Ahmadinejad Gets Blame and Sanctions as Economy Sputters

Mehdi slams a bottle of Heinz ketchup on the counter of his Tehran grocery store and says it’s the kind of item Iranians have stopped buying, after the price doubled in two months.

“People are spending their cash with more caution,” Mehdi said. He blames Iran’s government, as well as international sanctions, for the inflation that is hurting his business. “It’s a crisis in policy making, there’s not much thought behind it,” he said. “It was obvious from the start that this is what we were heading for.”

Iranians are celebrating the Persian New Year under austerity conditions exacerbated by the U.S. drive to isolate the Islamic republic’s $480 billion economy -- about the size of Norway. Measures aimed at curbing Iran’s nuclear program have targeted trade, banking and oil exports. Some imports have disappeared from the shelves and others have soared in price amid a run on the Iranian currency that saw its dollar value drop by half on the black market.

The sanctions are pushing up costs that were already surging after the government started removing energy subsidies less than a year and a half ago. Inflation has been above 20 percent since May, according to central bank figures. Mahmoud Ahmadinejad this month became the first Iranian president to be summoned to parliament and grilled about his economic policy, and in legislative elections his allies lost ground.

‘Worried About Inflation’

“Sanctions impact the most when the domestic policies of the government are unsuccessful,” said Hossein Raghfar, an economist at Al Zahra University in Tehran. “Purchasing power has decreased and Iranians are worried about inflation, especially employees who have a fixed income. The public perception is that there is no management of the economy.”

Iran has the Middle East’s second-biggest oil reserves after Saudi Arabia. It earned about $100 billion from crude exports in the 2011/2012 fiscal year, according to International Monetary Fund projections. The U.S. and European Union are blocking financial transactions with Iran, and an EU ban on Iranian oil is due to enter force in July. Iran denies western charges that it’s seeking to develop nuclear weapons capability.

More local production is the best way to counter the effects of sanctions, Supreme Leader Ayatollah Ali Khamenei told Iranians last week as they began almost two weeks of celebrations for Nowrouz, the start of the Iranian calendar year.

Supreme Leader

“If we manage to boost our domestic production, a large part of enemies’ efforts will no doubt be unsuccessful,” Khamenei said. “If we lift domestic production we will solve the issues of inflation and unemployment and our economy will be reinforced.” He also urged Iranians to favor domestic products whenever possible and shun imports.

In some cases, there’s no choice but to comply. In Tehran, shoppers and retailers list the international brands they can no longer obtain. Shahram, the head of a pharmacy on Vali-Asr Avenue, says he had to stop stocking items including Gillette razors and Pampers diapers, both made by Procter & Gamble Co. (PG)

Though sanctions prevent U.S. companies from selling to Iran, their products often make their way to shelves in Tehran and other cities through traders who purchase them in the U.S. or abroad and send them to Iran.

Hit by Sanctions

The U.S. and Europe are using sanctions to ratchet up economic pressure on Iran’s leaders in an effort to persuade them to abandon any illicit part of their nuclear program. The U.S., Europe and Israel have accused Iran of seeking the capability to build a nuclear weapon. Iran says its program is solely for civilian energy and medical research.

The Obama administration is under pressure to turn the screws on Iran even tighter as Israel warns that it’s prepared to take military action to prevent Iran from developing nuclear weapons.

“The future of foreign products is unclear,” said Shahram, who like Mehdi and many others interviewed in Tehran, declined to be identified by his surname, citing concern that Iranians who speak to foreign media risk reprisals. “Some shops had stocks and stored them away, thinking that in the new year perhaps prices will increase even more.”

Shahram said the price of locally made drugs “hasn’t changed a cent” because it’s fixed by the government, and that is hurting his business as costs rise. “When there’s inflation and the government seeks to control prices, it’s not possible to make profits,” he said. “We need to be able to go along with inflation.”

Food Prices

At the Tajrish bazaar, Abdullah, 50, wearing plastic boots up to his knees as he rinses fish for display, says the price of a kilogram (2.2 pounds) of white fish, the traditional Nowrouz meal, has risen as much as 50 percent to 120,000 rials ($10). People are opting for cheaper options such as trout, selling at 65,000 rials, he says. Nuts and pistachios, another holiday staple, have doubled to 300,000 rials a kilogram.

Higher food prices show how the effects of sanctions have spread through the economy. Iran relies on imported manure, while operating costs for farm machinery rose after subsidies were cut in December 2010.

The measure aimed to save government money, make energy use more efficient and direct spending toward the neediest Iranians, who receive cash handouts. Officials say the second round of subsidy cuts may start as early as June.

Expansionary Policies

The IMF backed the policy in a report published in July, which forecast that Iran’s economy was set to grow 3.4 percent this year, up from 2.5 percent in 2011. The fund predicted that inflation would quicken initially, to an average of about 23 percent in the fiscal year ending in 2012, before retreating to about half that level the following year, provided the government maintained “tight credit and fiscal policies.”

Ahmadinejad’s administration failed to meet those guidelines, pursuing expansionary policies when it should have cut costs, limited imports and supported local producers, economist Raghfar said. Under Ahmadinejad, who benefited from high oil prices after taking office in 2005, Iran became a more consumer-oriented society and imports surged, he said.

The president defended his policies during the special parliament session on March 14. “The government faced the most severe restrictions,” he said. “In this context of sanctions and global crisis, it performed extremely well.”

Ahmadinejad, who isn’t eligible to run again when his term ends in 2013, said recent price increases were caused by “games around the gold and currency markets” not the subsidy cuts.

Nowhere for Nowrouz

The central bank limited the availability of dollars and other currencies for Iranians after the rial plunged in January.

In any case, many Iranians who would usually have gone abroad for Nowrouz couldn’t afford to do it this year, said Mohsen Ghasemi, director of the Pardis tourism network. A knock- on effect is increased demand for domestic travel, and hotels in Iran’s main touristic cities such as Shiraz have lifted their prices by 25 percent, Ghasemi said.

“My wife and I used to travel somewhere abroad every year during the Nowrouz holidays,” said Hamid, in his mid-thirties and manager of a hotel in the capital. “This year, everywhere we’ve looked at is too expensive.” Packages to short-haul destinations such as India and Lebanon cost at least 20 million rials per person, he said.

Wealthier Iranians also are buying fewer consumer goods. In a northern Tehran computer shop dedicated to Apple Inc. (AAPL) products, salesman Khashayar says customers are dwindling after the price of Apple computers and iPhones increased by about 30 percent in a few months. “There were times when the shop would get so busy we would close it just to take a break,” says Khashayar. “Six months ago when we sold a dozen computers a day we would whine. Now if we sell three or four we pat ourselves on the back.”

No More Tips

At the other end of Tehran’s economic ladder is Hassan Jafarzadeh, 23, a former shepherd who moved to Tehran from the northern province of Gorgan three years ago. For the past three years he has worked for a restaurant, delivering food on his motorbike for 150,000 rials a day.

“When I first came to Tehran, there was a lot of money around,” Jafarzadeh said. “When I delivered food, people would pay me tips. Now they don’t put their hands in their pocket anymore.” He said the effect of Ahmadinejad’s cash handouts to the poor has been wiped out by the jump in prices.

Mehdi, the grocer, predicts that inflation and scarcity will worsen in the coming months, as routes for consumer goods to reach Iran are closed off. He likened the standoff between the U.S.-led bloc and Iran to “a game of cat and mouse.”

Listening, his assistant chipped in: “Until the mouse is cornered.”

To contact the reporter on this story: Ladane Nasseri in Dubai at lnasseri@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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