Oil Cash May Prove A Shaky Crutch for Iran's Ahmadinejad

Biggest Importers
By Thomas Erdbrink
Washington Post Foreign Service
Monday, June 30, 2008

TEHRAN -- Faced with rapid inflation and growing international concern about his country's nuclear ambitions, Iranian President Mahmoud Ahmadinejad is relying on huge increases in oil and gas revenue to insulate his government from internal and external pressures.

Some of the same Western countries taking steps to compel Iran to stop uranium enrichment are also the biggest consumers of its oil and gas. The European Union said last week that it would freeze the assets of Bank Melli, Iran's largest, in keeping with U.N. sanctions. The E.U. is also the leading global consumer of Iranian oil and gas.

Oil wealth, which funds 60 percent of the national budget, has allowed Iran's government to exercise its power to cut interest rates and ignore warnings from the country's Central Bank that overspending will worsen inflation.

Iran earned $80 billion from oil and gas sales in the fiscal year that ended March 20, up from $35 billion three years ago. But the increasing oil revenue is causing a widening gap between rich and poor, as some businesspeople prosper while inflation eats away at consumers' purchasing power. These developments jeopardize Ahmadinejad's populist appeal and could hurt his campaign for reelection in 2009.

Since 2005, when Ahmadinejad came to power, the annual rate of inflation has risen from 12.1 percent to 19.2 percent, according to Central Bank figures. The rate reached 25.2 percent in May, the bank said.

Ahmadinejad has long tussled with economic officials, who say the government has lacked expertise. Indeed, Central Bank governor Tahmasb Mazaheri has straightforward advice for Iran's leaders: "They should decrease the budget deficit, limit spending money and refrain from using oil revenues."

Ahmadinejad announced last week that he would implement unspecified changes in Iran's banking, taxation and import systems and blamed their leaders for being "ineffective." He also conceded that inflation was a "big problem."

Ahmad Zeidabadi, an Iranian political analyst who writes for several anti-government media outlets, said that increased oil revenue had "given the government lots of self-confidence in many fields."

"When you have plenty of money you can solve many problems," Zeidabadi said. But he also noted the danger of intertwining the country's economic fate with the fluctuating price of oil. "If the price suddenly would drop, they will not be able to provide the country with necessary imports. The oil money is this government's lifeline."

A small coterie of developers, oil traders and businesspeople with lucrative government contracts are profiting from the oil boom. Shiny new BMWs crowd the streets of northern Tehran, where real estate prices have doubled or tripled and where luxury developments can command $2,000 per square foot.

But the majority of Iranians have suffered from the inflation that analysts say is partly the result of government spending. Asgar Eskandiary, 32, a teacher, said he thanked God for the health insurance he bought years ago because it paid for a sinus operation. Otherwise, he and his wife would have had to spend rent money on the operation and "we would have lost our apartment for sure," he said, drinking a warm Coke at a fast-food restaurant where a blackout to save energy had deterred other customers.

Every visit to the supermarket brings unpleasant surprises, he said. The price of milk powder, which the couple needs for their infant son, increased from the equivalent of $3 to about $4.30 in just over a year's time. He makes the equivalent of about $540 a month and "can barely cope," he said. "We spend all we have for our small baby."

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