Shadow Economy & Corruption : Invisible Hands: Romance versus reality

Monday 18 June 2007

Romance versus reality

Romance versus reality
Jun 14th 2007
From The Economist print edition

Iran's populist president is finding it hard to stay popular Get article background
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.