Iran pushes market reform

09 June 2011

Tehran has increased its spending for 2011 to alleviate the effects of subsidy cuts, but analysts predict its economy will remain flat as sanctions continue to stifle growth

Although Iran suffers from a wide range of economic and social problems, including a lack of jobs, a significant brain drain, high inflation and trade sanctions, in the past year, the government has shown a new determination to tackle these issues.

In February 2011, President Mahmoud Ahmadinejad submitted a draft budget for the year of $539bn. The figure is based on an oil price of $80 a barrel and spending for state-owned companies of $362bn. The budget for the year that ended on 20 March 2011 was $368bn, some 40 per cent lower.

Subsidy reform in Iran

The main reason behind the substantial increase in spending is the need to alleviate the short-term effects of Tehran’s subsidy withdrawal programme, which began at the end of last year. On 19 December 2010, the government launched its agenda of sweeping economic reforms that will eliminate all subsidies on many consumer goods, including petrol, electricity and water, and foodstuffs, as a first step to introducing real market prices by 2015.

This year will be significant for Iran’s economy, as the first full year of subsidy cuts.

It was always expected that the removal of subsidies would lead to higher inflation in the short-term and the potential for unrest, as the price of gasoline quadrupled overnight.

There have been some demonstrations, but more positively, the removal of the subsidies has already reduced the consumption of electricity and gasoline. Of the money saved, the government said 50 per cent would be spent on Iran’s lower classes and there is anecdotal evidence that this wealth now is reaching small towns and reviving economic activity.

This year will be significant for Iran’s economy as it will be the first full year of the subsidy cuts

A further 20 per cent is due to go into key infrastructure projects. One of the major projects expected to benefit is the expansion of the Tehran metro, which is headed by Mohsen Hashemi, son of former president Ali Akbar Rafsanjani and a staunch opponent of Ahmadinejad. Hashemi was forced to resign in March over a disagreement with the president concerning funds for the metro project. The development of the country’s transport infrastructure has been slow, held back by a lack of financing.

However, in May, the Iranian majlis, or parliament, approved a bill to allocate a minimum of $2bn from the National Development Fund for investment in subways and other urban transport projects.

Iran GDP by sector, 2009
GDP=Gross domestic product. Source: Central Bank of Iran

The Washington-based IMF is forecasting Iran’s economy will remain flat in 2011, due to the combination of sanctions and the phasing out of subsidies. Inflation is predicted to accelerate, rising to 22.5 per cent. This is the second highest rate in the world, behind Venezuela.

Other reforms are also progressing, including an effort to improve ministerial efficiency, with plans to reduce the number of ministries to 17 from 21.

Ahmadinejad has also announced ambitious plans to tackle unemployment, which currently stands at about 11.3 per cent. The aim is to cut that figure by 2-3 percentage points by 2013, creating up to 2.4 million new jobs each year.

Hydrocarbon reserves and production in Iran
Oil production (thousand barrels a day)4,216
Oil reserves* (billion barrels)137.6
Oil proven reserves* (share of world total)10.3
Gas production (billion cubic metres a day)131.2
Gas proven reserves* (trillion cubic metres)29.61
Gas proven reserves* (share of world total)15.8
*At end of 2009. Source: BP Statistical Review of World Energy

Meanwhile, the government’s privatisation plans have also moved forward over the past year. The Iranian Privatisation Organisation (IPO) says it divested $80bn-worth of government-owned assets in 155 companies between 2005 and 20 March 2011. The IPO is aiming to raise $12.5bn from the sale of further assets over the next four years.

The largest contributing sector was the oil industry, including refineries and exploration assets, which generated $27.6bn. A further $11.5bn was raised from the sale of shares in the Telecommunications Company of Iran, $9.8bn from the sale of shares in the petrochemicals sector, $4.8bn from the country’s power plants and $4.3bn was raised from the sale of assets in the banking and insurance sector.

As with all matters in Iran, politics plays a major role. So far, 2011 has been plagued with high-profile resignations and rifts at the very top. On 6 May, Iran’s Supreme Leader Ayatollah Ali Khameni gave an ultimatum to Ahmadinejad to accept his decision over the re-appointment of the intelligence minister or resign.

Political uncertainty

This led to Ahmadinejad boycotting his official duties for more than a week, before reappearing on 1 May to hold a cabinet meeting. Several members of parliament (MPs) have revived a bid to summon Ahmadinejad for questioning over this. So far, 90 MPs have signed the petition. Under Iranian law, 85 more signatures are needed for the president to be impeached.

It remains to be seen how the increasingly shaky relationship between the two most powerful men in Tehran will play out in the months ahead. But if Iran can continue in its current direction, then the introduction of a free market economy will be achieved. International sanctions will, however, continue to stifle growth and block foreign investment.

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