Doubts raised on Iran sanctions

  • By Gareth Smyth
  • 04 Oct 2009
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Punitive measures against Iran might not work well, analysts said this week after Iranian and US officials met face-to-face in Geneva and the US House of Representatives threatened Tehran with petrol sanctions.

Proponents of further sanctions argue they should be applied if Iran fails to suspend its nuclear programme as demanded by three UN security council resolutions.

Many say Iran is particularly vulnerable to measures impeding petrol imports due to its heavy domestic consumption encouraged by cheap, subsidised fuel.

But Djavad Salehi-Isfahani, a research fellow at Harvard, told Emerging Markets that imports had halved since petrol rationing was introduced by Ahmadinejad in 2007, when they accounted for 40% of consumption.

“Imports fell from 200,000 barrels per day to less than 100,000 in 2007,” he said.

Economists suggest petrol sanctions would be inflationary. Heydar Pourian, editor of the Tehran-based Iran Economics monthly, told Emerging Markets they could also reduce economic growth by 0.5-0.75%.

Salehi-Isfahani argued that petrol sanctions could be “generally positive” for the Iranian economy, despite any inflationary effect.

“Iranians will learn to live with world energy prices, something that other people – for example, in Istanbul – have learned to do,” he said. “This would also help the government politically to accelerate its programme to reduce gasoline subsidies.”

The ration sells at 12 cents a litre. Government subsidies of petrol are part of energy subsidies that amount to over 10% of Iran’s GDP – and overall subsidies, including everyday items like bread and medicines, have been estimated at $50-$90 billion, or 15-30% of the GDP.

Iran’s parliament rejected a plan drawn up by Ahmadinejad last year to phase out subsidies in favour of benefits targeted at the poor. “Opposition was largely on the grounds that it could be inflationary,” Pourian said.

The political and economic challenges facing Ahmadinejad have been complicated by unrest following June’s disputed presidential election. Iran’s reformists continue to allege fraud and the supreme leader, Ayatollah Ali Khamenei, has been drawn into the factional fray.

Salehi-Isfahani said the “political emergency” gave Ahmadinejad greater leeway with the conservative-controlled parliament, which might lead him to step up withdrawals from the Oil Stabilisation Fund. The OSF collects windfall oil revenues ostensibly for investment, especially in the private sector, but successive governments have used it for current spending.

The level of oil revenue invested has therefore been insufficient for the economy to meet an 8% economic growth target set by the new Five-Year plan covering 2010-15. Hence, unemployment has risen officially to 12.5%.

The IMF projects 1.5% growth this year and 2.2% in 2010, down from 7.8% in 2007 and 2.5% in 2008.

Salehi-Isfahani said short-term politics remained focused on issues of redistribution rather than investment to foster growth.

“The predominant belief among the president’s supporters [among the Iranian public] is that the government is super rich and that since Ahmadinejad is an honest leader, then money should trickle down to them.”

Salehi-Isfahani argued there was also a danger the government would move towards greater control of the economy. The post-election unrest had raised its fears that liberal economic policies had fostered the growth of a restive middle class whose ranks were swollen by expanded higher education and reduced poverty, he said.

  • By Gareth Smyth
  • 04 Oct 2009

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