Iran Economy Seen Worsening

Iran’s oil-rich economy, already forecast to contract this year, is likely to suffer further in the future as a result of the steep plunge in the value of its currency, the rial, over the past month, according to the International Monetary Fund and economic experts.

In its semiannual report on global economic conditions, the IMF said the Iranian economy will contract by 0.9% in 2012, after growing 2% last year. It estimated inflation will rise to 25% this year from 21.5% last year, and that its current-account surplus will fall to 3.4% this year from 12.5% a year earlier.

However, the sharp devaluation of recent weeks, sapping one-third of the rial’s value, will adversely affect those predictions, fueling inflation and undermining the ability of Iranian companies to finance trade and import goods, according to private economists.

“The World Economic Outlook forecasts show a small contraction in Iran’s economy during 2012/2013,” said Wafa Amr, a spokeswoman for the IMF. “The very recent significant depreciation of the currency and the related increased uncertainty…will have a further negative impact on economic performance in the year ahead.”

Iran’s economy will be further hit by new European Union sanctions that European diplomats said were agreed upon on Friday.

Under the new measures, the European Union will ban imports of Iranian gas and prohibit the exporting by European countries of graphite, steel, aluminum and other metals that could be used in Tehran’s nuclear program.

Brussels is also set to tighten the thresholds on transactions with Iranian banks that can go ahead without authorization. Except for humanitarian trade, European banks will need preapproval for any transaction over €10,000, or nearly $13,000.

The IMF report, released this week, was compiled before the rial’s plunge. It forecast a potential for positive economic growth in 2013. But those forecasts are likely to fade as a result of the currency’s precipitous fall.

The dim estimates come from an institution that doesn’t view Iran with particular hostility. The IMF has been one of the few international organizations to stay closely engaged with Iran in the face of a U.S.-led campaign to diplomatically isolate it.

For instance, the fund last year praised an economic reform by President Mahmoud Ahmadinejad that aimed to save the Iranian government $100 billion a year by cutting state subsidies that have held the prices of gasoline, wheat, rice and other commodities to artificially low levels.

However, some critics of the IMF accuse the Washington-based organization with relying almost solely on the Iranian government for its economic data, resulting in overly optimistic projections. Many believe that Mr. Ahmadinejad’s policies have pushed annual inflation to as high as 70%, much higher than the fund’s estimate of 25%.

“It’s hard to accept this information as not being flawed,” said Alireza Nader, an Iran analyst at the Rand Corp. in Washington.

Ms. Amr said Iran, as a member of the IMF, retains its right to the fund’s economic advice. She also said IMF staff closely monitors Iran’s economy through its country visits and regular meetings with Iranian officials.

The Iranian government in recent days has seized on the relatively neutral conclusions of the IMF report to bolster Tehran’s claims that it will survive Washington’s economic war.

“The forecast suggests the sanctions will not face the Iranian economy with a crippling balance of payments crisis,” reported Iran’s state-owned English-language satellite channel, Press TV, this week.

Iran’s Supreme Leader Ayatollah Ali Khamenei, in a speech Thursday, chastened Western governments for expressing “joy” over the drop in the value of the Iranian rial. He said his country would endure the sanctions war and continue its development of a nuclear program.

“The Westerners, somewhat undiplomatically, didn’t even try to hide their joy at Iran’s economic difficulties,” Mr. Khamenei said in an address in northern Iran. “But, of course, we have all seen the people of Europe pour on to the streets of many European cities, and the Europeans are grappling with far more serious economic crises and problems of their own.”

U.S. and European diplomats believe the West’s increasing sanctions on Iran, and government mismanagement, have fueled the sharp drop in the rial in recent weeks.

Washington and Brussels have coordinated sanctions on both Iran’s central bank and oil exports, causing Tehran to lose $15 billion in export revenues every quarter, according to U.S. officials. Outside analysts also believe the financial sanctions are reducing Iran’s foreign exchange reserves, which were estimated to be around $110 billion at the beginning of the year.

                                                                                                                                                               JAY SOLOMON -Reuters

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