Iran Economy NewsANALYSIS-Iran's Ahmadinejad takes gamble on subsidy cuts

ANALYSIS-Iran’s Ahmadinejad takes gamble on subsidy cuts

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Reuters: A ragged and torn one-thousand Iranian rial note is worth around $0.10 and can buy you a couple of bus rides across Tehran, half a loaf of price-controlled bread, one imported cigarette – or a litre of gasoline.

By Robin Pomeroy

TEHRAN, May 27 (Reuters) – A ragged and torn one-thousand Iranian rial note is worth around $0.10 and can buy you a couple of bus rides across Tehran, half a loaf of price-controlled bread, one imported cigarette – or a litre of gasoline.

But the days when Iranians can fill their cars for less than the price of a cappuccino are set to end as President Mahmoud Ahmadinejad’s subsidy reform law takes effect later this year.

If successful, the plan could save the government a fortune and also lessen the impact of any future international sanctions on fuel supply to the Islamic Republic

Iran spends $100 billion a year — almost one third of gross domestic product — subsidising essentials such as petrol, natural gas, electricity and food.

Reducing gasoline demand from an inefficient and highly polluting automobile fleet would ease congestion and pollution and, crucially, might allow Iran to finally free itself from a precarious dependency on imports.

The world’s fifth-largest oil exporter lacks adequate refining capacity and imports up to 40 percent of its gasoline needs or over 100,000 barrels per day.

U.S. politicians have targeted this weakness with sanctions against fuel suppliers, as they pressure Iran to stop enriching uranium, over concerns it is seeking nuclear weapons capacity.

Several gasoline sellers have already stopped shipments to Iran in anticipation of the sanctions.

HIGH RISKS

Ahmadinejad inherited the subsidy reform policy from his predecessors but has adopted it as his own and plans to start the cuts in the second half of the Iranian year, from September, delayed by six months due to a row with parliament.

The policy gamble carries high political and economic risks.

Despite plans to make cash payments to millions of the less well-off to help them cope with steeper prices, the fact remains that people are going to notice a big jump in inflation.

That is something that opponents of the hardline government outside of Iran hope could re-ignite popular discontent which flared after Ahmadinejad’s re-election last June when Iran saw the biggest street protests since the 1979 Islamic revolution.

In a hint that growing economic concerns could pose as much a threat to Ahmadinejad as political opposition, last Monday hecklers chanted about unemployment as he gave a speech — a rare case of public dissent in front of the powerful president.

In the first six-month phase, the plan is to cut $20 billion of subsidies. Few other details have been made public: how much will prices be allowed to rise, who will be eligible for the cash handouts, and how much those payments will be.

Sifting through sparse official information and sometimes contradictory public statements by officials, analysts have made their own calculations about the economic impact.

An Iran analyst at Middle East consultancy BEDigest.com said forecasts for the inflationary impact range from the central bank’s 11 percent to parliament’s 23 percent.

Added to an underlying inflation rate of 8.5 percent, that would mean price hikes of between 20 and 30 percent — a large jump, “but not a major catastrophe”, said the analyst.

Last year official inflation was 11 percent, down from 25 percent the year before, so Iranians would cope, he said.

Kevan Harris, a sociologist at Johns Hopkins University, said the likelihood of a painful price shock depended on the pace of reform. “The risks are high if the plan goes forward fast,” said Harris, an Iran expert who frequently travels there.

“More likely is a sluggish implementation and in this respect the Byzantine aspect of the state is a boon — slower is usually better when it comes to such a policy.”

Without a massive and sudden surge in prices, Harris does not see an uprising by the poor.

“I would expect poorer Iranians to deal with this hardship the way they usually deal with such problems.” Households would muddle by, relying on relatives and local connections to make ends meet, he said.

RIOTS

On a balmy spring evening in Tehran, clapped out Iranian-made Paykans squeeze past Korean SUVs to get to the gas pumps where drivers insert micro-chipped cards that allow them to buy their ration of subsidised petrol. Each car owner is allowed to buy 60 litres of gasoline per month at the $0.10 price. After that they pay the semi-subsidised rate of $0.40.

When the government first set limits on the amount of dirt-cheap fuel available, in 2007, riots broke out.

With that in mind, the government may chose to soften the impact on motorists at first by keeping the 10-cent gas, but gradually reducing the amount is allows people to buy, the BEDigest.com analyst said.

Other price hikes will be less easy to mask. The price of natural gas used for cooking and heating could surge from 150 rials ($0.015) per cubic metre to 900 ($0.08) — something that would be particularly painful if it happens as Iran enters a cold winter, the analyst said.

But despite Iran’s bitter election battle last year, and the massive protests which followed, few voices have been raised in outright opposition to the subsidy reform — likely to be the biggest economic policy move of Ahmadinejad’s political career.

Sceptics tend to express concern over the method or pace at which it will be introduced rather than saying it should not happen at all, such is the political consensus that Iran needs to shake off its reliance on subsidies.

Most politicians and economists agree that a dose of market realism could help the economy develop, reduce waste, increase energy efficiency and, by reducing consumption, neuter the threat of a future sanctions banning gasoline sales to Iran.

One Tehran motorist waiting to fill up his compact SABA Pride — an Iranian version of the Korean Kia — said he agreed the current system was unfair as the relatively wealthy who consume more gained more from the subsidies than the poor.

“There would be more justice without the subsidies so it’s a good idea,” he said, but added he was not likely to change his own behaviour. “I won’t get the bus no matter how much the prices go up,” he said.

But the real impact of the subsidy reform — on consumption patterns, on the economy and on Iranian politics — will depend on exactly how much, and how quickly, prices rise, and no one knows that yet.

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