Wall Street Journal: Iranian President Mahmoud Ahmadinejad has taken initial steps to remove government subsidies of key energy and food products for Iran’s citizens, a move American officials believe could destabilize his government as international sanctions bite into the economy.
The Wall Street Journal
Moves to Withdraw Supports on Basics Appear Risky for Ahmadinejad; Showing Sanctions’ Strain.
By JAY SOLOMON And FARNAZ FASSIHI
WASHINGTON—Iranian President Mahmoud Ahmadinejad has taken initial steps to remove government subsidies of key energy and food products for Iran’s citizens, a move American officials believe could destabilize his government as international sanctions bite into the economy.
This week, Tehran began implementing its plan to reduce price supports on several staples by issuing cash payments to lower-class Iranians in three provinces, Iranian state media said. The payouts, equal to about $40 a month per eligible citizen, are designed to soften the impact of higher prices to come, according to Iranian officials.
Iranian economists believe Tehran’s plan to cut the subsidies could lead prices on goods such as gasoline and wheat to jump by as much as 20% in the coming weeks, possibly stoking popular unrest. The unwinding of lavish subsidies can be politically explosive in developing countries: Indonesia’s cut in popular payouts helped lead to the fall of dictator Suharto in 1998.
“Politically, this is suicide if it doesn’t work,” says Hashem Pesaran, a professor of economics at the University of Cambridge in the U.K. “It’s difficult to understand why he’s making this decision now.”
The fallout of the subsidy cuts could bolster Iranian opposition members’ case against the government, and also have major implications for U.S. foreign policy. The Obama administration is hoping economic strain will push Tehran into negotiations aimed at curtailing its nuclear program.
The United Nations passed new sanctions against Iran in June over its pursuit of nuclear technology, which Tehran says is peaceful but international opponents say is aimed at weapons production. Those measures were followed by unilateral moves by the U.S., the European Union and others. U.S. and European officials are expecting a new round of nuclear talks to begin next month in Vienna.
“In the coming weeks, Iran’s government is going to have to make some serious economic decisions—none of its options are good ones,” said a senior U.S. official. “The economic situation in Iran is exacerbating political divisions in the government.”
The summer’s spate of sanctions led scores of international banks and corporations to sever their business relationships with Iran in recent months. The measures have sparked jitters inside Iran’s banking system, as merchants worry about their ability to obtain foreign currency.
Earlier this month, the Iranian currency, the rial, fell by more than 10% in two days of trading due to these concerns, Iranian businessmen say. Iran’s central bank stepped in to stabilize the currency by selling U.S. dollars.
Under Iran’s existing system of price supports, a household of four typically receives nearly $4,000 a year in gasoline, oil and electricity payments from the government, according to the International Monetary Fund. Cuts will hit those pay-outs and also include water, wheat, sugar, rice and milk. The phase-out will occur over five years and prices will be adjusted to going rates in other Persian Gulf countries, according to Iranian media reports.
Mr. Ahamadinejad’s government has said the subsidy cuts are required to strengthen Tehran’s balance sheet amid lower revenues from oil sales and other export businesses. But in executing the cuts, Iran risks stoking inflation that would serve to further devalue the Iranian rial, say U.S. officials and economists.
Mr. Ahmadinejad and other Iranian officials have dismissed the impact of international sanctions and say Iran’s economy remains strong. They have also said that many countries and companies remain open to doing business with Iranian firms, despite Washington’s intensifying financial campaign against Tehran.
“The world is big and the people who are trading [with us] find ways to transfer money,” Iranian finance minister Shamseddin Hosseini told reporters in Washington this month during an International Monetary Fund conference. “There is no substantive obstacle regarding that.”
Mr. Ahmadinejad’s plan to cut subsidies was passed into law last January after more than a year of wrangling in the Iranian parliament. Economists estimate Iran spends as much as $100 billion annually to keep the prices of gasoline, fertilizer and many foodstuffs significantly below international levels. The policy has placed constraints on Tehran’s ability to fund development projects and has fed into higher borrowing rates for businesses.
Still, Mr. Ahmadinejad’s policy of cutting pay supports continues to face opposition from many powerful factions inside Iran, including the parliament and merchant class. Iran’s powerful clergy has become a particularly strident critic of Mr. Ahmadinejad, with regular attacks of his economic policies. Last month, one of Iran’s leading religious scholars, Grand Ayatollah Nasser Makarem Shirazi, charged Mr. Ahmadinejad with distorting economic data. “Statistics about reducing inflation are constantly released, but contradict what people see with their own eyes,” Ayatollah Shirazi told Iranian media.
The political pressure has forced Mr. Ahmadinejad to delay the price hikes on at least two occasions over the past year, say Iran analysts. But his government’s moves to begin doling out cash payments is seen as a sign the subsidy cuts will likely go ahead over the next month.
Many U.S. officials and Iran analysts have been surprised by Mr. Ahmadinejad’s willingness to go forward with the cuts. They note that Iran may have enough foreign-exchange reserves—$80 billion as of March, according to the IMF—to continue propping up the rial while also keeping the prices of staple goods at artificially low rates, at least in the short term. They also say that cash continues to flow into many Iranian banks, due to the high interest rates they pay for short-term investments.
One theory for Mr. Ahmadinejad’s move is that he could use the subsidy cuts to try and strengthen his own political-patronage system: The U.S. officials and analysts note that by establishing a system of direct payouts to certain sectors of the Iranian population, he could essentially tie key constituencies to his own largesse. The cuts will also hit Iran’s middle class, seen as hostile to his rule.
“The manufacturing sector could become beholden to Ahmadinejad if it wants to survive,” Mr. Pesaran said. “This could increase the president’s power.”
Iran’s government has said 60 million of its 75 million people are eligible for cash payments in lieu of subsidies for energy, fuel and food. Subsidies are paid to individuals who officially request payments by filling out forms and opening up a special bank account.
It is unclear whether the remaining 14 million aren’t eligible or didn’t request cash payments, Iranian news media reported. It is also unclear how long the payments will continue.
Iranian security officials said this week they will deal severely with price gougers for “economic havoc-making.”
“The Judiciary will deal with those who are indifferent to the country’s economic situation and are seeking to disturb the public order by hoarding goods and closing markets,” Tehran Prosecutor General Abbas Jafari Dolatabadi said in Tehran on Wednesday.