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Falling Price Of Oil Compounds Iranian President's Problems

President Ahmadinejad holds a sample of Venezuelan-made synthetic oil during a visit in 2006.
President Ahmadinejad holds a sample of Venezuelan-made synthetic oil during a visit in 2006.
Watching global markets floundering in the wake of the credit crunch, Iran's clerical and political elites are reveling in the West's economic woes, which have partly deflected attention from the country's domestic troubles and international isolation.

But the Iranian population is struggling with 30 percent inflation, high unemployment, and President Mahmud Ahmedinejad's continuing failure to improve the living standards of the population and put "the oil money on [people's] dinner tables," as he famously pledged during his election campaign in 2005. Iranians are therefore unlikely to share that triumphalism.

In fact, Ahmadinejad has run Iran's economy into the ground. On October 11, just a day after Ahmadinejad declared that inflation was easing, the Central Bank reported that annual inflation had reached 30 percent. Previously, the government had imposed price controls and mobilized members of the Basij, a paramilitary organization operating under the Islamic Revolutionary Guards Corps, to enforce price controls.

Labor and Social Affairs Minister Mohammad Jahromi recently estimated the ranks of the jobless at 3 million, 2.4 million of whom are young people. That's within a population of roughly 70 million. The Statistics Center of Iran issued figures showing unemployment among young people -- that is, those below the age of 35, who make up the majority of the population -- is 21.8 percent, or twice the national average.

At least 14 million Iranians live below the poverty line, according to "Economic Statistics," a quarterly issued by the Central Bank, which in 2006 put the poverty line at a per capita monthly income of 969,750 rials (about $100).

As long as oil was trading close to $150 a barrel, the populist policies of Ahmadinejad worked. But he now faces serious problems, as the price of oil has dropped by half, to $70, in just three months. Over the past three years, Ahmadinejad has squandered much of the country's unprecedented oil windfall by injecting liquidity into the market and boosting imports. He pursued crowd-pleasing policies like loans to the poor, and financed short-term employment projects that helped him to gain support among the working classes. Former Central Bank chief Tahmasb Mazaheri, who was sacked for opposing such populist spending policies, has accused Ahmadinejad of "looting" the bank's assets.

Perhaps more importantly, the question of whether those policies can be sustained is now open to doubt. According to Mazaheri's successor at the head of the Central Bank, Mahmud Bahmani, the sharp decline in oil prices will reduce Iran's oil revenues by $54 billion in the current year alone. With the other sectors of Iran's economy stagnating and oil revenues constituting some 80 percent of government revenues, Iran will face a severe budget deficit, and may even have to adopt an austerity budget, scale back its spending, and collect more taxes to make up the shortfall, which in turn means more economic pressure on the people.

Taxes are the government's second-largest source of income, but this month the economy faced a nationwide strike in major bazaars over a 3 percent value-added tax. The work stoppage, the first by bazaar merchants since the 1979 revolution, forced the government to suspend the tax.

The International Monetary Fund predicts that Iran will face an unsustainable budget deficit if the price of oil remains under $75 per barrel. Three months ago, Ahmadinejad predicted that the price of oil would not drop lower than $100 per barrel; that view was seconded by a number of other Iranian officials.

Officially, the government budget assumes oil prices of $55 a barrel, with any surplus channeled into a foreign-currency reserve fund that is supposed to provide a cushion in times of low prices. But Ahmadinejad has raided that fund in order to assuage economic malaise. This year alone, $17 billion has been withdrawn from the fund (some financial experts believe the figure is even higher). The Central Bank does not disclose the fund's balance, but an unreleased Central Bank report leaked by an Iranian legislator in mid-September estimated the balance at just $7 billion.

Former top nuclear negotiator Hassan Rohani, who now heads the Expediency Council's Center for Strategic Studies, recently blasted Ahmedinejad's economic policies, saying the government has withdrawn $46 billion from the fund in the last three years and, as a result, has drastically reduced the country's capacity to withstand the shock of falling oil prices.

The oil-price fall could hardly have come at a worse time for Ahmadinejad, who is seeking reelection for a second term in June 2009. The economy, his Achilles' heel, could be a deciding factor in that election -- even given Iran's convoluted power structure, in which the supreme leader wields ultimate control and, in effect, functions as kingmaker.

Meanwhile, Ahmadinejad, seemingly unperturbed by the whole issue, plans to tour more provinces in an attempt to buy support by dispensing largesse in the form of cash and cheap loans.