Conservatives Challenge Ahmadinejad Over Economy

Tuesday, 8 July, 2008

The link has been copied

Mohammad Mahdi

The headlines in Tehran’s morning and evening papers are dominated by one big issue these days – inflation. Spiralling price rises have had a real impact on people’s lives in the past couple of years, but complaining about the problem has traditionally been the preserve of opposition politicians.



In the last month or so, however, things have changed and inflation has become the subject of open discussion and some heated argument within the ruling elite.



Until the first round of the parliamentary election took place on March 14, the issue was played down for reasons of political expediency. The “principalists” or religious conservatives had little appetite for discussing this thorny issue in the legislature, as this would have implied criticism both of the government and of parliament’s own record.



But as the second round on April 25 drew closer and it was already apparent that conservatives were going to dominate the new parliament, the principalists found a new interest in airing concerns about surging prices.



Thus, inflation is now high on the agenda not only of the opposition reformers, but of right-wing traditionalist factions, particularly Hezb-e Motalef-e Eslami (the Islamic Coalition Party), which have taken it upon themselves to hold the government of President Mahmoud Ahmadinejad to account.



These principalists are now positioning themselves as plaintiff rather than accused, and are depicting Iran’s inflation problem as the fault of Ahmadinejad specifically, not of the factions that support him.



In this context, it becomes clear why the deputy speaker of the outgoing parliament, Mohammad Reza Bahonar – aligned with the principalists – is now saying that “inflation has become intolerable” and that “we forecast inflation from the very beginning, and we have had some differences of opinion on this issue”.



Warnings and criticism have come not only from political groups, but also from senior clerical figures, who have called for swift action to bring inflation under control. Among the prominent clerics who have spoken out are Ayatollah Mahdavi Kani, who is influential in conservative circles and sits on the Assembly of Experts, Ayatollah Mousavi Ardabili, Ayatollah Makarem Shirazi and even Ayatollah Mesbah Yazdi, often called the “spiritual father” of Ahmadinejad.



Why, then, are so many principalists suddenly rounding on the president?



When Ahmadinejad launched his bid for the 2005 presidential election, he won the support of vulnerable, impoverished sections of society by promising to tackle the economic problems that affected them. His campaign pledges included “bringing oil money to people’s tables” and curbing inflation.



These promises were central to Ahmadinejad’s policies from the start of his term until very recently.



AHMADINEJAD’S TERM MARKED BY HIGH PRICES



Less than a year after Ahmadinejad came to power, inflation levels took off, spurred on by the economic policies espoused by his government. Property prices shot up by 150, even 250 per cent, and the introduction of petrol rationing last year had the spillover effect of bumping up the cost of goods and services.



The most recent inflation figures from the Central Bank show that year-on-year for the Iranian month ending May 20 stood at 25.3 per cent, one percentage point up on the previous month, and significantly higher than the 18.4 per cent recorded for the past Iranian calendar year, which runs from March to March.



The state news agency IRNA has joined the new openness about talking about inflation, with a report highlighting the situation in one southern province, Bushehr, where goods including foodstuffs have seen price rises of over 70 per cent, and in some cases 100 per cent, within the space of two months.



Some analysts say the Central Bank figures underestimate inflation levels as they fail to capture important data such as property prices.



“In the view of many economists, the Iranian Central Bank’s method of measuring inflation is flawed and inaccurate,” said Mohammad Baqer Nowbakht of the Centre for Economic Research, part of the Centre for Strategic Studies. “The Central Bank indicators do not include changes in housing prices. Yet in a city like Tehran, house prices have risen by between 200 and 250 per cent.”



Mohammad Qoli Yousefi, an academic in the economics department at Tehran’s Allameh Tabatabai University, agrees there is a statistical problem.



“What we observe in real life is different to the Central Bank statistics when it comes to inflation,” he said. “The things people have to contend with in their daily lives are not incorporated into the bank’s calculations, so the true inflation rate is higher than what it cites in its reports.”



On the streets of Tehran, there is no doubt people are feeling the pinch.



“It isn’t effective to write about surging prices; under present circumstances, you have to shout about it,” said 30-year-old Asieh, a female resident of the capital. “Before the New Year [March 20], I could buy oranges at 700 tomans a kilo but now I’m paying 2,000 tomans.” In other words, the price has gone from one US dollar to three.



A 42-year-old woman, who did not want to give her name, said tomatos had gone from 400 to 2,000 tomans a kilo, and similar prices rises had affected all foodstuffs including meat, poultry and fruit.



INFLATION DRIVEN BY PROFLIGATE LOANS, SPENDING



The first factor to spark inflation was the large increase in liquidity that followed Ahmadinejad’s election in 2005. This was largely a result of the free-for-all in government loans granted to individuals and companies, with the aim of boosting employment and productivity. However, lack of supervision by government and the banks over how these loans were distributed and used meant that much of the money was spent on non-productive activities such as property purchases and business deals.



According to Morteza Allahdad, head of the Higher Institute of Banking, liquid assets rose from around 60,000 billion tomans in 2005 to 150,000 billion tomans in 2007. The amount of disposable cash around has fuelled inflation, he said, adding that the outlook for 2008 is worrying.



A second factor that has led to dramatic prices rises is the impact of oil revenue. In this regard, Iran’s experience is comparable to that of other countries that have suffered inflationary trends as a result of the uncontrolled influx of oil money. The unprecedented rise in the world oil price has only strengthened this tendency.



The solutions to this general trend appear to lie in tighter government policy, in particular keeping expenditure in check.



Instead of doing this, however, the Ahmadinejad government appears to have been spending freely out of oil revenues held as reserves.



When the Ahmadinejad administration took over in 2005, the trend towards rising world oil prices was already evident, and economists were pleading with the government to refrain from pumping oil revenues into an economy that was in no fit state to handle the shock.



But the authorities proceeded to splash out with billions of dollars taken from oil revenues, and inflation went from 12 per cent and falling in 2005 to last year’s 18.5 per cent.



Finding itself in an inflationary environment, the government reached for a quick-fix solution to hold prices down – importing more goods to make goods more available on the domestic market. But this came at the cost of spending oil money and thereby fuelling price rises.



Elyas Naderan, a member of the parliamentary committee on economic affairs, and Ahmad Tavakkoli, head of the legislature’s Centre for Research, recently revealed that Iran’s trade ministry withdrew 840 million dollars from the foreign currency reserve and spent the funds on imports shortly before the new Iranian year began on March 20.



“This withdrawal took place without the required parliamentary approval, and in such a manner that it was spent on unnecessary items,” said Naderan, “This is indicative of erratic practices on the part of the trade ministry.”



Naderan warned that such policies, if repeated across the economy, would inflict serious damage.



Economists have spoken out against the government’s heavy reliance on oil money. They warn that with rising imports, high inflation and an expansive budget, Iran could fall victim to “Dutch disease”, a phenomenon where a country ill-prepared to cope with the distorting effects of sudden oil wealth finds that the rest of its economy becomes less and less competitive.



UNPROMISING OUTLOOK



Many Iranian economists paint a grim picture of the economic prospects.



Under the government’s own development plan, provision was to be made to bring the inflation rate down to nine per cent in 2007 and ensure it remained in single-digit figures thereafter. That has obviously not happened, and looks unlikely to do so in the near future.



According to Nowbakht, “Not only are the economic problems going to persist, but growth in 2008 will be lower than last year.”



Assuming that is the case, we are likely to see inflation issues being discussed out in the open for some time to come. With the principalists abandoning their pre-election show of unity, the very public debate on inflation now taking place within the conservative camp is already creating serious rifts among elite groups, much to the disquiet of Ahmadinejad’s closest allies.



Mohammad Mahdi Afkari is a journalist and editor with the Andishe-ye Nau daily in Tehran.



Mianeh is an IWPR-run initiative to provide an open webspace for ideas, analysis and debate for Iranian journalists and writers. This article is taken from Mianeh’s independent bilingual website, http://mianeh.net.