Financial Crisis, Iranian Style

A steep fall in crude prices allied with lower output will decrease the Iranian government’s foreign revenues significantly. The Tehran Stock Exchange (TSE) has lost 30% of its value in the last four months, which points to a sizable economic slowdown in the near future. Perhaps Iran is among a handful of countries that has not properly planned to combat any potential economic crisis in the face of lower oil prices and the global financial meltdown that began to show its visage in the middle of 2007. The substantial inflow of petrodollars to the government’s account coupled with the faulty assumption that the oil prices will continue to rise triggered the government to infuse billions of dollars into the economic and banking system. Iranian officials have just begun to accept the new global circumstances and are after drafting a budget for the next Iranian year to ride out the financial turmoil. The administration is planning to eliminate energy subsidies and reduce its price controls in the new fiscal budget planning in order to reduce the massive deficit. It is indeed ironic from a government that has no belief in principles of a free market economy and denied it in the past to draw such a plan, many economists have stated. Whether the government has realized its past mistakes, is unknown and whether the new budget and policy will ease the current economic problems, remains to be seen! A more important question is whether the central bank and the administration will be able to employ the available monetary and fiscal tools to tackle the profound upcoming economic challenges, since they already tied their hands by their past mistakes and beliefs. Overall, the next few months or perhaps years will undoubtedly be very challenging times for the system.