Image: Iranian President Mahmoud Ahmadinejad
Hassan Ammar  /  AP
Iranian President Mahmoud Ahmadinejad has pubicly acknowledged for the first time that tumbling oil prices are gouging his country's fragile economy.
updated 12/3/2008 6:36:00 PM ET 2008-12-03T23:36:00

Iran's hard-line president has acknowledged publicly for the first time that his country's economy is taking a severe beating from tumbling oil prices, a damaging admission by a leader whose popularity is eroding ahead of a tough re-election battle next year.

Oil prices have plunged more than 60 percent since July as a faltering global economy dampens demand. Mahmoud Ahmadinejad said that will force the government of the world's fourth-largest oil exporter to make painful spending cuts, the official IRNA news agency reported Wednesday.

Ahmadinejad said his government would have to lower its expectations of oil revenues when planning next year's budget, which is largely financed by oil exports. International financial institutions estimate Iran needs oil at $90 a barrel to keep this year's budget balanced, but it is currently below $50.

"We have to leave a major part of our projects behind," the president said.

Only a month ago, officials in the president's office said they planned to base the budget on an oil price of $50-$60 a barrel.

"But we are obliged to set it at $30-$35 because we do not decide the price of oil on the global market," Ahmadinejad said.

For months, the weakened president, who is seeking re-election in June, had sidestepped the country's troubling unemployment and inflation figures in his remarks on the economy. Instead, he took shots at the United States, which he accused of exporting financial problems to the rest of the world.

Just last month he boasted that even if the price of oil sank to $5 a barrel, Iran's economy would be fine. Now, the president says Iran's government has no choice but to trim spending and generous subsidies and to raise taxes.

30 percent inflation
Ahmadinejad was already under sharp criticism for his unpopular economic policies. In November, 60 economists wrote their third letter to Ahmadinejad since 2006 blaming him for skyrocketing inflation caused by the huge sums of oil money that his government injected into the country's economy. Inflation is currently running at 30 percent annually.

Ahmadinejad promoted the cash injections as a way to stimulate job creation. However, unemployment has increased to around 10 percent.

Possible rivals in June's presidential election — particularly former nuclear negotiator and moderate conservative cleric Hasan Rowhani — have seized on Ahmadinejad's vulnerability, noting that Iranians are poorer and the economy is suffering.

They and other critics accuse Ahmadinejad of squandering the opportunity presented by soaring oil prices over the past three years and failing to use the higher income to insulate Iran for tougher times.

The president has also drawn criticism for his hard line on the standoff with the U.S. and other major international powers over the country's nuclear program, which has contributed to Iran's isolation.

Political analyst Mostafa Mirzaian said Ahmadinejad's handling of the economy was hurting him especially with middle-class voters who are "already complaining whenever they have the chance."

Diving oil prices and their impact pose the biggest threat to the president's already eroding support.

Oil prices have plunged from $147 a barrel in July to under $48 on Wednesday, near a three-year low. The sharp decline has added to the pain of Iran's rising inflation and unemployment. Iran, the second-largest OPEC producer, is deeply dependent on oil exports. About 80 percent of its foreign revenue comes from those sales.

Damage control
Iran has been one of the most vocal proponents of steep cuts in OPEC production in an attempt to prop crude prices back up to between $80 and $100 per barrel. A 1.5 million barrel a day cut by the cartel in October, however, has so far failed to reverse the slide in prices.

"Because of the world recession, oil prices will be declining for some time," Ahmadinejad said, according to IRNA's report based on a transcript of an interview the president gave to state television late Tuesday.

But he insisted his administration can control the damage and will continue direct payments to the poor — a populist pledge that helped the former Tehran mayor win the presidency in 2005.

Ahmadinejad did not elaborate on which public sector projects would have to be shelved.

Independent economic analyst Saeed Leilaz said most of them would likely be public utility projects while oil and gas exploration projects could be delayed.

Another possibility is to cut subsidies that keep automobile fuel prices low but drain the country of hard currency. Because it has few domestic refineries, Iran must import some $350 million worth of fuel per month.

"To manage the country in a better way, applying taxes to low-priced energy is the best" solution, Ahmadinejad said.

But the government's imposition of limited fuel rationing in 2007 proved wildly unpopular. Many economists believe cutting fuel subsidies will shoot Iran's inflation up to more than 50 percent.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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