March 25, 2008 / 12:17 AM / 10 years ago

Iran inflation keeps pressure on Ahmadinejad

TEHRAN (Reuters) - Ali Daryani is embarrassed at the inflationary pain he is passing on to his customers.

<p>A butcher holds money in a butcher's shop in Islamshahr, 50km (31 miles) southwest of Tehran March 5, 2008. REUTERS/Raheb Homavandi</p>

“Sometimes we have to change the price stickers three times a day because of inflation,” the 42-year-old Tehran grocer said.

Iran’s President Mahmoud Ahmadinejad survived this month’s parliamentary election without a big blow to his prestige, even if his core support base among a broad conservative camp shrank.

Now the president’s opponents in the Islamic Republic, both from the reformist minority and the victorious conservatives, could force him to rein in populist spending policies seen as partly to blame for inflation hovering around 19 percent.

Since Ahmadinejad swept to power in 2005 promising to spread Iran’s oil wealth to the people, soaring world oil prices have swelled national revenues, but economists say colossal subsidies and presidential handouts have predictably fuelled inflation.

Ahmadinejad is basking in support from Iran’s Supreme Leader Ayatollah Ali Khamenei for his tough nuclear stance, but his economic record may dent his chances of re-election next year.

Iranians are cushioned by a vast array of costly subsidies, but runaway prices still hit the pockets of ordinary consumers.

“The prices of rice, meat, fruit and everything else have gone up,” complained Baqer Gabai, a 54-year-old retired teacher, in Tehran’s Mohseni Square. “The price of chicken has doubled in six months, but my income has not changed a bit.”

Former Central Bank Governor Seyed Mohammad Hossein Adeli, who now heads a think-tank, said Ahmadinejad was aware of the danger and was already reverting to some more orthodox policies.

“He has helped the poor in some way with micro-attention,” he said of the president’s habit of touring the provinces, receiving petitions and trying to address problems directly.

“But if you go and spend money and have a huge expansionary fiscal policy without limits, it pushes inflationary pressures.”

CURBING MONEY SUPPLY

Adeli told Reuters the Central Bank was now pursuing “very contractionary policies” to correct this.

The previous Central Bank governor, Ebrahim Sheibani, quit last year over differences with Ahmadinejad over interest rate policy. The current governor, Tahmasb Mazaheri, has proposed bank loan repayment rates, or “profit-sharing” rates, based on inflation plus a fee -- a move analysts saw reversing a policy backed by Ahmadinejad that had sent rates below inflation.

Iran, the world’s fourth-biggest crude producer, has raked in $70 billion in oil revenue in the past year, the government says. But much of the cash flows out in lavish subsidies on everything from fuel and transport to food and medicine.

“The system is buying loyalty to pursue its nuclear program,” economist Saeed Laylaz said.

Many of the subsidies are not targeted, which often means the rich benefit more than the poor because they consume more.

<p>A butcher holds money in a butcher's shop in Islamshahr, 50km (31 miles) southwest of Tehran March 5, 2008. REUTERS/Raheb Homavandi</p>

Adeli put the direct and indirect cost of fuel subsidies alone at $45 billion a year.

Lacking the refining capacity to meet domestic demand, Iran had been importing at least $5 billion worth of petrol a year, which was sold cheaply to the public, encouraging waste and smuggling.

To reduce the import bill, the government began rationing petrol last year. Last week, in an apparent bid to streamline the subsidy, rationing was temporarily relaxed to let drivers buy extra petrol for five times more than the subsidized price.

The new system could be extended, although the liberalized petrol price may also have a short-term inflationary effect.

COMPLEX TASK

“Taking away subsidies is no easy matter,” said Mohammad Ali Farzin, an Iranian economist who heads a United Nations Development Program poverty reduction unit. “The scale of the problem is just so overwhelming that it will take time.”

<p>A butcher holds money in a butcher's shop in Islamshahr, 50km (31 miles) southwest of Tehran March 5, 2008. REUTERS/Raheb Homavandi</p>

Ali Reza Cheloyan, a farmer in Ahmadinejad’s home town of Aradan, east of Tehran, acknowledged his dependence on state assistance with fertilizer, tractors, petrol, gas oil and bread, as well as the price he gets for his wheat and cotton.

“Inflation has gone up but it’s a global problem. We support the government,” he said.

Reliance on subsidies is growing, argued the UNDP’s Farzin.

“Where you have chronic inflation, disproportionate rises in property prices relative to income, serious unemployment and underemployment, it’s only natural that low-income households cannot keep up,” he said. “So they rely on subsidies.”

Iran has reduced absolute poverty over the years, but officials say 7 to 10 percent of the population of 70 million still live below the line set at a minimum daily intake of 2,100 calories.

However, Farzin said, wealth inequalities are widening.

“Iran’s economy doesn’t produce in such a way as to generate sufficient employment, distribute the income well and alleviate relative poverty,” Farzin said. “This is the core problem.”

Iran is grappling with economic challenges that are exacerbated by U.N. and unilateral U.S. sanctions that have raised the cost of doing business and deterred badly needed Western investment in its oil and gas industry.

But it would be rash to assume more economic pressure would force Iran’s leaders to compromise in their row with the United States and its allies over the nuclear program, which the West suspects has a military purpose. Tehran denies this.

“They’re in a crunch, but the reality is they have a very high tolerance for economic hardship,” a Western diplomat said.

Adeli, an ex-ambassador who thinks Iran should interact more with the world for economic reasons, called sanctions futile.

“Historically they haven’t been able to serve their purpose, especially when it comes to Iranians, with their pride, their resilience, their resistance towards foreigners,” he said.

Additional reporting by Parisa Hafezi; Editing by Sara Ledwith

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