A Government in Disarray Over Subsidy Reforms

By Nader Uskowi

The removal of government subsidies was the focal point of Ahmadinejad’s economic reforms for his second term that began in August 2009. After heated debates in Majlis over the effect of the subsidy removals on the country’s inflation rate, the government’s plan passed the parliament in early January and became law after the Guardian Council approved it on 15 January 2010. Ahmadinejad announced at the time that the implementation of the first phase of the plan would start in “a few months.”

Helping people to cope with subsidy removals, Ahmadinejad requested Majlis to approve $40 billion allocation to be paid out in cash to over 80% of the population in monthly payouts. Last March, Majlis fearing high inflation resulting from such cash infusion into the economy refused to pass the bill, but later approved a smaller version that would allocate $20 billion to the government to fund the monthly payouts.

The government finally announced that the first phase of subsidy reforms would start no later than 21 September (the beginning of Iranian calendar month of Mehr). The government also announced that its subsidies are costing the treasury $100 billion a year, and their removals were key to country’s future economic growth.

In October, after the 21 September target date had come and gone, a number of government officials said the first phase of the reforms would start shortly and would include the energy sector, including gasoline. They also suggested that the price of new “subsidized” gasoline would be set at $1.44 per gallon with a limit of 16 gallons a month per vehicle, with consumers able to purchase extra gasoline at $2.40 a gallon.

On 12 October, government officials suggested that the first phase of the reforms would start in “ten days.” On 19 October, the government started depositing 40,500 toumans (about $40) as monthly cash payout in the accounts of 60 million Iranians, or 80% of the population. The monthly cash payout amounted to some $2.4 billion.

On the eve of the planned announcement of the start of the subsidy removals, the country’s minister of commerce raised some fundamental objections to the plan, questioning the government’s assertion that the reforms were in planning stages for months and even years. The minister said on 20 October that replacing the old subsidies with the new ones (i.e. $2.4 billion cash handout) and postponing simultaneous reductions in government expenditures would create an “avalanche” that would “destroy” everyone.

Ten days passed, still no reforms.

On 1 November, this blogger argued in a post entitled “Removing Subsidies: Political Risks and Rewards,” that if Ahmadinejad could pull off the reforms, eliminating most of the subsidies without inciting pressure from the public and rival politicians to scrap the program, he could start an economic boom that can politically reward him and his close associates, some of whom might have aspiration to run for president in 2013. If Ahmadinejad’s first term was marked by uranium enrichment and later marred by the Green movement, his second term would be defined by the success or failure of his subsidy reforms.

On 6 November, the minister of economy announced that government’s plan of redistribution of the savings from subsidy removals. 50% would be redistributed directly to the people, 30% would be allocated to agriculture and industry sectors, 20% would be allocated to the government’s general budget. Majlis immediately objected, saying no monies from the savings could be used by the government to boost its budget.

On 16 November, informed sources in Tehran indicated that the reforms would begin on 22 November (1 Azar).

On 19 November, the second monthly installment was deposited into people’s account. But the 22 November came and gone, no reforms in sight. But the old subsidies were still in force and the government was handing out additional $2.4 billion a month, notwithstanding the avalanche warning from the commerce minister.

On 1 December, the influential conservative daily Kayhan quoted the minister of economy as saying that the gasoline prices would rise 700% to $2.52 per gallon. His ministry later denied that the minister made the statement. But Kayhan stayed with its story.

On 4 December, the Central Bank of Iran (CBI) announced that the inflation has risen to 9.7% and attributed the rise in prices to physiological factors, namely public expectations of rapidly rising prices as a result of impending subsidy reforms. Now Iran has a government that is continuing its monthly cash payouts and raising expectations of an imminent rise in energy prices as the result of the reforms, with inflation rising rapidly, but no savings from the reforms, because there were no reforms. The government is creating all negative side effects of the reforms, and denying itself the benefits of the savings generated by the reforms themselves. Wow!

On 12 December, the speaker of Majlis announced that the reforms might not begin until the start of the Iranian New Year (March 2011).

This is a government in disarray. They need to put their act together and begin the first phase of the reforms now.