With soaring inflation, chronic unemployment and rampant poverty, Iran is nobody’s picture of economic health. So when the International Monetary Fund (IMF) issued its latest working paper on Iran last month, the rosy assessment contained therein raised more than a few eyebrows.
That study, “Iran – The Chronicles of the Subsidy Reform,” heaped praise on the regime in Tehran for launching a raft of much-needed rollbacks of costly subsidies on everything from energy to foodstuffs. This effort, the report says approvingly, “has created a unique opportunity for Iran to reform its economy and accelerate economic growth and development.”
That rosy view has gained quite a bit of resonance of late. In June, no less prominent a publication than the Economist – using the IMF’s preliminary conclusions as a point of departure – lauded the “exemplary” steps Iran has taken in commencing structural reforms to its economic sector. All of this, of course, must be music to the ears of Iran’s ayatollahs, who in recent months have redoubled their efforts to convince the world that the country is thriving despite the West’s best efforts to ratchet up the costs associated with its nuclear program.
But there’s good reason to think the opposite. Over the past three years, the Iranian government – in its quest to eliminate the massive entitlements of the Khomeini era and make the national economy more competitive – has indeed taken serious steps to pare back costly economic subsidies. This effort, launched in 2008, has so far saved the regime about $68 billion that otherwise would have been spent on artificially lowering commodity prices.
Still, it is clear that Iran’s particular version of “shock therapy” is having significant deleterious effects, at least in the short term. Without government offsets, prices for gasoline, bread and sundry other goods have soared exponentially, while inflation has jumped to just over 15 percent, nearly double what it was a year ago. To hear Iran’s leaders tell it, however, these fluctuations are only temporary and both prices and inflation will drop over time.
Well, that depends on the numbers. By dint of its methodology, the IMF relies on data culled from the very governments it is surveying, including Iran. As a result, the fund has taken at face value the exceedingly optimistic official Iranian forecasts for economic growth and glossed over systemic inefficiencies that will make long-term prosperity difficult – if not impossible – for Iran to achieve. Yet, as more than a few observers have noted, the statistics on which the IMF relied are deeply suspect. The numbers generated in Tehran “no longer serve any purpose because no one believes them,” one Iranian expert observed recently. Western economists have been similarly dubious, attributing the IMF’s optimistic conclusions to Iran’s “creatively developed” accounting.
Then there is the oil question. As the IMF study notes, oil and natural gas “remain the main source of foreign exchange earnings and fiscal revenues” for the Islamic republic. That’s something of an understatement. According to the U.S. Department of Energy’s most recent estimate, crude oil and oil derivatives make up almost 80 percent of Iran’s total exports and provide about half of its government revenues. Iran, in other words, is an economic one-trick pony, and sustained disruptions in its energy exports would wreak serious havoc on the regime’s economic fortunes – and perhaps even its domestic stability. It also means that a decline in the current high price of world oil could send Iran into an economic tailspin and dash the regime’s hopes of weathering the destabilizing effects of its subsidy-rollback plan.
Under other circumstances, this discussion would be little more than a sideshow in Iran’s notoriously fractious domestic politics. However, the true state of Iran’s economy matters a great deal because an accurate reading of Iran’s fiscal health is essential to the West’s approach to Iran’s nuclear program. Simply put, the United States and its allies desperately need to know whether existing economic pressure on the Islamic republic is working – and where and how to apply more most effectively .
Unfortunately, thanks to the IMF, figuring that out has just gotten a little bit harder.
Ilan Berman, vice president of the American Foreign Policy Council.