Iran sanctions a ‘blessing in disguise’

06/10/2009 | Taimur Ahmad, Gareth Smyth

Sanctions against Iran’s petrol imports could be “a blessing in disguise”, the country’s Central Bank governor, Mahmoud Bahmani, said yesterday.

Penalizing companies that sell Iran petrol is being considered in the US and Europe as an option should talks over Iran’s nuclear programme fail. “When nations are subject to sanctions, they innovate,” said Bahmani, in an interview with Emerging Markets in Istanbul.

Iran has been trying for several years to reduce consumption of petrol –which sells cheaply due to subsidies – and to increase refining capacity.

Some reports have suggested that petrol imports, which come mainly through the UAE, have halved since rationing was introduced in 2007, when imports were 40% of consumption. Using a smart card, motorists buy a quota at around $0.10 a litre, and can buy more at a higher price.

Advocates of further sanctions argue they would spark discontent and increase pressure on the authorities to curb the nuclear programme.

But Bahmani argued that while punitive measures imposed “a price”, the country’s vulnerability was low. Foreign reserves were at levels “unprecedented for half a century”, he said.

As is Iran’s practice, he declined to reveal figures, and he was also unwilling to disclose the size of the Oil Stabilisation Fund (OSF), which collects windfall oil earnings for investment and contingencies.

“Because of the current international situation, we prefer not to [disclose this] anymore,” he said. “At present, we are facing some threats. Naturally, we have to equip ourselves to face them.”

The Economist Intelligence Unit estimates foreign reserves at US$81.1 billion, down from US$96.3 billion in 2008. An Iranian parliamentary report put the OSF in March at $25 billion in March.

Bahmani said Iran held “very little” of its reserves in dollars and was “steering clear” of the greenback in its oil sales.

Iranian banks stopped issuing letters of credit in dollars in 2007 as the US tightened unilateral banking sanctions, and the Central Bank reported in August 2007 that Iran was receiving 70% of oil revenue in currencies other than the dollar.

As well as coping with US and UN sanctions, the Central Bank has faced since 2005 a government, under president Mahmoud Ahmadinejad, that has favoured expansionary fiscal policies and bank lending rates at or below inflation.

Bahmani’s two immediate predecessors, Ebrahim Sheibany and Tahmasb Mazaheri, left in quick succession in 2007 and 2008 after differences with Ahmadinejad.

But Bahmani, who took over in September 2008, has revived the Monetary and Credit council, which met in July around two years after it was reportedly abolished by Ahmadinejad.

Bahmani described the two years as “a number of meetings held in different venues” rather than – as suggested in some media reports – the council’s decision-making powers, including over lending rates, being exercised by the president’s office.

The governor stressed his co-operation with Ahmadinejad and his own attendance at cabinet meetings. “It’s interesting that our close working relationship has led to my having a free hand with independent decisions,” he noted. “Decisions are fully based on [technical] expertise and independence.”

Bahmani said monetary policy had now “fully contained” liquidity growth, meaning point-to-point inflation had fallen to 13.1% in September from 29.5% in September 2008. “We can now envisage achieving single-digit inflation,” he added.

President Ahmadinejad’s critics argue his spending policies have diverted resources away from investment needed to stimulate employment, so compounding effects of the global economic crisis and falling oil prices.

Hence the recent IMF World Economic Outlook projected Iran’s growth at 1.5% for 2009 and 2.2% for 2010, down from 7.8% in 2007 and an average 5.4% from 1996 to 2006.

Bahmani stressed the global crisis had been “triggered in the developed countries”, which had behaved “in an ignorant manner” over risk management.

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