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Iran Must Reform Its Economy Or Face Social Explosion

Published Thursday, April 19, 2007

Iran Press Service - A Persian proverb says: “everything which can be rotten is salted, but what about when the salt itself if rotten?”. It seems that even the regime does not believe its own economic statistics? Can you tell us in which situation is Iranian economy?

Dr. Fereydoun Khavand – It seems that you are referring to statistics published recently by the Majles’ Research Centre, one of the regime’s most credit worthy research institutes, about the rate of inflation in Iran, statistics that are really shattering. The role of this Centre is to update and brief Iranian lawmakers about the latest political and economic situation of Iran as well as major nations. According to latest data released by this Research Centre, the rate of inflation for the past Iranian year of 1385 (March 2006-March 2007) was 22.4 per cent and in the present year that has just started, would reach 23.4 per cent.

even the 23 to 24 per cent rate of the inflation suggested by the Parliament is artificial.

Considering the fact that the government of Mr. Mahmoud Ahmadi Nezhad and the Central Bank of Iran have put these figures vaguely at between 11 and 12 pr cent, we can imagine the shock that the finding of the Parliament’s Research Centre creates, stating that contrary to the President’s assurances that very soon the inflation rate would become one digit, it would climb towards the 24 per cent mark.

For the Centre, the principal factor for the increase in the inflation rate is the huge increase in the monetary mass, the phenomenon that economists call it M2. The Research Centre of the Majles says that this monetary mass in (Iranian year) 1834 increased by 34 per cent, 37 per cent last year and for this year, it would reach to more than 40 per cent and believe that this staggering M2 explains the upward trend of the inflation, itself the result of the uncontrolled use of oil revenues in the past years.

In the past year, Iran’s revenues from oil export reached the historical sum of over 60 billion US Dollars, which was injected by Mr. Ahmadi Nezhad into the regime’s economic veins, without having any plan and programme, rejecting even the fourth development plans on the pretext that it had been drawn on patterns from the World Bank and International Monetary Fund.

In one word, the injection of such a large amount of money into the shaky economy produced the staggering rate of inflation the country is facing now. One has to stress that even the 23 to 24 per cent rate of the inflation suggested by the Parliament is artificial, for the simple reason that governments of the Islamic Republic of Iran, by providing huge subsidies, keep down artificially the prices of many items, from bread to sugar, medicine and fuel, specially this one, which cost 80 Touman (Euro 8 centim) per lire, the cheapest in the world. In order to keep the rate of inflation artificially low, not only Ahmadi Nezhad can not touch to subsides, but also he has wide open the gates of importation. More over, thanks to the same oil revenues, he keep the value of the local money artificially low, resulting in the increase of imports and difficulties for non oil exports. Iran is the only country in the world giving subsidies to imports.

The burden of this important rate of inflation is felt by the poor classes of the society, the very those that Ahmadi Nezhad had promised to help. Now let’s take one example: An employee of the government may get five per cent pay rise, but at the same time he looses 24 per cent of his purchasing power. Another result of this inflation is that goods made in Iran become more and more expensive, incapable of competing with foreign made goods, loosing their markets to competitors. Hence the extraordinary number of factories closing their doors, going bankrupt, not able to even pay their workers.

IPS – You said that the government earned more than 60 billion US Dollars; you also explained that some of this revenue goes for the subsidies, but what happens to the rest, where it goes? It looks like snow left under the sun!

Iran Must Reform Its Economy Or Face Social Explosion-Body-2

F Kh – Except the part that goes for the subsidies, you have the huge administration with its 5 to 6 millions employees; external adventures of the Islamic Republic of Iran in Lebanon, in Iraq, in Palestine, in Afghanistan and in other parts of the world that swallows billions; then you have the bonyads, (foundations) the Revolutionary Guards that is fed by this money and can be considered as the biggest winner from the government of Mr. Ahmmadi Nezhad; the military purchases and above all, the nuclear programme that cost a lot. However, the great machine that create all this wealth is the poor parent of the revenues it generates: the share of the oil industries in Iranian general budget is kept at the minimum by all Iranian governments.

The result is that Iran’s oil production is now around 3.7 million barrels per day instead of the 4 mbd two years ago. Investment in this vital sector does not allow compensating for the machinery that is ageing, making it difficult to even keep with the quota fixed by OPEC for Iran and at the same time the country is far behind in refining capacities. In 1385, Iran imported refined products for 7 billions dollars. In this year, it will cost Iran more than 10 billions to import fuel for cars; part of this cheap fuel is smuggled to neigbouring countries like Turkey, Iraq, and Afghanistan.

IPS – You said important part of the oil revenues goes to subsidies to keep the price of basic foodstuff low. The question is that if the do not subsidies, what can they do to keep prices affordable?

F Kh – Iran is not the only country facing this problem. Many other developing nations and even some developed countries had had this difficult choice. However, the way to solve it is to undertake profound reforms. Let’s explain it: the subsidies in Iran, items like bread or fuel, with the market price of 500 Toumans but offered at 80, concerns all Iranians – to the advantage of the better offs than the deprived class. Even the richest families can buy subsidized sugar or bread or soap.

The solution is to do what other developed nations did before us: helping the segments of the society that are more fragile and vulnerable, like the poor, the workers, the middle class, by means of different allocations: family, health, housing, child care, education, minimum salaries etc while allowing the market play its role of price regulator. As I said, at present situation, the staggering amount counted for subsidies benefits more the rich and the poor, but if the government let the price of fuel go step by step to its normal level of 500 Toumans and at the same time allocate the 480 Toumans for helping the poor ones by giving them direct subsidies, this would be the first step on the road to much needed economic reforms.

But reforms can not be introduced by a populist government like that of Mr. Ahmadi Nezhad. What is needed urgently is a regime and officials who can speak the language of the truth to the people, to let economic, political and social problems be debated in a free atmosphere by experts, political parties, unions, ngo etc. If not, the road ahead leads to an explosion. While other nations have carried out these necessary reforms, the Iranian regime continues to ignore them.

The burden of this important rate of inflation is felt by the poor classes of the society, the very those that Ahmadi Nezhad had promised to help

IPS – But the application of such reforms is obviously very painful, unpopular.

F Kh – Of course it is, but it is vital. Many countries had to undergo that painful path. Former Soviet bloc countries, many Latin American nations and closer to us, Turkey suffered. But look at the result; they are all in a much better shape.

Another phenomenon specific to the Islamic Republic of Iran is that despite inflation at about 24 per cent, the exchange rate of its money has been kept stable: In Iran today, the exchange rate of Rial to Euro or to Dollar is almost the same as it was two of three years ago. Why? because the Central Bank of Iran, leaning on the oil dollars, has kept the rate of the local money artificially at fix parity with major world currencies and this while inflation is about 24 per cent in Iran against 3 per cent in the US and 1.5 to 2 per cent in Europe.

The Iranian logic is absurd at best. While China and many developing exporting countries, in order to enhance their exports, tries hard to keep their money under value, in Iran, they do the reverse, meaning they encourage imports against exports. One reason you might ask is because Iran does not need exports, since it has plenty of money from oil. But what would happen once oil prices drops or oil fields are empty, this is another question the present leaders do not care about.

IPS – You said earlier that Iranian regime is one of the very few ones in the world that encourages imports instead of exports. It is hard to believe. Can you explain?

F Kh – One of the reasons of this situation is to prevent social explosion. In other word, if in effect Iran keeps its currency at its real value, you obviously can not buy the dollar at the present rate of exchange of 923, 924 or 925 Toumans; you can not buy Euro at 1.250 Toumans. The rate of Euro and Dollar would shoot up, at one Euro to more than 2.000 to 2.500 Toumans. In such an event, not only imports would become more expensive, but the inflation would jump to over 4o per cent. Everything is artificial in Iran. The question is this: for the time being, thanks to high oil prices and thanks to oil dollars, the government can afford subsidizing. But what when oil prices drops. What will happen to the subsidies; to the artificial exchange rate; to the artificial inflation?

IPS – You mentioned that if Iranian economy is to be performing, it must be reformed drastic ally. The question is that is this regime, as it is, with its laws, is reformable?

Iran Must Reform Its Economy Or Face Social Explosion-Body

F Kh – Efforts to make reforms have taken place before in this regime. For instance, Mr. Ali Akbar Hashemi Rafsanjani, when elected president, tried, with the help of some experts, to address this issue, especially also because international organizations like the IM or the World Bank were putting pressure on Iran. This effort continued under the presidency of Mohammad Khatami, but it became clear that in the framework of the IRI in the one hand and considering the problems that exist inside and outside the country on the other, like the involvement of theocracy in the political and economic fields, the great power and influence of some local organizations that benefit from the present situation and therefore put brakes on reforms, international frictions and confrontations over Iranian nuclear issue, the land is not ready for reforms, as confirmed by the fiasco of efforts deployed under Hashemi Rafsanjani and Mohammad Khatami.

In one word, the economic situation of Iran is the very symbol of a nation that is very seriously ill, depending on oil and on a State that is itself seriously sick and paralyzed. To answer your question, I would say: No, the necessary conditions for reforms are not ready in Iran.

IPS – So, where Mr. Ahmadi Nezhad’s train that has no brake and no rear gear is heading for?

F Kh – In my view, during the 18 months Mr. Ahmadi Nezhad and his team are in charge of the Iranian Government, they have reached the conclusion that there is absolutely nothing they can do but to inject the oil dollars in what is called economy – which in fact is not --. One interesting finding of the Majles’ Research Centre is that in the present year of 1386, budget allocated to development plans would drop by 60 per cent compared with last year, placing the growth rate of Iran at 4 or 5 per cent, a figure that is also artificial since it is due to the oil dollars. Even if we take that rate, it places Iran far behind the average growth rate of third world and developing nations. Iran is facing a stagflation situation. It seems that Mr. Ahmadi Nezhad has discovered all these problems and reached the conclusion that the easiest way out of explosion is multiplication of foreign conflicts.

That explains his efforts to create new crisis with the international community, going as far as seeking a military conflagration in order to explain to his base that if I can not solve your problems if I can not improve your life, if I can not fulfill my promises, it is because the country is in a pre-war conditions, it is because the enemies of Iran and Islam do not want to see you happy and prosperous, as the beloved leader says.

My guess is that to exit an explosive situation that is getting out of their control, the already tough language of Iranian leaders with the international community would get harsher; they would increase their regional and international adventurism. As to the question about where the train is heading, the answer is: to reforms or explosion. ENDS KHAVAND


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As of January 2009, this site is definitely closed, but you can follow Safa Haeri on his new blog: DAMAVAND at

Iran Must Reform Its Economy Or Face Social Explosion-Main
Iran money is kept artificially strong face to major currencies, harming exports.



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