Rooyesh

While Iran struggles under increasing punitive measures implemented by the international community and unilaterally by the US, the country’s self-inflicted damage to the economy continues with the latest decree to slash interest rates that will stoke already rampant inflation. The interest rate cuts ordered by Iranian President Mahmoud Ahmadinejad in May is akin to adding fuel to a raging fire and have led us to revise our inflation forecast up to 20.0% y-o-y for 2007. Indeed, the consumer price measure of inflation (CPI) came in at 17.6% y-o-y in January-February (the Iranian month of Bahman); a result of the president’s spending splurge, the inflow of petro-dollars and rampant money supply growth - 39.4% y-o-y in 2006 according to the Central Bank of Iran.

CPI was 6.5% y-o-y in the first month of the last Iranian calendar year, March-April, 2006 (Farvardin 1385). Producer price inflation has also followed a similar course, having more than doubled according to the latest figures, jumping from 6.4% y-o-y in March-April 2006, to 15.7% y-o-y in February-March (Esfand) this year. In addition to this, following years of delays, the decision to implement fuel subsidy cuts in May, raising retail prices by 25%- though Iranian gasoline prices remain one of the lowest in the world - will also contribute to the upward trajectory of prices throughout the economy. Estimates suggest around 10% of its oil export revenues were spent on importing gasoline last year. Further plans to ration gasoline, by forcing consumers to pay more for purchases above a set quota, have been delayed, and it is possible that this may prove far too unpalatable politically to implement in the near future. The president has been keen to lower interest rates having campaigned on a platform to spread the oil wealth to the masses and provide cheap credit. He has faced resistance by the Money and Credit Council of the nominally independent central bank and even the economy minister, but has opted to ignore such advice. Last year the government blamed to media for high inflation in response to criticism of his handling of the economy. This is not the first time he has decreed rate cuts - in 2006 rates for state-owned banks were slashed from 16% to 14% and 22% to 17% for private banks. The latest decree brings both rates down to 12%. Rather than boost investment and control inflation as the government argues, such imprudent policies are certain to have the opposite effect by adding to inflationary pressures and damaging investor confidence - there are already reports of panic selling at the Tehran Stock Exchange (TSE) - and hence general economic activity. As such, we concur with the view expressed by the former head of the TSE that ‘this ad-hoc decision will not benefit the investment market at all and will only terrify investors’. Source: Business International Monitor

MAHMOUD AHMADINEJAD won presidential office promising to give Iran’s oil money back to the people. But he is finding the demands of populism hard to reconcile with economic reality. His government has recently been wobbling over implementing two of its biggest economic decisions: to bring in petrol rationing and to cut interest rates. It has dithered over rationing for more than a year, with one promised date after another passing, and no clear announcement of how or when it will happen.

Rationing was finally introduced last week for government cars, but the authorities are no closer to deciding when to cap consumption by private motorists. Few Iranians will be surprised if implementing the policy is delayed for several more months. Last year Iran spent $13 billion-plus on subsidising petrol. Though it has the world’s second-largest oil reserves, the country is so short of refining capacity that it spends a lot of cash on importing fuel. Local economists complain that the subsidy tips the trade balance the wrong way, wantonly increases state spending, encourages people to waste fuel or smuggle it abroad and is regressive because the poor do not own cars. Motorists have now been given smart cards, which they have to use when buying petrol. Once rationing is introduced these will be used to measure a monthly allowance of subsidised fuel and to charge more for excess consumption. The government has blamed the delays on technical problems with these cards. In fact, neither Mr Ahmadinejad nor his parliament wants to take responsibility for unpopular decisions, and has not yet decided how much fuel to let people have or what rates higher consumption should incur. Some politicians even tried to dismiss the idea of public rationing altogether, saying that last month’s tiny increase in the price of a litre of petrol (by $0.02) and that smart cards monitoring national consumption will solve the problem without rationing. They seem unlikely to get their way, but there may be more rows before the policy is implemented. The government has also made a hash of monetary policy. Mr Ahmadinejad has called for a cut in interest rates to 12%. Lending rates are capped at 14% for state banks and 17% for private banks. The money and credit council, which is meant to set rates, said in April that they should not be cut this year because of high inflation and the risk of hurting private banks. Long-term cuts are meant to help create jobs by encouraging investment in business. But with high inflation and the threat of more UN sanctions hanging over Iran’s economy, most borrowers are likely to pump cash into the booming property market instead. Even if Mr Ahmadinejad decides not to insist on the cut, his intervention has further worried businessmen who think his indifference to the plight of private banks shows he is hostile to private enterprise as a whole. This week, in an unusually bold move, 50 economists castigated the president for what they deemed to be his dismal economic policies. Source: Economist