ANALYSIS - Forget gilded elite, Iran's economy is under strain

TEHRAN/BEIRUT Wed Feb 17, 2010 6:18pm IST

A woman sells sunglasses at a market in Tehran June 6, 2009. Islamic Republic's underlying economic problems are likely to be aggravated by any more sanctions over its disputed nuclear programme and by political unrest set off by a fiercely disputed presidential election in June. REUTERS/Ahmed Jadallah/Files

A woman sells sunglasses at a market in Tehran June 6, 2009. Islamic Republic's underlying economic problems are likely to be aggravated by any more sanctions over its disputed nuclear programme and by political unrest set off by a fiercely disputed presidential election in June.

Credit: Reuters/Ahmed Jadallah/Files

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TEHRAN/BEIRUT (Reuters) - Rich Iranians don't mind flaunting it. Porsche sold more than 100 luxury vehicles at its opening reception a few months ago to customers undeterred by the hefty price tag or the 100 percent customs duty.

Such ostentation shows the disposable income available to a few in Iran, which is the world's fifth largest oil exporter and sits on gas reserves second only to Russia's, said Cyrus Razzaghi, president of Ara Enterprise, a business consultancy.

But it cannot mask the Islamic Republic's underlying economic problems, likely to be aggravated by any more sanctions over its disputed nuclear programme, and by political unrest set off by a fiercely disputed presidential election in June.

"Nobody in their right mind expects the system to collapse, but uncertainty is pushing people to leave," said Razzaghi, who called Iran the world's biggest brain exporter per capita, with 150,000 to 300,000 mostly educated people a year going abroad.

Officials say unemployment dropped to 11 percent in January from 12.5 percent in April, but sluggish growth and business jitters are hampering young job-seekers, especially as more women want to work -- the World Bank says women undergraduates now outnumber men 2 to 1 at Iranian universities.

GRADUAL DECLINE

The economy, while not in crisis, confronts significant difficulties, said a Western diplomat in Tehran.

"It's a gradual, continuing decline. There doesn't seem to be anybody pushing policies that could reverse it, for example by allowing more foreign investment, reducing the state sector or devaluing the rial to help the domestic sector," he said.

The government has passed a subsidy reform plan aimed at saving $100 billion from the state budget, despite critics who say phasing out price supports on petrol, electricity, cooking gas, food, water, health and education will fuel inflation.

The Central Bank says inflation, rarely below double digits in recent years, fell to 7.8 percent in January, compared with the same month in 2009, from a peak of 30 percent in late 2008.

Hardline President Mahmoud Ahmadinejad has pursued populist economic policies since he was first elected in 2005, handing out cash and loans to assuage local demands, while slowing economic reforms and privatisation begun by his predecessors.

"Privatisation is still on the agenda, but official foot-dragging continues to ensure almost total state control over the largest commercial enterprises," said Mohammed Shakeel, an Iran economist at the Economist Intelligence Unit.

Ahmadinejad boasted in May that the economy was growing at 5 to 6 percent, far higher than IMF estimates of 1.5 percent real Gross Domestic Product growth in 2009 and 2.2 percent in 2010.

Some economists suggest even the IMF figure is rosy.

"We estimate that real GDP growth will have weakened in 2009/10 to just 0.5 percent, owing to the drop in oil earnings over the year, which will have affected the rate of private consumption and investment growth," said Shakeel.

He said real GDP was forecast to pick up steadily to 2.9 percent in the Iranian year to March 2011, attributing this to higher oil prices and a small rise in oil output.

Labour supply, meanwhile, is growing about 4 percent a year, according to the World Bank.

Ahmadinejad's critics accuse him of squandering windfall oil revenue Iran earned when crude prices soared in the first half of 2008, leaving Iran more vulnerable to any new U.N. sanctions.

PRESSURE FOR SANCTIONS

The United States and its European allies are seeking ways to pressure Iran into dropping a suspected nuclear weapons programme. Tehran says its atomic work is for peaceful purposes.

Tighter sanctions may focus on Iranian banks, as well as individuals and companies connected to the Revolutionary Guards organisation, which U.S. Secretary of State Hillary Clinton this week accused of moving Iran towards a "military dictatorship".

Even if the West resists Israeli calls for "crippling sanctions" on Iranian petrol imports or oil exports, any new measures will help deter investment, especially in the energy sector, source of at least 80 percent of government revenue.

Iran produced over 5 million barrels per day of oil in 1978, a year before the Islamic revolution, a level not matched since, thanks to war, under-investment, sanctions and natural decline.

Yet Tehran has set an ambitious target for oil production capacity to reach 5.6 million bpd by 2010.

"Without extensive outside assistance, attaining this is totally unrealistic," Shakeel said, adding that European firms were under pressure to pull out of Iran, while their competitors from China, Russia and East Asia lacked the technical expertise.

He forecast Iran's oil revenue at $65 billion this year from an estimated output of 3.82 million bpd -- a similar production level earned $82 billion in 2008 when oil prices jumped.

Iran netted an estimated $54 billion from 3.74 million bpd last year, when OPEC quotas restrained output, he said.

Oil wealth has helped Iran improve health and education services in the past 20 years, but even Ahmadinejad now argues it can no longer afford untargeted subsidies which benefit the rich more than the nine million Iranians classified as poor.

Razzaghi, the business consultant, said a small middle class was growing, even as disparities widened between disadvantaged Iranians and those who can splash out on a Porsche Cayenne.

"The extremely poor are becoming poorer and the extremely rich are becoming even richer."

(Writing by Alistair Lyon)

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