Iran General NewsIran enters new year in sombre mood as economic...

Iran enters new year in sombre mood as economic crisis bites

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The Independent: It’s the Iranian New Year and people have been stocking up on food and buying goldfish, the symbol of luck and prosperity, to adorn their homes.
The Independent

By Anne Penketh in Tehran

It’s the Iranian New Year and people have been stocking up on food and buying goldfish, the symbol of luck and prosperity, to adorn their homes.

But Iranians are down on their luck this year. Three years after the election of their radical President, Mahmoud Ahmadinejad, his populist economic policies have led to rocketing inflation and high unemployment which contributed to an electoral backlash against his supporters.

For most Iranians, the 14 March elections were all about the economy, rather than the power struggle that is consuming the various political factions in the Islamic republic.

Iranians are finding it harder to make ends meet, with a sharp increase in basic foods like rice, chicken and eggs. Unemployment, standing at 10 per cent, is particularly felt by young people in a country where 70 per cent of the population of 70 million are aged under 25.

“Inflation is the biggest concern. People are getting restless,” said an Iranian economic analyst. One year ago, inflation stood at 12 per cent. Now it is officially 20 per cent, although estimated to be 10 per cent higher. “The government is being blamed for the economic mismanagement,” the analyst said.

The main victims have been the poor, the people who were among the biggest supporters of Mr Ahmadinejad in the 2005 presidential election.

“Inflation is the killer of poor people. The social structure is fragile because of it. Hundreds of thousands of people will go under the poverty line because of the inflation rate,” said Saeed Laylaz, an economic commentator who is editor-in-chief of the business daily Sarmaye.

According to his analysis, food prices have more than tripled in the past year.

He is particularly critical of Mr Ahmadinejad for his economic mismanagement. Since coming to office, the President with a PhD in transportation has lavished oil revenue on imports and arbitrary handouts to the needy, spending $78bn (£39bn) in his first two years in office, according to the Iranian central bank. He also raided the foreign exchange reserves to fund his pet project, the Imam Reza Love Fund.

He was forced into an embarrassing U-turn after raising the minimum wage by 50 per cent. And his sudden introduction of petrol rationing last summer in an attempt to curb consumption sparked rioting. The government is now expected to partially liberalise petrol prices to coincide with Nowruz, the New Year, which will be welcomed by Iranians as long as prices are not allowed to rise to the real market value.

Comparing Iran unfavourably to Russia, another oil and gas rich country benefiting from the surge in oil prices, Mr Laylaz pointed out that Russia now has $400bn in foreign reserves, compared with Iran’s $100bn. “We should have had $200bn,” said Mr Laylaz.

Eshagh Jahangiri, a former industry minister under the reformist president Mohamed Khatami, Mr Ahmadinejad’s predecessor, warns that Iran is threatened with a case of the “Dutch disease” that derailed the Dutch economy in the 1960s following the discovery of natural gas, because of the President’s spending spree.

Mr Jahangiri pointed to Iran’s sugar industry as an example of “Dutch disease”. “Ahmadinejad has imported three and a half million tonnes of sugar. So the sugar factories are closed, and the farmers don’t grow beet while the stores are full of sugar. There’s some concern about other industries too,” he said, adding: “The economy has followed a terrible path under Ahmadinejad.”

It would be easy to blame the UN economic sanctions over its uranium enrichment activities, which have particularly affected the banking sector, for contributing to the economic crisis. But Iranian analysts say that Iran has been able to circumvent the effects of the embargo. Front companies have been set up, and Iran has shifted banking activities to other places in the region, including Dubai.

“The sanctions aren’t watertight,” said a European businessman working in Iran’s IT sector. He said foreign companies, including the US, Germany and China, were still active in Iran despite political pressure to wind down trade. German exports to Iran increased 5.8 per cent last year compared with 2006, reaching €969bn (£755bn).

The businessman also put his finger on another problem which is storing up trouble for the Islamic republic in the future. “IT isn’t about sending equipment, it’s about brain power,” he said, noting that Iran needs help from abroad to compensate for the loss of educated Iranians. Many of Iran’s bright young things, stymied by religious restrictions, head abroad with their diplomas, never to return. Or having studied abroad, they find jobs outside the country. According to the International Monetary Fund, Iran has the highest brain drain rate in the world.

Mr Jahangiri, the former reformist minister, believes that to overcome its present difficulties, Iran needs to privatise some state-run companies, generally curb the influence of the government in the economic sector and streamline the bloated Iranian government. Oil income, which provides over 80 per cent of government revenue, should be spent on boosting the private sector rather than imports. “With these policies we can reduce unemployment and inflation and increase growth,” he said.

But the reformists’ influence in the new parliament has been eroded after the majority of their candidates were barred from running by the religious authorities.

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