Ahmadinejad’s Economic Conundrum

This article originally appeared in the Middle East Times.

As the economy takes center stage in the U.S. presidential election, an even more contentious economic debate is developing in Tehran. Though elections are almost nine months away (currently scheduled for June 12, 2009), tensions over the state of fiscal affairs have already risen to the point that Supreme Leader Ali Khamenei felt it necessary to interject and call for civility.

In his Friday sermon last week, Khamenei called for a halt in the attacks on President Mahmoud Ahmadinejad, which he deemed to be “destructive” to the nation. Instead, he asked that Iran’s political leaders conduct themselves with dignity and debate the issues: “If they have solutions to existing problems, such as the problem of high prices and inflation, they should say it.”

With the official rate of inflation currently at 27 percent – up from 11 percent when Ahmadinejad rose to power in 2005 – the state of the economy and the president’s record to date are certain to be central issues in June’s elections, as it was in last March’s parliamentary polls.

Critics have long accused Ahmadinejad of recklessly injecting significant amounts of cash into local infrastructure projects, which in turn leads to an increase in the money supply growth, and thus inflation. The consistent budget deficits during the Ahmadinejad presidency have certainly not helped either.

As such, it is little surprise that Khamenei’s praise for Ahmadinejad in August centered on his handling of the nuclear program and not his fiscal planning.

In fact, Khamenei and Ahmadinejad have been at odds over how to repair Iran’s struggling economy: the former supports opening up the economy through partial privatization under article 44 of the Constitution, while the latter sees it as a power grab by Iran’s elite that would tip the scales away from his biggest constituency, the poor rural communities. As such, Ahmadinejad and his supporters have consistently blocked the progress of privatization legislation in the Majlis.

Echoing Khamenei’s calls for economic privatization is the current mayor of Tehran, and likely 2009 presidential hopeful, Mohammed Baqer Qalibaf.

Qalibaf’s dislike for Ahmadinejad is well known. In a March 2008 interview with Time Magazine, Qalibaf offered these impressions of the Iranian president: “We have different tastes. There are those with narrow views. I don’t agree with those views.” When it comes to the economy, Qalibaf is equally as direct: “Our economy is public and must be privatized. A bill’s signed and we’re in that process, but it’s much too slow, and the government is investing massively in business at the same time that it’s supposed to privatize its shares of the economy. That is contradictory.”

Many Iranians struggle to understand how an energy-rich nation like the Islamic Republic is not thriving economically during the current wave of high oil prices.

Hassan Rowhani, who will represent the Moderation and Development faction in the June’s presidential elections, criticized Ahmadinejad for failing to “make use of golden opportunities” that have been afforded to him by high oil revenues.

While oil revenues topping $70 billion last year, few Iranians have seen a positive change in their standard of living. In an interview with Reuters, 54-year-old retired teacher Baqer Gabai noted that “The price of chicken has doubled in six months, but my income has not changed a bit.”

Given that Ahmadinejad made numerous bold promises when oil prices were stable around $25 per barrel, his failure to deliver prosperity during the current economic climate reflects poorly, as his critics note.

The economy, however, is hardly the only sore point. Over the past few weeks, a number of prominent Iranian political figures have openly criticized the president for his handling of the nuclear file.

Rowhani was critical of the president’s dismissal of United Nations Security Council resolutions as “worthless papers.” Former President Mohammad Khatami, who is considering another run for President, challenged Ahmadinejad during a recent speech in the southwestern province of Khuzestan: “Aggressive and blistering rhetoric plays into the hands of the enemy, harming the country and the system.” Nevertheless, criticism over the economy is never far away – Khatami soon after accused the Ahmadinejad’s administration for failing to provide accurate fiscal statistics.

Despite the disagreement over the nuclear file, the economy will be Ahmadinejad’s sink or swim issue – something the president seems to recognize. He has promised economic change and will unveil a new platform upon his return from New York.

While the complete plan is still unknown, preliminary details do not look promising. According to a Press TV report, the central feature of the plan will be a reduction in government subsidies for energy, which Ahmadinejad argues would reduce overall consumption (a major issue for a nation that imports over 40 percent of its refined petroleum).

Ahmadinejad believes that the majority of subsidies primarily benefit the wealthy and harm the poor, his main constituency. “This is one of the primary causes behind the reform of the subsidy system.”

Analysts, however, argue that the move will likely only exacerbate Iran’s inflationary troubles and leave the poor with less consumption power. The rest of his plan, which also includes the revaluation of the riyal (Iran’s currency), is equally questionable.

In the interim, he has taken steps to make sure that his vision, and not that of his rivals, is implemented. Just this week, Ahmadinejad dismissed Central Bank Governor Tahmasb Mazaheri, who has opposed a number of the president’s policies for distributing Iran’s oil wealth directly to the poor in favor of more inflation-friendly policies, including raising interest rates.

And therein lies Ahmadinejad’s greatest challenge. His populist strength is rooted in the disenfranchised and poor rural areas, yet appeasing them may well lead to economic disaster for the very people he seeks to help and a most certain political demise in June.

Joshua D. Goodman is the director of research at the Foundation for Defense of Democracies and the deputy director of its Center for Terrorism Research.