Iranians brace for price hikes as government rolls back on subsidies

Iranian households have weathered a series of economic disasters since
December 2010, when the implementation of Mahmoud Ahmadinejads subsidy
reforms led the prices of fuel, utilities and groceries to skyrocket. In a
nation buckling under the weight of sanctions and stagflation, this week’s
implementation of the second phase of subsidy reforms is fueling fear of
further economic instability. Billed as a necessary liberalising measure by
President Hassan Rouhani’s centrist government, the state’s removal of some
$16 billion in fuel subsidies has found few supporters among members of the
public, many of whom are too concerned with making immediate ends meet to
accept the government’s mantra of short-term pain for long-term gain.

Long prescribed by the International Monetary Fund as a necessary step
toward market competitiveness, the removal of government subsidies on
energy, food and medicine has proved an economically costly undertaking for
both the previous and current administrations. At an estimated cost of
$40-100 billion annually, the subsidies – a holdover from Iran’s 1980s
wartime economy – have strained government coffers and fostered inefficient
energy use. But a decade of inflation and low job creation meant that
Iranians grew increasingly dependent on them.

To pad the financial impact on households, the Ahmadinejad administration
introduced in 2010 its now-infamous plan of per capita payments to a
majority of the population, as well as direct payments to affected
industries. In the ensuing panic, the prices of gasoline, heating gas and
staple food items tripled overnight. While barely palpable in upper and
middle-class households, the cash subsidies lowered labor incentives for
low-income families, causing further dependence on government handouts.
They also infused the already overheated economy with extra cash,
devaluating the currency, slowing production and leading to rampant
inflation that is still being felt now, over three years later.

The new government now finds itself in an impossible situation: It has to
push forward with the liberalisation of energy prices while also continuing
the cash handouts, which have become a lifeline for the increasing number
of poor and unemployed. Unlike the oil-rich Ahmadinejad administration,
Rouhani’s debt-ridden government is under pressure to cut spending while
addressing mounting environmental and socioeconomic problems: traffic and
air pollution in large cities, infrastructural backwardness in the
provinces, water scarcity, and a nationwide youth unemployment rate of
nearly 30%.

For now, the amount of the monthly cash payout to each applicant remains
unchanged at 45 thousand tomans (less than $15), financed by the removal of
some 48 thousand billion tomans ($16 billion) in energy subsidies. Top
income earners have been asked not to apply this time around, but
enforcement is difficult due to the profligacy of unreported incomes.
Subsidy applicants have had to declare income and provide bank account
information. The government may access the bank accounts and fine
applicants in case of discrepancies. Over three million people have
forfeited their subsidy applications, according to government figures.
Still, some 73 million people applied for the phase-two subsidies, and over
half of them declared monthly incomes below $300.

Meanwhile, Iranians are bracing themselves for the inflationary fallout.
Prices of subsidised gasoline, available to motorists based on a monthly
quota, rose by 75% on 25 April, from 400 to 700 tomans ($ .16 – .28) per
liter. Unsubsidised gasoline prices increased 42%, from 700 to 1000 tomans.
The cost of heating fuels had already been raised 25% earlier in the year.

The experience of 2010 has led Iranians to believe that the fuel hikes will
have wider consequences like higher food prices, rents and other living
expenses. Tehran taxi fares, among the first harbingers of the widespread
inflation in 2010, fluctuated wildly in the week before 25 April. Drivers
on popular rush-hour lines from north Tehran’s Vanak Square doubled their
fares, ignoring transport regulations asking drivers to cap fare increases
at 30%.

To prevent panic and arbitrary price hikes, pundits have emphasised the
smaller scale of current reforms. The economic daily Donya-e-Eghtesad
published a front-page article comparing the current situation to the price
increases of 2010, noting that the 75% gas price increase was considerably
lower than the 300% surge of 2010. In a separate editorial, economist Ali
Dadpay said that the new phase of subsidy reform was “not a failure,” but
“an experience.”

Rather than focusing on Iran’s current political and macroeconomic issues,
Dadpay highlighted the unrealistic national assumption that access to cheap
goods and services is a natural consequence of resource wealth. “We think
we have a right not to pay the real price of commodities and expect the
government to create cheap and abundant markets.For this reason, it
should be said that even the cancellation of three million subsidy
applications is a big step,” he writes.

But Dadpay also notes that Iranian policymakers have given their
constituents little reason for confidence in long-term economic prospects.
“Our society has learned to look at short-term horizons, because for many
of us, the long-term outlooks are meaningless,” he writes. “When we are
pessimistic about the future, the most natural thing for a consumer is to
seize the largest possible share of existing resources and maintain the
economic flexibility to confront future fluctuations.”

This mindset is shared by citizens like Ali, a septuagenarian who
supplements his modest pension by driving his rusting Paykan up and down
the southern stretch of east Tehran’s Shariati Street. As passengers pile
in and out of the vehicle, Ali apologizes to each one and asks them to pay
an extra 200 toman ($.06), up to 40% more than the standard fare, because
of the higher gasoline prices.

When one passenger suggests that the subsidy reforms may improve the
quality of Iran’s substandard gasoline, Ali’s features twist into toothless
scowl. “Quality?” he barks. “Forget quality. First, we have to stay alive.”

Tehran Bureau correspondent
Monday 28 April 2014


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