Accessibility links

Breaking News

Iran Moves To Cut Popular Economic Subsidies Despite Political Risk

The removal of subsidies would quadruple the price of gasoline and could result in similar increases for basic goods, creating an inflation rate of 60 percent of more.
The removal of subsidies would quadruple the price of gasoline and could result in similar increases for basic goods, creating an inflation rate of 60 percent of more.
Iran's top legislative body has approved a plan to phase out billions of dollars in state subsidies that currently keep the costs of energy and food low in the country's inflation-struck economy.

The Guardians Council on January 13 approved President Mahmud Ahmadinejad's "Economic Reform Plan" intended to allow the prices of now-subsidized goods to reach normal market prices over the course of the next three to four years.

The body's spokesman, Abbas-Ali Kadkhodaei, said the bill complies with Islamic laws and the Iranian Constitution. The approval comes just a week after the Iranian parliament, the Majlis, ratified the bill after much controversy over how the government will carry out the changes.

It's not immediately clear when the bill will be implemented.

Through the cuts, Ahmadinejad hopes to save some $100 billion now spent to control the prices of petroleum products, electricity, water, wheat, milk, rice, and fertilizer, to name just some of the goods.

Funding those subsidies currently eats up 30 percent of the country's annual state budget.

But RFE/RL's Radio Farda economics correspondent Javad Kooroshy says eliminating them could prove a high-stakes gamble for the government.

"The subsidies, which have been in place for three decades, keep the cost of gasoline to one of the lowest prices in the world: some 10 U.S. cents a liter," Kooroshy notes. "Ordinary Iranians have grown used to relying upon the low cost of fuel and staples both at home and in business."

During parliamentary discussion of the bill, the Majlis Research Center, the parliament's research arm, warned that removing price supports would quadruple the price of gasoline and could result in similar increases for basic goods, creating an inflation rate of 60 percent of more.

A number of gas stations were torched in 2007 when gasoline prices rose 25 percent.
Perhaps most dangerously for Ahmadinejad, the phase-out comes at a time when his government already faces the worst political unrest in Iran since the Islamic Revolution. If the subsidy cuts stoke economic discontent they could give new life to the opposition protests which still continue seven months after his disputed reelection in June.

Unpopular Action

Kooroshy says that previous Iranian governments which have had trying to reduce subsidies have run into trouble. To date, all of them have had to reverse their efforts for fear of unrest.

"In 2007, during Ahmadinejad's first term, rioters torched at least 19 gas stations in nationwide antigovernment protests after the price of gasoline was raised by 25 percent," he says. "Ahmadinejad later withdrew the measure."

Still, governments have repeatedly tried to eliminate the popular subsidy program because leaders across the political spectrum agree that it is harmful for the country.

The subsidies encourage overconsumption of gasoline and other products, make Iran more dependent on imports, and encourage smuggling of the subsidized goods across the border for resale in neighboring states.

In the case of gasoline, the public's demand for low-cost fuel is met by importing most of it from abroad because Iran's own domestic refining capacity is too small to supply the market.

Phasing out the state funding carries high risks, chief among them being stoking inflation at a time when it's already high. The official inflation rate currently stands at 13 to 15 percent, down from a 2008 peak of nearly 25 percent. But independent observers say Iran's inflation rate is higher than official figures and always in double digits.

At the same time, most Iranians have little prospect of earning more income in the country's stagnant and heavily state-dominated economy.

Social 'Justice'

But if many former Iranian governments have wanted to eliminate subsidies for economic reasons, Ahmadinejad has brought an additional ideological dimension to his effort.

He has called phasing them out a matter of social justice to protect the rights of the poor against abuses by the rich.

President Ahmadinejad has previously distributed funds to cities and towns he visits personally.
Ahmadinejad pushed the bill through parliament by arguing that blanket subsidies unfairly reduce the living costs of the rich as much as they benefit the poor.

Initially, Ahmadinejad's government had demanded the authority to spend the money in any area it sees fit. But the parliament insisted on a compromise position that was finalized last week.

The two sides agreed to setting up a government agency that will redirect to Iran's poorest households 50 percent of the money the government saves by eliminating the subsidies.

It will direct another 20 percent to infrastructure projects to promote the industrial and agricultural sectors and to programs strengthening the country's weak social-security system.

The new agency's operation will be overseen by the Majlis as part of the normal government budget process.

Will Subsidies Hit Target?

But the Majlis gave Ahmadinejad a free hand to use the remaining 20 percent of the money saved for projects of its own choosing, outside the usual parliamentary budget-approval process.

Whether the government can successfully manage such a complex restructuring of the economy is an open question. Kooroshy says that Ahmadinejad's government lacks the information needed to change the subsidy system without causing economic pain and unrest.

"The government aims to support households which earn under $300 to $350 a month. But Iran does not have accurate tax records or census information that identifies precisely which families have what incomes," Kooroshy says.

"So there is really no way for the government to guarantee that it can find needy homes and deliver help to them, as it promises."

State media have said the government will open bank accounts for 36 million people to give them cash to compensate for the higher food and energy prices. Few other details of the program are publicly available.

The government's efforts to go ahead with minimal parliamentary supervision lead some to suspect Ahmadinejad will seek to use the money to further expand his own patronage system among the poor.

In his first term, he often directly dispersed money to towns and villages he visited, calling the handouts in line with his policy of "bringing the oil money to the people's dinner table."

The big questions now are whether the people will accept Ahmadinejad's argument that his subsidy cuts are indeed in their best interest, and whether they will stay off the streets if they bring economic pain instead.

RFE/RL has been declared an "undesirable organization" by the Russian government.

If you are in Russia or the Russia-controlled parts of Ukraine and hold a Russian passport or are a stateless person residing permanently in Russia or the Russia-controlled parts of Ukraine, please note that you could face fines or imprisonment for sharing, liking, commenting on, or saving our content, or for contacting us.

To find out more, click here.