Financial Times
October 21, 2012
Najmeh Bozorgmehr
Iran’s
parliament has revised its budget law in a bid to curb the populist policies of
President Mahmoud Ahmadi-Nejad amid criticisms that these policies have made
the country more vulnerable to sanctions.
MPs on
Sunday approved an urgent plan “to support investment in development [projects]
and national production and revise the budget law” after a week of discussion.
Under the
revised law, the government is barred from using oil revenues or the difference
between the official and open market currency exchange rates to pay for a
widespread programme of welfare payments, and is threatened with prosecution if
it violates the terms of the law.
Iran’s
economy has been rocked by international sanctions imposed in
response to its disputed nuclear programme. An EU ban on Iran’s oil imports, which came into force in July, and
US banking sanctions have hit the currency market hard, leading to a more than
50 per cent fall in the rial since January.
Iran’s
fundamentalists are in a tense power struggle with the president, who is barred
by the constitution from running for a third term in elections next June but is
believed to be seeking to have a close ally succeed him.
His critics
argue that his lavish spending on public welfare payments has come at the
expense of longer-term development projects and is the main reason behind a
rapid rise in consumer prices and sharp drop in domestic production – curbing
the economy’s ability to withstand sanctions.
According to
official figures, inflation and youth unemployment stand at 23.5 per cent and
28.6 per cent respectively, but economists believe real the figures are far
higher.
Ali
Larijani, Iran’s parliament speaker, who is one of Mr Ahmadi-Nejad’s main opponents and may run for
president, said last week that the legislative body had decided to focus on the
economy to help support domestic industries.
This was
necessary, due to “the sensitive conditions” resulting from sanctions, he said,
while insisting that sanctions were not the main cause of the country’s
economic woes. Instead, he blamed the government for the deteriorating economy,
including the closure of half of the country’s industrial complexes due to
financial problems.
At the heart
of the attacks against the president is his decision to cut about $100bn in subsidies on energy and other basic commodities which
began in December 2010 as a much-needed reform of the country’s state-dominated
economy.
This plan
has placed an increasingly heavy burden on the economy because the government
decided to give almost all the money saved from the subsidy cuts – not half as
was required by the law – back to the public in the form of cash compensation payments, in spite of the
inflationary impact of such a move. Whereas half of the money saved was
supposed to have been used to compensate producers for rising energy bills.
More than
60m Iranians, out of a population of 75m, are receiving IR455,000 ($37.11 at
the official exchange rate) each month as compensation for the rise in prices
of basic goods.
The
government, which is believed to be facing a huge budget deficit, has also been
accused by some MPs of trying to exploit sanctions by making money out of
fluctuations in the currency markets.
The
legislative body on Sunday also restricted government access to the National
Development Fund, into which 20 per cent of oil revenues is placed for
long-term development projects, amid speculation that the government was
planning to use the fund to help meet its budget shortfall.
Other parts
of the revised budget bill are intended to increase investment in upstream oil
and gas projects and to stop the government from using the proceeds from the
privatisation of state-owned companies for any purpose not specified in
the budget law.
“If the
subsidies plan were carried out properly and legally,” said Akbar
Hashemi-Rafsanjani, a former president and chief critic of the current government “it
could have helped boost the country’s economy and [domestic] production and
deter foreign threats [sanctions].”
It is not
clear yet how the government of Mr Ahmadi-Nejad -- which is occasionally
accused of ignoring parliament approvals – will respond to the new budget
restrictions. But analysts doubt there will be any cut in the welfare payments
or change to the scheme – at least until the presidential election in June.
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