Iranian president runs into flak over draft budget

Reuters, Wednesday 1 Feb 2012

Ahmadinejad's plans for the economy take too little account of challenge from international sanctions, say critics

Iran's defence spending would more than double under plans set out by President Mahmoud Ahmadinejad on Wednesday, but critics said his overall draft budget took too little account of economic pressures posed by mounting international sanctions.

Ahmadinejad presented to parliament a budget based on a 20 per cent rise in tax revenues, but some analysts thought this unrealistic as Iran struggles with threats to key oil revenues from sanctions linked to its disputed nuclear ambitions.
The president said the public budget for 2012-13 was worth around $90 billion, with an increase of 127 per cent in the defence budget. The public budget covers items like wages, subsidies and development projects.
"The total budget is around 510 trillion tomans (around $415 billion), of which 400 trillion tomans covers state firms and entities," Ahmadinejad told lawmakers in a speech broadcast live by state radio.
Tension with the West rose last month when Washington and the European Union imposed the toughest sanctions yet in a drive to force Tehran to curb its nuclear work. The measures target the ability of OPEC's second biggest Oil producer to sell its crude.
Iran has suggested it will fight sanctions with sanctions, with the oil minister saying the Islamic state would soon stop exporting crude to "some" countries.
Iran has repeatedly said it could close the Strait of Hormuz shipping lane if sanctions prevent it from exporting crude, a move in the vital waterway which Washington said it would not tolerate.
Ahmadinejad said the draft budget proposed a 5.6 percent drop in government spending. Parliament has often criticised Ahmadinejad for allowing government spending often to exceed what was initially planned.
"The budget is aimed at securing a growth rate of eight percent, higher than 7.3 percent growth in the current year. The budget bill for 1391 (the Iranian year starting on March 20) has been drawn up by taking into account the price of oil and the international economy," Ahmadinejad said,
without giving a figure.
Iranian media said the budget was based on an oil price of $85 a barrel, which is below international crude prices. Brent crude rose above $111 a barrel on Wednesday, gaining for a second straight session on fears that tensions between Iran and the West may escalate further.
Revenues from oil exports above the proposed oil price should be transferred to an Oil Stabilisation Fund, part of foreign reserves meant to be used in situations like now when Iran faces economic hardship due to international sanctions.
In practice, analysts say, even in oil windfall years like 2008/9, the government has often tapped those reserves to support budget spending.
The president has been accused by his hardline rivals, including lawmakers, of stoking price rises with profligate spending of petrodollars.
"The submitted budget is too optimistic. It is not compatible with the realities of our economy," lawmaker Ali Akbar Olia told Reuters.
Analyst Hamid Farahvashian agreed.
"The government has adopted a contractionary policy for next Iranian year. It is unfeasible for the government to meet its spending needs with such a budget ... Parliamentarians will challenge the budget," Farahvashian said.
Critics say international sanctions and the government's economic policies are hurting many and economic growth has fallen below targets. MPs can amend the budget bill.
"The economic problems in Iran arise from the government's wrong economic policies rather than imposed sanctions," reformist politician Majid Ansari was quoted as saying by the Arman daily on Wednesday.
The president said without elaborating that defence spending would increase by around 127 per cent.
Iran is at odds with the West over its nuclear work, which Washington and its allies say is aimed at building bombs. Iran, OPEC's second biggest producer, says it needs nuclear technology to generate power.
The United Sates and Israel have not ruled out military action if diplomacy fails to resolve Iran's nuclear dispute with the West.
Iran has threatened to hit back at Israel and U.S. bases in the Gulf if attacked.
"Considering increasing pressure and threats against Iran, it was necessary to increase the defence budget," MP Jahanbakhsh Amini told Reuters.
Ahmadinejad, whose camp faces a popularity test in a 2 March parliamentary election, said the budget aimed to promote social equality, which analysts say is aimed at winning votes of working-class Iranians.
Soaring food prices are the most explosive issue for many people ahead of the vote.
While steadily climbing double-digit inflation could make the president's supporters vulnerable at the ballot box, increased social and development spending aimed at helping the poor since his government took office may limit the impact.
"Ahmadinejad's camp wants to win the vote by spending petrodollars. This will pave the ground for winning the presidential vote," said Farahvashian.
Iran's economy is feeling the bite from sanctions. Iran's inflation is now officially running at about 20 per cent, although economists say prices of the goods most Iranians worry about are rising at a much faster rate.
Inflation has been climbing steadily in recent months and Iran's rial currency has declined 40 per cent against the U.S. dollar on the black market over fears of a military strike against Iran.
Some economists questioned whether the government could achieve the forecast 20 per cent rise in tax revenues.
"Ahmadinejad has always had lavish spending and he has never respected the budget framework. How can people pay higher taxes when they struggle to make ends meet," said a former official, who asked not to be named.
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