Iran’ s plan to cut costly fuel and food subsidies brings to a head a debate over economic inefficiency that has raged for years but has become urgent because of the threat of more UN sanctions, analysts say.
The stakes are high for President Mahmoud Ahmadinejad, who has pushed the plan through Parliament – despite rioting in 2007 over gasoline rationing and mass protests this year over a disputed election – with what analysts assume is the backing of Supreme Leader Ayatollah Ali Khamenei.
The bill could save up to $20 billion in 2010/2011 by slashing subsidies for gasoline and other refined products, natural gas, electricity, water, food, health and education.
The subsidies cost Iran some $100 billion a year, or 30 percent of GDP, according to BEDigest, published by a France-based energy consultancy group.
Iran faces international sanctions over its nuclear energy program, and its economy is suffering from past overspending and lower oil prices, currently around $76.50 a barrel compared with over $147 in July 2008.
“ Economic mismanagement is a big issue,” said a Western diplomat in the Gulf who follows Iran. “ There is no choice. They hope that by taking the money they save, some of the deleterious effects will be lessened.”
The reforms run the risk of creating a new lightning rod for the opposition protests that have posed the biggest challenge to the Islamic Republic since 1979.
Ahmadinejad faced accusations of corruption, profligate spending and cronyism during his re-election campaign, and removing subsidies could worsen already high inflation.
So the government, whose nuclear dispute with Western powers could lead to a military clash with United States or its ally Israel next year, must calculate clear benefits in going ahead with the reform, analysts and diplomats said.
The United States fears Iran wants to develop nuclear weapons, but Iran denies any such intention. UN and US sanctions over Iran’ s nuclear energy program, which Ahmadinejad has championed on the world stage, have made subsidy reform more pressing by stunting growth in the key energy sector where Western firms have ceased investments.
“ Iran’ s economy is the energy sector, they have little else [to export], and things are going very badly,” the diplomat said. “ They lose around 200,000 barrels a year through well-depletion rates, and reservoir management is tough.”
Ending gasoline subsidies could make Iran less vulnerable to further sanctions targeting fuel imports in the nuclear energy dispute. “ This will be at the back of the regime’ s mind,” said Hazhir Teimourian, an Iranian commentator based in London.
Though Iran is the world’ s fifth-largest oil exporter, it lacks sufficient refining capacity and imports 40 percent of its gasoline. Weaning people off the over-consumption that subsidized gasoline has led to will lessen any future hit.
“ If they don’ t get runaway consumption of gasoline under control, they are at a serious strategic disadvantage. That’ s the prime driver; beyond that, it’ s just too costly,” said energy analyst Peter Wells.
The debate over subsidies is also partly driven by disputes among the leading personalities and institutions of state over who gets resources to boost their power base in the aftermath of the presidential vote, where Khamenei backed Preisdent Ahmadinejad.
Parliamentarians have accepted the fundamentals of subsidy reform – seen as the will of Khamenei – but they have tried to attach conditions to a bill seen as fortifying Ahmadinejad’ s position, analysts say.
It still needs to get the approval of the watchdog Guardian Council before it becomes law, and could face other unforeseen hurdles.
Defeated presidential candidate Mirhossein Mousavi spoke out against the reforms this week, saying subsidies were not a bad thing. Critics say cracking down on fuel smuggling to outside the country would by itself constitute a major saving.
Mohsen Rezaie, close to another Ahmadinejad rival, former President Akbar Hashemi Rafsanjani, suggested on Monday more time was needed to study the bill.
The government will be able to use the savings to redirect funds towards its supporters within the state and among the population – and away from the middle class who back Mousavi.
“ This regime thinks of the middle class as the enemy now and doesn’ t care too much about it,” Teimourian said. “ They definitely think of themselves as the government of the poor and deprived.”
The authorities could use mosque distribution networks to help the poor, while the more affluent will suffer more from removing subsidies on education and health, he added.
State media have said that the government will open bank accounts for 36 million people, about half the population, to give them the cash to compensate for the higher food and energy prices.
Though some 30 percent of the saving is intended for industrial loans, much of it is for social redistribution, or what the government calls “ targeted” assistance.
“ Ahmadinejad’ s support is the rural poor, provincial cities and the urban sprawl to the south, west and east of Tehran,” said Wells. “ As long as he satisfies these constituencies with a subsidy, hidden or otherwise, it’ s okay.”
Author: Andrew Hammond
