Monday, December 20, 2004

FT.com / World / Middle East & Africa - Sparks fly over Iran's $8bn oil price buffer fund

FT.com / World / Middle East & Africa - Sparks fly over Iran's $8bn oil price buffer fund: "Sparks fly over Iran's $8bn oil price buffer fund
By Gareth Smyth in Tehran
Published: December 20 2004 17:36 | Last updated: December 20 2004 17:36

Rivalry between the Iranian government of reformist President Mohammad Khatami and the conservative majority in parliament, is intensifying over the windfall oil revenues generated by high oil prices.

The oil stabilisation fund, which contains revenues accrued when the oil price rises above $19 a barrel, was set up four years ago to hedge against price falls and finance private sector projects. It totals about $8bn (€6bn, £4bn).

But as they jockey for position before next year's presidential election, reformists and conservatives are at odds over how the money should be spent.

"The government and parliament are both trying to get their hands on it," said Heydar Pourian, deputy general secretary of the Tehran metals exchange.

Along with Iraq, Iran has about the cheapest petrol in the world, resulting in congestion on Tehran's streets, air pollution and petrol smuggling to neighbouring countries. But a political consensus has evolved to keep prices down, for fear of provoking social unrest.

Deputies in the majlis, the Iranian parliament, have refused the oil ministry's proposal to use $1.3bn to pay for the higher cost of importing petrol, agreeing to only $825m. Instead, some deputies have proposed giving $900m from the oil fund to agricultural areas that have faced drought, $500m to the Imam Khomeini Relief Committee for welfare projects and $350m to the Basiji, the Islamic militia, to improve its bases.

But the reformists in government see these proposals as ways to influence the presidential elections, which are expected to be held next May or June.

Mohammad-Jaafar Mojarrad, vice-governor of the central bank, expects oil revenue in the current year, ending in March 2005, to reach record levels.

"We expect the fund to reach $10.5bn by year-end if the year's average price is $34 per barrel, and $9.6bn at an average of $33 per barrel," he said. "This would be the fund's highest-ever level, despite projected government withdrawals of $5.5bn in the current year."

He was confident the government and parliament would resist political pressure to tap the fund, pointing out that the parliamentary speaker, Gholam-Ali Haddad-Adel, recently warned his colleagues to consider Iran's long-term future.

When the government in the last financial year, ending March 2004, withdrew around $5bn from the fund - to cover a budget shortfall and for $2.2bn in private sector loans - the central bank warned it would fuel inflation. An International Monetary Fund report in September emphasised the need "to increase savings in the Oil Stabilisation Fund while oil prices are high" and advised the authorities to "resist pressure to relax fiscal policy".

The oil fund is managed alongside Iran's other foreign exchange holdings, which are now held 40 per cent in dollars and 60 per cent in other currencies, according to Mr Mojarrad. "This is a change from two years ago when 70 per cent of our holdings were in dollars. Like any central bank, we are cautious. Ours is a professional judgment and nothing to do with politics.""

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