IRPO: AUGUST 2006 ECONOMIC UPDATE

S E C R E T SECTION 01 OF 02 DUBAI 005421 SIPDIS NOFORN SIPDIS E.O. 12958: DECL: 8/26/2016 TAGS: IR ECON EFIN SUBJECT: IRPO: AUGUST 2006 ECONOMIC UPDATE REF: A) 05 DUBAI 4989; B) DUBAI 3999 DUBAI 00005421 001.2 OF 002 CLASSIFIED BY: Timothy M. Brys, Acting IRPO Chief, Dubai, UAE. REASON: 1.4 (b) 1.(S//NF) Summary: Contacts and visa applicants constantly tell us that business in Iran is "dead." They claim it is worse now than in Ahmadinejad's first few months in office, and continues to deteriorate. This downturn in business has also affected businesses with ties to the Iranian government. Contacts and visa applicants report that prices for goods have risen at least 20 percent since the Persian New Year (21 March),exacerbating an already difficult economic situation for many Iranians. Iran's economic situation is made worse by problems with budgetary issues and corruption. End summary. Business and Investment Climate Takes a Dive -------------- 2.(SBU) According to a recent report in the Economist, the business atmosphere in Iran in 2005 was the worst among 60 developing nations surveyed, while the investment climate was evaluated as unfavorable. Iran's Tehran Stock Exchange (TSE), has fallen almost 4000 points since September 2004, according to TSE figures (Ref A). In addition, the number of shareholders in SIPDIS the TSE reportedly dropped from 53,000 in September 2004 to 17,000 in March 2006, and the share of real buyers has dropped from 35 to 17 percent. Abysmal Economic Climate Affects Even the Government -------------- -------------- 3.(S//NF) A board member of Iran's Alborz Insurance Company recently claimed to Conoff that two issues are to blame for Iran's current economic situation: 1) the fiscal policy of the Iranian government; and 2) the current political situation. He believes the situation will not improve under the current government. He repeated the oft-heard complaint that many of those in charge of policy in the current Iranian administration have little experience. As a result of the recent government decision to lower interest rates, banks are giving fewer loans. In addition, building projects have stopped as many in the construction business have adopted a "wait and see" attitude. 4.(S//NF) According to the head of a private consulting business in Iran, business has worsened since Ahmadinejad took office. A large percentage of the consultant's business is government-related, and he claimed the Iranian government is often late with payments as a result of Iran's poor economic climate. When the government does pay, he claimed, it is only small amounts at a time. A Tehran-based businessman reiterated these comments, and told Acting Consul General on July 15 that the current economic situation in Iran is very bad. He said the government is not paying contractors, and claimed that he knew of one who had not been paid by the government in six months. He alleged, however, that these contractors "were sure" they would eventually be paid. Inflation on the Rise -------------- 5.(S//NF) According to an announcement by the Central Bank in June, Iran's inflation rate dropped to 12.1 percent during March 2005 to 2006. Iran's Economic Minister, Davud Danesh Jafari, announced on July 11, that the rate had fallen to 10.3 percent from June 2005. Both of these figures, however, are far below the level cited by analysts. In mid-June, 50 prominent economists wrote an open letter to President Ahmadinejad, warning that his government's fiscal policies were promoting "skyrocketing inflation." According to an Iran Daily (an English-language news website) report from August 20, a professor from Allameh Tabatabaei University stated that prices for consumer goods and services have risen 42 percent since the beginning of the Iranian new year (March 21) and put the "unofficial" inflation rate at 30 percent. He admitted that the government "has managed to bring prices under control in recent months," but despite these "controls" inflation remains at 28-30 percent. The same article quoted a former deputy economic minister, who stated that official inflation figures released by the Central Bank are accurate and "truly reflect the economic situation." 6.(S//NF) A number of contacts and Iranian visa applicants in Dubai have complained about the recent increase in prices on consumer goods and overall inflation (tavarom in Farsi) in Iran. An Iranian who owns a grocery store in Iran told Conoff on June 13 during a visa interview that prices have gone up an average of 20 percent since the beginning of the Iranian new year. He DUBAI 00005421 002.2 OF 002 was unclear about the exact cause of the increase, and was unsure if fear over possible sanctions was leading to hoarding and driving the prices higher as had been claimed to Conoff by a separate visa applicant in May. He surmised, however, that the increase was probably a simple case of supply and demand. He claimed that the highest prices were being charged for imported products, especially beef, and also Iranian products that could fetch a higher price if exported. Interestingly, he did not blame the government, which he thought was doing its part to keep prices down, but the market which determined much of the price. 7.(S//NF) This information tracks with information from a longstanding contact of Conoff's who reported in May that prices had risen closer to 30 percent since the beginning of March. A factory owner who was in Dubai for a visa interview told Conoff on July 17 that the already bad economic situation in Iran has been made worse by high inflation, claiming that prices have increased anywhere between 15-20 percent in recent months. An employee at Iran's Banking Institute told Conoff on July 19 that the official inflation rate, as allegedly reported by the Central Bank of Iran, is approximately 15 percent (Note: It is unclear why the official rate as provided by this contact does not match that found in press. End note.) He claimed, however, that the increase is actually closer to 25 percent, but gave no indication of the reason for the discrepancy between official figures and what is actually occurring. 8.(S//NF) Although Iran's government announced on August 19 that it will proceed with gasoline imports until the Majles settles the budget issue and issues a bill on gasoline rationing, prices may be driven even higher if the government's plan to ration gasoline goes into effect (Ref B). Rationing or higher gas prices will drive up the cost of transporting goods. This, in turn, will cause a price hike, further hurting struggling Iranians. In a July 15 discussion with Acting CG, a Tehran-based businessman claimed that people do not have the money to pay higher prices for gas. Unprincipled Economic Policy Plagued by Corruption -------------- -------------- 9.(S//NF) Iran's economic problems are being exacerbated by issues with the budget and economic policy. According to the insurance industry contact, Iran's budget is "totally crazy." He claimed that Ahmadinejad's administration has "totally massacred" the budget and that it is nowhere near balanced. A separate Iranian businessman told Conoff that the government has not allocated funds in the current budget to cover economic promises that Ahmadinejad makes on his trips to the provinces, raising doubts whether these projects will be implemented. 10.(S//NF) The insurance contact further asserted that the entire Iranian government is "corrupt." He claimed Ahmadinejad only made a pretext of being hard on corruption during the election to get votes. Although he promised to get tough on corruption before his election, his anti-corruption campaign has thus far achieved few results. This information tracks with what Conoff was recently told by two-Dubai based Iranian businessmen. They claimed that Ahmadinejad's picks for several key economic positions in his administration are well-known to be corrupt, including the head of Bank Saderat Iran(who previously directed Saderat's Dubai operations) and possibly the head of the oil surplus account. Comment - Ahmadinejad Not Delivering on Promises -------------- --- 11.(S//NF) Ahmadinejad campaigned on a platform of social justice and one of his key campaign slogans was "a chicken in every pot." To date, many Iranians, including Ahmadinejad's core supporters among the poor and those in rural areas, have yet to see the economic improvement they were promised. In fact, with increased prices, the economy's poor overall condition, and the possibility of gasoline rationing, many Iranians' economic situation may become worse instead of better. Iranian visa applicants and contacts have made it very clear that the day-to-day struggle to make a living and feed their families supersedes all else, including a desire for greater political or social freedoms. If the already precarious economic situation of many Iranians is further threatened, Iranians may resort to street protests to call attention to their dissatisfaction. BURNS BRYS