Iran's president concedes oil prices hurt economy

By NASSER KARIMI

Associated Press Writer

TEHRAN, Iran (AP) -- President Mahmoud Ahmadinejad has acknowledged publicly for the first time that tumbling oil prices are hurting Iran's fragile economy, a sensitive subject for the leader critics have accused of mismanaging the country's finances, state media reported Wednesday.

Oil prices have plunged more than 60 percent since the summer as a faltering global economy reduces demand. Ahmadinejad said that will force the government of the world's fourth largest oil exporter to make painful spending cuts, official news agency IRNA quoted Ahmadinejad as saying.

"Suppose we plan to base next year's budget on $30 per barrel of oil; we have to leave a major part of our projects behind. But we are obliged to set it on $30-$35 because we do not decide the price of oil on the global market," the president said.

It was a tough admission for the increasingly unpopular president, who is seeking re-election in June. For months, Ahmadinejad's remarks on the economy sidestepped his own country's troubling unemployment and inflation figures. Instead, he took shots at the United States, which he accused of exporting financial problems to the rest of the world.

Just last month he was boasting that even if the price of oil sank to $5 a barrel, Iran's economy would be fine. Now, the president says Iran's government has no choice but to trim spending and generous subsidies and raise taxes.

Ahmadinejad is already under sharp criticism for his unpopular economic policies. In November, 60 economists wrote their third letter to Ahmadinejad since 2006 blaming him for skyrocketing inflation caused by the huge sums of oil money that his government injected into the country's economy.

Ahmadinejad promoted the cash injections as a way to stimulate job creation. However, unemployment has increased to around 10 percent.

But it's the diving oil prices and their impact that pose the biggest threat to the president's eroding support.

Oil prices have plunged from $147 a barrel in July to under $50, adding to the pain of Iran's rising inflation and unemployment. Iran, the second largest OPEC producer, is deeply dependent on oil exports. About 80 percent of its foreign revenue comes from those sales.

International financial institutions estimate Iran needs oil at $90 a barrel to keep this year's budget balanced.

However, Ahmadinejad said the government budget for the next year would have to be readjusted to base it on an oil price of around $30 a barrel. Only a month ago, officials in the president's office said they planned to base the budget on $50-$60 a barrel.

The IRNA report was based on a transcript of an interview Ahmadinejad gave to state television late Tuesday.

"Because of the world recession, oil prices will be declining for some time," he said.

Ahmadinejad said, however, that his administration had the power to control the damage and that it would continue direct payments to the poor -- a populist pledge that helped the former Tehran mayor win the presidency in 2005.

Ahmadinejad did not elaborate on which public sector projects would have to be shelved.

Independent economic analyst Saeed Leilaz said most of them would likely be public utility projects and that oil and gas exploration projects would be delayed.

"You have already witnessed a lack of water, electricity and heating gas. No new project will be launched," she said.

Among the subsidies that could be squeezed are the high payments to keep automobile fuel low but which drain the country of hard currency. Because it has few domestic refineries, Iran must import some $350 million worth of fuel per month.

The government's imposition of limited fuel rationing in 2007, however, proved wildly unpopular.

"To manage the country in a better way, applying taxes to low-priced energy is the best" solution and would prevent the waste of resources, Ahmadinejad said.

Many economists believe cutting fuel subsidies will take Iran's inflation over 50 percent from the current 30 percent.

If Iran does see a budget deficit next year, it would need to either trim spending, print more bank notes -- at the risk of exacerbating inflation -- or borrow money. The country is thought to have $28.6 billion in foreign debt already.

However, Ahmadinejad said Iran's foreign currency reserves are healthy and currently topped $23 billion.