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Iran prepares to cut price subsidies
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Irans regime is risking further unpopularity by preparing to cut the
official subsidies holding down the prices of energy and basic
commodities.
The government says the annual cost of energy subsidies alone total
about $100bn (=A363bn, =8072bn). Iranians can buy a litre of petrol for
only 10 cents, less than half the price of the same amount of mineral
water.
But a new law means the government has to start cutting subsidies by
April at the latest.
The prices of petrol, water, electricity, gas and other essential
commodities such as wheat, sugar and rice, will all rise to
international levels over the next five years.
Many Iranians consider cheap energy and food their birthrights because
their country sits on the world’s second largest oil and gas reserves.
Dropping subsidies might deepen the regime’s unpopularity at a time
when the opposition Green Movement is still able to hold frequent
protests against the disputed re-election of Mahmoud Ahmadi-Nejad as
president last year.
The unrest has largely been led by the middle classes. But analysts
believe that the plan to cut subsidies might widen the Green
Movement’s support to include the working classes.
Mir-Hossein Moussavi, the opposition leader, has urged his supporters
to focus on economic problems, rather than political grievances, to
win over the poorer segments of society.
The industrial sector is already working at only half capacity: the
additional costs imposed by the removal of subsidies might prove to be
crippling.
“Many small and medium businesses would stop when the subsidies are
cut,” said a senior businessman. Issa Kalantari, a former agriculture
minister told the Financial Times that the “subsidies plan would be a
point-blank shot to the agricultural sector which would be hit the
most”.
But the government argues that the cost of subsidies is unsustainable
and they have encouraged domestic consumption to get out of control.
If Iranians use their oil and gas at the present level for another
decade, there will be nothing left to export, depriving the country of
its main source of income.
The government is supposed to cushion the blow by giving cash to the
most vulnerable people. The idea is to help the poor through direct
grants, instead of blanket subsidies.
This approach, argued Mr Ahmadi-Nejad, would eradicate poverty in the
next three years. Many economists support the cancelling of subsidies
as a significant move towards a free market economy.
But they are concerned about the government’s ability to implement the
plan and fear the result could be more economic damage.
The official inflation and unemployment rates stand at 13.5 and 12 per
cent respectively but economists said the real figures were much
higher. Najib Hosseini, an MP, predicted that inflation would rise to
40 per cent when the subsidies start to be reduced.
Copyright The Financial Times Limited 2010. You may share using our
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By Najmeh Bozorgmehr in Tehran
Published: February 7, 2010
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