The IMF's Bizarre Love of Iran

The IMF says the Iranian economy is growing after subsidy reform

We don't tend to think of Iran as a paragon of economic reform, and we certainly don't expect an organization like the International Monetary Fund--perhaps the most prominent symbol of the Western capitalism Iranian President Mahmoud Ahmadinejad disdains--to recognize Iran as such. On Thursday, though, The Wall Street Journal examined the IMF's "rosy" report on Wednesday that the Iranian economy grew by 3.2 percent this year on the strength of greater agriculture production and higher oil prices. The IMF praises Iran for cutting $60 billion in subsidies of energy and food products in December while containing inflation, noting that "the subsidy reform is expected to increase efficiency and competitiveness of the economy, improve income distribution, reduce poverty, and help Iran unlock its full growth potential."

The Journal, however, recommends you take those numbers with a grain of salt (Dina Esfandiary of the International Institute for Strategic Studies in London agrees, while Bloomberg reports the same news less skeptically). For starters, the report contradicts an IMF assessment in April that the Iranian economy wasn't growing at all--a report that appears to have relied on independent economists rather than official Iranian data and that drew fierce criticism from Iranian officials, spurring the IMF to revise its analysis. The Journal adds that the IMF analysis is also at odds with the view of many Iranian analysts, who claim the mismanaged and inefficient economy, beset by international sanctions related to Iran's nuclear program, is actually contracting dangerously. Far from praising the subsidy reform, the paper observes, many Iranians are blaming the strategy for stoking inflation and market volatility.

What makes today's article particularly interesting is that it comes a week after the Journal reported that Iranian President Mahmoud Ahmadinejad is "being hailed as an economic reformer" in the halls of the IMF, where people considered his subsidy reform "one of the boldest economic makeovers ever attempted in the oil-rich Middle East." Iranian and IMF officials told the paper that by scaling back energy and agricultural price subsidies, Iran managed to reduce domestic oil and gas consumption, sell more of those energy assets abroad, and dole out $40-a-month payments to Iranian households to help them cope with high prices and sanctions. "This reform is first and foremost about reducing a waste of resources," Dominique Guillaume, the IMF's lead economist on Iran, explained in an interview. "But it also creates a greater sharing of Iran's oil wealth amongst its people."

What explains the IMF's sudden fondness for Iran? It's not entirely clear, but the Journal does note that the IMF and World Bank have long "pressed the Middle East's monarchies and one-party states to embrace market prices," with little success. Perhaps the organization is now doing all it can to coax that process along in Iran. And while the evidence raised by the Journal suggests that the IMF's praise may be misguided, The Economist thinks the IMF has a point:

Not only has [the subsidy reform] relieved the government of a huge financial burden. It has slashed local energy demand, reducing chronic pollution and leaving more oil for export. It has dramatically raised disposable incomes for the poorest without placing extra burdens on the rich, spreading social equity while boosting consumption and bolstering the banking system. In future, Iran’s subsidy reform may even be seen as a model for top-down social change, not unlike successful schemes pioneered by Mexico and Brazil.