Special Report: Tehran’s fresh start

15 February 2009

Public spending in Iran cannot continue as planned, if the current low in oil prices is sustained.

Balancing the books while also meeting the needs and expectations of more than 65 million people is no easy task. And it is made even harder for Iran’s President Mahmoud Ahmadinejad by the current low oil prices.

Iran’s Oil Minister Gholamhossein Nozari announced at the beginning of the year that the country’s budget for the next financial year, set to start in March, would be based on an oil price of $37.50 a barrel.

However, Iran’s projected spending - on fuel subsidies, new road and rail projects, and investment in the country’s energy sector - is far greater than the income the country will generate from oil sales, if prices stay at about $40 a barrel, as analysts predict. For Iran’s public spending programme to be funded by its oil and gas sales, oil prices would have to be nearer $80 a barrel, according to analysts.

The chances of Iran’s non-energy-related industries - principally, metals and mining - being able to fill the funding gap are slim, given that hydrocarbons sales account for about 70 per cent of the country’s revenues.

This will force Ahmadinejad - or his successor after the presidential election in June - to choose between running a budget deficit in the coming year, or cutting back on the public spending programmes that would help the economy diversify.

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