Proposed Iran budget reduces oil dependence

February 1, 2012 - 1:15 PM

TEHRAN, Iran (AP) — Iran's new budget, presented to parliament Wednesday, cuts spending and aims to reduce the country's dependence on oil revenues, as the West cranks up sanctions against Iran that could cut into its oil exports.

The new budget, which would go into effect in the new Iranian calendar year beginning March 20, would cut overall government spending by 5.6 percent while boosting spending on development projects by 20 percent. In all, the budget is about 5 percent lower than the pervious year's budget and is based on a projected oil price of $85 per barrel.

The draft budget "has been drawn up based on precise predictions about the global situation, the country's economy and the oil price," President Mahmoud Ahmadinejad told the parliament in a speech also broadcast live on state radio.

He said the government was looking to reduce its dependence on oil revenues, but did not elaborate further aside from saying that Iran was already diversifying its economy and increasing its non-oil exports.

The new budget comes at a time when Iran is confronting growing international pressure and isolation over a nuclear program the United States and its allies maintain is geared at weapons development. Iran has repeatedly dismissed the claim, arguing the program is for purely peaceful purposes such as generating electricity.

The United States imposed, but has yet to put into force, new sanctions targeting the Iran Central Bank while the European Union has imposed an oil embargo — measures Tehran has blasted as tantamount to a declaration of economic war on the Islamic Republic. The EU embargo is slated to go into effect in July.

In tandem, the sanctions complicate Iran's ability to sell its oil, and Iranian officials have reacted with equal parts anger and disdain for the measures.

While officials have said the oil embargo would hurt Europe more than Iran, others have repeatedly warned the country could choke off the Strait of Hormuz, through which a fifth of the world's oil flows, in retaliation for sanctions targeting its oil sector. The warnings have rattled global oil markets.

By early afternoon in Europe, the U.S. benchmark crude futures contract for March delivery was hovering at slightly more than $99 per barrel on electronic trading on the New York Mercantile Exchange while its London-based Brent counterpart was trading up over $1 at $112.13 per barrel on the ICE Futures exchange.

Ahmadinejad's comments that the draft budget envisages a reduced reliance on oil revenues reflects the building tensions stemming from the potential impact of the sanctions and the threat to close the strait. Oil sales account for 80 percent of the country's foreign revenues.

The country produces about 4 million barrels per day, making it the second largest producer within OPEC, and exports about half its output.

While strong oil prices over the past couple of years have helped the country build a solid foreign currency reserve base, earlier U.S. sanctions and other restrictions have pressured the economy. The latest tension has affected the value of the currency, with the Iranian rial shedding as much as 50 percent of its value against the dollar since the start of 2012 before rebounding in the past week. It now trades on the black market at about 20 percent lower than its level at the start of the year.

The currency pressures have built on already troubling macroeconomic indicators, such as increasing inflation and unemployment rates.