownership in the economy by giving Iranians greater control over the spending of the national wealth," she wrote.

Yet to Jamshid Assadi, an Iranian economist at the ESC Groupe Business School in Dijon, France, such assessments fail to take heed of the parlous state of Iran's finances and their impact on ordinary citizens' living standards. Iran's Central Bank, Assadi believes, is running short of money -- leaving the government unable to provide the cash handouts that were meant to compensate for the subsidy cuts.

"They even want to reduce the cash subsidies to the households," Assadi says. "They don't have money and they have said that some households who are well-off, we don't give them money and we give to the poor people. They consider that by the new calculation of the government, they are going to give money almost to less than one Iranian out of four. But the rate of poverty in Iran is much higher than the proportion of one of four."

The report's most revealing aspects, according to Assadi, lie in what it omits to say -- by dint of the IMF's requirement to use diplomatic language and limit itself to official statistics. Beneath the apparently upbeat exterior, the findings are not really positive.

"If you read carefully the report, it's not that positive," Assadi says. "It says, for example, the rate of growth is fantastic -- it's 3.5 percent. But 3.5 percent to anybody who knows that Turkey has a rate of growth much higher, it shows that Iran is not doing greatly. Almost every country around Iran is doing better. But the IMF is an official institution, so they cannot be very critical and very often when they get information and data, these are official information and data that they put in the report. So I really don't see a lot of positive things when I read this."

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