The Economic Noose Is Tightening

About 10 days ago, representatives of the Iranian Teachers' Association gathered at the entrance of parliament in Tehran, and presented an ultimatum to President Mahmoud Ahmadinejad: Should he revoke their salary raise as foreseen in the 2007 budget, they would go on strike. "What has become of the president's promises, both before and after the elections, regarding equal distribution of oil revenues and improving the situation of the poor? Not only have we not seen prosperity, we haven't even sniffed it," protested the head of the Teachers' Association, Ali Akbar Baghani, who grew up in the poor neighborhoods of South Tehran, in an interview with the Iranian Web site Rooz. The eve of the new fiscal year in Iran, which begins on March 21, is a good time to put pressure on the president and the government. "We demand salaries comparable to those of the oil workers," Baghani insisted. In the sector he represents, the average wage is $320 a month, about half the sum Iran has fixed as its poverty line.

According to Iranian sources, a number of former ministers and politicians gathered last week at the home of former parliament speaker Mehdi Karroubi to discuss, and in fact to criticize, the way the president has run affairs of state. Reports of the meeting indicate that the participants do not like the way Ahmadinejad conducts his public relations, or his boastfulness with respect to Iran's nuclear program (their reservations do not extend to the actual decision to develop nuclear technology). The main topic of the discussion, however, was the Iranian economy.

It appears that while there is increasing anxiety in the international community over the Iranian nuclear program, within Iran itself the main concern is over the proposed national budget, submitted to parliament last week. Its members, most of whom are identified with the conservative camp, have demonstrated their unwillingness to automatically approve every plan the president proposes. Ahmadinejad undoubtedly has not forgotten his battle with them at the beginning of his term, when the parliament refused to approve his candidate for oil minister.

This time around, Ahmadinejad will have to convince the legislators that the budget's $248 billion will be used judiciously, and that the government will not overspend and then request additional allocations. This comes on the heels of the fiscal year 2006 - the year of the president's great splurge, in which he launched numerous costly plans and projects, and then turned to parliament to increase the budget accordingly.

More importantly, in the expected debate over the budget, parliament will undoubtedly demand that Ahmadinejad explain why the dependence on oil revenues has burgeoned, contrary to the guidelines of the economic five-year plan. According to the plan, oil revenues were supposed to provide $12 billion of the country's income, but in practice, their share was $40 billion. During the last year, imports have increased significantly, with the expenditure in foreign currency rising from $21 billion in 2003 to $45 billion in 2006. For Iran, this is not just bad economic data, but gloomy political news, because it is proof of the country's dependence on oil and its price on the world market, and of the Iranian economy's lack of diversity.

Its dependence on oil is considered Iran's weak point. Saudi Arabia, which is both fearful and angry over Tehran's involvement in Iraq, Lebanon and the Palestinian Authority, is not slow in exploiting that fact. Saudi King Abdullah recently declared, "The Palestinian problem must be solved by the Arabs alone, and no foreign element should enter our territory."

The struggle between Saudi Arabia and Iran is erroneously perceived as a war between Sunni and Shi'ite, but in reality it is a political struggle over Iranian power. This was the context of the Saudi statement that it would not agree to raising oil prices beyond their current levels. (Both countries are members of the Organization of Petroleum Exporting Countries, OPEC, which determines world oil prices.) The current oil prices suit the Saudis but anger the Iranians, who would like to raise them further. In addition, King Abdullah made it clear that the Iranians cannot threaten to raise the price of oil if the West imposes sanctions on Iran because of its nuclear program.

Ahmadinejad is trying to deal with that difficulty through his budget proposal. His assumption is that in the coming fiscal year, the price of oil will not drop below $33.70 per barrel, a level the Saudis are also interested in maintaining. (The current price is $52 per barrel.) Thus, in Ahmadinejad's estimation, every barrel of oil sold above that minimum price will represent surplus revenue for Iran. By Iranian law, that revenue must be transferred to a reserve fund earmarked for troubled times, like wars or natural disasters, but also for assisting the private sector.

On paper, the data in the budget proposal looks promising, to the extent that it has even won support from a number of newspapers identified with the reformist stream. In fact, however, it raises some hard questions. For example, where will the country find sources of revenue other than oil? On the face of it, the additional revenue is supposed to come from taxes and private-sector investments. It transpires, however, that many small businesses, like those in the bazaars, do not keep books as required by law, and tax collection is based on estimates alone. Furthermore, approximately one-third of all economic activity in the private sector is in the hands of charitable organizations, which are exempt from paying taxes. Among other things, these organizations are involved in distributing consumer products; and, insofar as they are tax-exempt, they undermine the competitiveness of private businesses, and thus the latter's ability to invest in expansion.

Similarly, the privatization of government bodies - a move supported by Iran's spiritual leader and patron saint of the private sector, Ali Khamenei - is not proceeding according to plan. It appears that in most cases the companies have been purchased by charitable organizations, which pay no taxes, thus further increasing the centralization of the economy.

Ahmadinejad, for his part, does little to encourage the private sector. In one of his speeches, for example, he referred to businessmen as "a corrupt group." The conservative head of the Iranian judiciary, Ayatollah Shahroudi, sharply criticized Ahmadinejad's statement, saying , "There is no place for calling someone 'economically corrupt.' If there is corruption, it must be proven in a court of law." It seems that the president got the message. Ahmadinejad also knows that he is likely to be asked tough questions about the fact that the private sector has not received assistance from the reserve fund because he emptied it to finance his ambitious projects.

These difficulties did not stop Iran from committing a billion dollars for the rehabilitation of Iraq. But Tehran apparently does not just give money away. Some of that sum is earmarked for the development of industrial zones on the border between the two countries. The commercial activity would assure revenue for Iran, thus providing some return on its investment.

At the same time, Iran's nuclear program continues without hindrance. During a visit to Tehran last week, Russian security chief Igor Ivanov said his country would not allow any international sanctions to interfere with the construction schedule of the nuclear reactor it is building for the Iranians at Bushehr - even if Iran activates more centrifuges and continues to rattle its sabers, and if the United Nations intensifies its sanctions on the country. That being the case, is it the Iranian president himself who is preventing his country from conducting a policy that is in its best interests, with no one contradicting him?

An Iranian commentator living in Los Angeles, speaking on condition of anonymity, believes that the Iranian president has made every effort to understand the signals reaching him from the field: "When the spiritual leader does not react for two weeks to the UN decision to impose sanctions, thus expressing his displeasure; when the Iranian representative at the UN does not object to the condemnation of Holocaust denial; when Mohsen Rezai, the former commander of the Revolutionary Guards and Ahmadinejad's rival, seeks a return to his old post; when parliament is preparing for the big clash over this year's budget - we can expect a quieter Ahmadinejad. After all, Iran wants to continue its nuclear development and the expansion of its influence in Iraq, and those are things that cannot be done noisily."