Iran inflation keeps pressure on Ahmadinejad

TEHRAN (Reuters) - Ali Daryani is embarrassed at theinflationary pain he is passing on to his customers.

"Sometimes we have to change the price stickers three timesa day because of inflation," the 42-year-old Tehran grocersaid.

Iran's President Mahmoud Ahmadinejad survived this month'sparliamentary election without a big blow to his prestige, evenif his core support base among a broad conservative campshrank.

Now the president's opponents in the Islamic Republic, bothfrom the reformist minority and the victorious conservatives,could force him to rein in populist spending policies seen aspartly to blame for inflation hovering around 19 percent.

Since Ahmadinejad swept to power in 2005 promising tospread Iran's oil wealth to the people, soaring world oilprices have swelled national revenues, but economists saycolossal subsidies and presidential handouts have predictablyfuelled inflation.

Ahmadinejad is basking in support from Iran's SupremeLeader Ayatollah Ali Khamenei for his tough nuclear stance, buthis economic record may dent his chances of re-election nextyear.

Iranians are cushioned by a vast array of costly subsidies,but runaway prices still hit the pockets of ordinary consumers.

"The prices of rice, meat, fruit and everything else havegone up," complained Baqer Gabai, a 54-year-old retiredteacher, in Tehran's Mohseni Square. "The price of chicken hasdoubled in six months, but my income has not changed a bit."

Former Central Bank Governor Seyed Mohammad Hossein Adeli,who now heads a think-tank, said Ahmadinejad was aware of thedanger and was already reverting to some more orthodoxpolicies.

"He has helped the poor in some way with micro-attention,"he said of the president's habit of touring the provinces,receiving petitions and trying to address problems directly.

"But if you go and spend money and have a huge expansionaryfiscal policy without limits, it pushes inflationarypressures."

CURBING MONEY SUPPLY

Adeli told Reuters the Central Bank was now pursuing "verycontractionary policies" to correct this.

The previous Central Bank governor, Ebrahim Sheibani, quitlast year over differences with Ahmadinejad over interest ratepolicy. The current governor, Tahmasb Mazaheri, has proposedbank loan repayment rates, or "profit-sharing" rates, based oninflation plus a fee -- a move analysts saw reversing a policybacked by Ahmadinejad that had sent rates below inflation.

Iran, the world's fourth-biggest crude producer, has rakedin $70 billion (35.4 billion pounds) in oil revenue in the pastyear, the government says. But much of the cash flows out inlavish subsidies on everything from fuel and transport to foodand medicine.

"The system is buying loyalty to pursue its nuclearprogramme," economist Saeed Laylaz said.

Many of the subsidies are not targeted, which often meansthe rich benefit more than the poor because they consume more.

Adeli put the direct and indirect cost of fuel subsidiesalone at $45 billion a year.

Lacking the refining capacity to meet domestic demand, Iranhad been importing at least $5 billion worth of petrol a year,which was sold cheaply to the public, encouraging waste andsmuggling.

To reduce the import bill, the government began rationingpetrol last year. Last week, in an apparent bid to streamlinethe subsidy, rationing was temporarily relaxed to let driversbuy extra petrol for five times more than the subsidised price.

The new system could be extended, although the liberalisedpetrol price may also have a short-term inflationary effect.

COMPLEX TASK

"Taking away subsidies is no easy matter," said MohammadAli Farzin, an Iranian economist who heads a United NationsDevelopment Programme poverty reduction unit. "The scale of theproblem is just so overwhelming that it will take time."

Ali Reza Cheloyan, a farmer in Ahmadinejad's home town ofAradan, east of Tehran, acknowledged his dependence on stateassistance with fertiliser, tractors, petrol, gas oil andbread, as well as the price he gets for his wheat and cotton.

"Inflation has gone up but it's a global problem. Wesupport the government," he said.

Reliance on subsidies is growing, argued the UNDP's Farzin.

"Where you have chronic inflation, disproportionate risesin property prices relative to income, serious unemployment andunderemployment, it's only natural that low-income householdscannot keep up," he said. "So they rely on subsidies."

Iran has reduced absolute poverty over the years, butofficials say 7 to 10 percent of the population of 70 millionstill live below the line set at a minimum daily intake of2,100 calories.

However, Farzin said, wealth inequalities are widening.

"Iran's economy doesn't produce in such a way as togenerate sufficient employment, distribute the income well andalleviate relative poverty," Farzin said. "This is the coreproblem."

Iran is grappling with economic challenges that areexacerbated by U.N. and unilateral U.S. sanctions that haveraised the cost of doing business and deterred badly neededWestern investment in its oil and gas industry.

But it would be rash to assume more economic pressure wouldforce Iran's leaders to compromise in their row with the UnitedStates and its allies over the nuclear programme, which theWest suspects has a military purpose. Tehran denies this.

"They're in a crunch, but the reality is they have a veryhigh tolerance for economic hardship," a Western diplomat said.

Adeli, an ex-ambassador who thinks Iran should interactmore with the world for economic reasons, called sanctionsfutile.

"Historically they haven't been able to serve theirpurpose, especially when it comes to Iranians, with theirpride, their resilience, their resistance towards foreigners,"he said.

(Additional reporting by Parisa Hafezi; Editing by SaraLedwith)