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Dolma at every meal

Presidential candidates reluctant to condemn handouts before election

by Gareth Smith

Despite all the political maneuvering, recent presidential elections in Iran have hinged on the economy. But winning votes and delivering economic growth are hardly the same.

Candidates have criticized the management of Mahmoud Ahmadinejad, the outgoing president who is ineligible under the constitution for a third consecutive term. No wonder. Since the last election in 2009, growth has vanished, the currency has lost over half its international value and official figures put unemployment at 13 percent and inflation at 32 percent. 

Not all can be blamed on Ahmadinejad’s populist policies — crucially, cash handouts and subsidized bank lending — as sanctions have tightened, especially in the past year. But the president’s critics have ample evidence that his approach has failed.

But what is the alternative, and is it being aired in the election? The central challenge of economic policy in Iran will persist whoever replaces Ahmadinejad, and candidates have been reluctant to confront it. Like many energy-rich states, Iran faces a tension between spending revenue for short-term consumption and investing it productively for long-term growth.  

Elections are part of the reason, as popular pressure goads politicians into making promises about the here-and-now rather than designing and presenting policies for the long term. It was a reformist candidate, Mehdi Karrubi, who in the 2005 election promised that if elected president he would dole out 500,000 rials monthly (then around $57) from energy sales to every Iranian over 18.

Many in Iran’s political class scoffed, but Karrubi won 17.2 percent of first-ballot votes ­— not far behind Akbar Hashemi Rafsanjani’s 21 percent and eventual winner Ahmadinejad’s 19.5 percent, and ahead of the main reformist candidate Mostafa Moein’s 13.8 percent, who fought on the typical reformist themes of social and political freedoms.

Nor was Karrubi alone in 2005 in a straight appeal to voters’ wallets. In defeating Rafsanjani in the run-off ballot, Ahmadinejad said he would “put oil money on the sofreh”, the carpet or cloth placed on the floor on which poorer Iranians sit for dinner. Again in 2009, the economy was the major issue as Mir-Hossein Musavi, another reformist, fought a skillful campaign blending day-to-day issues with a call for civil and political rights.

A mechanism for ringfencing windfall oil revenue — the Oil Stabilization Fund — was established in 2000 by the reformist government of Mohammad Khatami partly in order to finance private-sector investment. But political pressures led both parliament and government to raid the fund even before Ahmadinejad replaced Khatami in 2005. The fund was first shrouded in secrecy and then replaced by another fund which seems to have become dormant. 

Ahmadinejad delighted the International Monetary Fund with a scheme phasing out state subsidies of everyday items like gasoline, electricity and bread. But wary of political fallout, he replaced them with cash handouts, adding $15 billion to the annual budget rather than yielding the savings that abolishing subsidies was supposed to produce. His $40 billion lending program for small enterprises, plus a low-cost housing scheme, added liquidity to the economy but put the state banks further in debt.

Ahmadinejad continued his course even in the past year as tightening Western sanctions have halved Iran’s oil sales, with the government admitting that revenue for the Iranian year ending in March was at $77 billion, well below the budgeted $117 billion. With sanctions squeezing the private sector and the state short of development resources, the International Monetary Fund projects a contraction of 1.3 percent in 2013, making nonsense of the 8 percent annual growth target set by the fifth Five-Year Plan guiding government policies from 2010 to 2015.

In this year’s election, candidates have been reluctant to condemn Ahmadinejad’s cash handouts, which have amounted to 450,000 rials per person monthly since January 2011. The dollar equivalent has slipped from about $45 to $22, but this is still significant for the poorest among the 70 million population, and around half of Iranians are net beneficiaries of cash transfers compared to the subsidies they replaced. 

Rather than explaining the real issues Iran faces, the politicians have been extolling the country’s alleged successes. One candidate — Saeed Jalili, who once led negotiators in talks over the nuclear program — spoke last month of “Iran’s eye-catching progress, thanks to resistance”. 

But even without the likelihood of the United States further tightening sanctions and squeezing others into following suit, Iran’s new president will face some hard choices. And they may well not be popular. 


Gareth Smyth has reported from around the Middle East for nearly two decades and is the former Financial Times correspondent in Tehran

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Gareth Smith

Gareth Smyth has reported from around the Middle East for more than two decades and is the former Financial Times correspondent in Tehran.

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