Iran risks spending squeeze in election year

By Edmund Blair - Analysis

TEHRAN (Reuters) - Iran's government risks a squeeze on spending next year, when President Mahmoud Ahmadinejad is expected to seek re-election, unless oil prices bounce back to around $80 a barrel.

Despite the oil windfall it reaped as crude surged to $147 a barrel in July, economists say Iran has not saved enough to maintain spending levels now the price has tumbled to $50 and, due to sanctions, has limited prospects for borrowing abroad.

The timing is particularly uncomfortable for Ahmadinejad, who has staked his presidency on sharing out Iran's oil wealth more fairly and made frequent tours of the provinces where he doled out cash. He is expected to seek a new term in the June presidential election.

A central bank official said last week Iran was mulling a return to the market with an international bond. But, even if sanctions do not deter investors, the global credit crunch has left few players with much debt appetite.

"The situation is so tough, that if the price of oil does not go up to at least close to the level of $80 a barrel, we are going to have problems," said one Iranian economist, who asked not to be identified.

The 2008/2009 budget, which ran from March, was based on oil revenues of about $65 billion, economists say. Iran may achieve this figure even with the price fall because of soaring earnings earlier this year. But prospects next year are bleaker.

"Those writing the budget should consider pessimistic scenarios ... because it has been predicted the negative consequences of the global economic crisis will continue for at least the next one and a half years," the economic newspaper Sarmayeh wrote in an editorial last week.

If the oil price stays low, for example below $55 a barrel, it would "really impact the budget ... and the government would be facing a serious deficit unless it cuts expenditure," said economics Professor Ebrahim Hosseini-Nasab.

If the price rises to "$80-90 I think (Iran) will be safe; not too much changes in the domestic economy," he said.

RAINY DAY FUND DRYING UP

A rainy-day cash pile, the Oil Stabilization Fund (OSF), has been used to fill the budget financing gap in the past, but even the most generous estimates say it now has only $25 billion.

When the 2008/2009 budget was passed, withdrawals from the OSF worth the equivalent of $18 billion were approved.

Economists say actual withdrawals this year may be more due to higher costs of importing gasoline to fill the gap between demand and Iran's refining capacity. An official last week said Iran needed up to $5 billion more than the $3.3 billion budget.

With the OSF unlikely to offer an easy source of cash, the economist said Iran has three other routes: cutting spending, dipping into central bank reserves or borrowing from abroad.

"The only feasible option is to cut expenditure because the central bank has already been over exposed in injecting funds into banks," he said, adding that sanctions and the global credit crunch ruled out borrowing abroad as a realistic option.