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Muted Response to Iranian Subsidy Cuts

by YASAMAN BAJI in Tehran

08 Jan 2011 00:2512 Comments
sub.jpgNo protests as fuel and food prices rise at start of long-awaited subsidy reforms.

[ dispatch ] The launch of cuts to food and fuel subsidies in Iran went off more smoothly than anyone expected, the only excitement coming as people rushed to the bank to access the one-off payment they received by way of compensation.

On December 20, day one of President Mahmoud Ahmadinejad's Subsidy Smart Plan, police officers were deployed on major streets, squares and petrol stations in the capital Tehran and other large cities to prevent possible protests against the cuts.

Subsidies on 16 goods and services including fuel, electricity, water, wheat flour and bread, rice, cooking oil, milk and sugar are being phased out over a five-year period. Petrol now retails at 70 US cents a liter, up from 40 cents, while diesel has gone from 1.6 to 35 cents a liter.

Wheat flour that bakers could previously buy for well under once cent per kilogram now sells at 28 or 30 cents. Water used to be charged at an average of under one cent per cubic meter, a cost which now runs at between 25 to 37 cents.

Thousands of government inspectors have been sent out to ensure that shopkeepers do not sell at higher prices than those stipulated by the authorities.

In any event, there was no trouble. For one thing, the cuts were launched just as Iranians were busy preparing for Yalda, a traditional family-centered festival marking the longest night of the year, December 21.

The immediate impact was that people rushed to their banks to get hold of their compensation money, which had been placed in their accounts some time earlier but was only accessible when the Subsidy Smart Plan came into force.

On the day, Iranians received a one-off payment of 810,000 rials -- about $80 USD. Only households in which each member's monthly income was less than $130 were eligible for the compensation, although Economy and Finance Minister Shamsoddin Hosseini pointed out that this encompassed 70 percent of the population.

Account-holders formed long queues at ATMs until the early hours of the morning to withdraw cash or transfer the funds from one account to another, apparently fearing that the government might freeze the funds or even take them back. As one bank customer put it, "I immediately transferred the money into a different account to place it out of the government's reach."

The run on ATMs disrupted computerized banking systems across much of Iran, with Kerman, Luristan, Khorasan and Sistan-Baluchestan provinces worst affected.

President Ahmadinejad's government has long pressed for reform of an economic system in which the prices of fuel, foodstuffs and other items are held at artificially low levels by subsidies. It argues that the country can no longer sustain the costs involved, and that in any case budget spending decisions should target the neediest rather than benefiting those who can afford to pay.

Iran's parliament, the Majles, worried that the dual effect of freeing up prices and injecting cash into circulation through compensation payments would lead to high inflation rates. After prolonged wrangling, it approved the reforms only after insisting that price rises happen gradually over a five-year period.

Ahead of the launch, television and radio stations carried programs explaining how the cuts would work and preparing people for higher prices. Officials and analysts attempted to reassure people that as long as they used water, electricity and gas in a sensible manner, their utility bills would not shoot up. The authorities also ran courses for public-sector employees to encourage them to back the initiative.

The government made it clear it would not brook public criticism of its reform program.

Trade Minister Mehdi Ghazanfari warned that anyone who disrupted implementation of the plan would face prosecution for "economic corruption," an offense that can carry the death penalty.

A security guard at Iran's telecommunications ministry said the government had issued instructions "to dismiss any employee who objects to the subsidy plan."

To underline the message, a left-wing economist called Fariborz Rais Dana, who had spoken out against eliminating subsidies, was arrested on the evening prior to the launch.

One thing the media did not report was the street protests in Bolivia against the elimination of fuel subsidies, which began at roughly the same time.

Although protests might have seemed most likely in Tehran, given the city's role as the hub of political opposition, popular reactions there seemed more sober than in other parts of the country, with a greater focus on energy-saving methods and less of a rush to cash the compensation payments.

One immediate effect of the fuel price hike was that Tehran drivers began using their cars less. The deputy governor of Tehran province, Mohammad-Reza Mahmoudi, reported a six to ten percent fall in traffic volumes in the days that followed, and expressed hope that if this was sustained it might improve air quality in this heavily polluted city.

From conversations overheard in shops and taxis, it is clear many Tehran residents are consciously adjusting to the new situation. They are turning lights off, watching how much water they use, and installing double-glazing -- this in a city where it was common to leave radiators and gas heaters on with the windows open.

Ten days after the cuts came into effect, the energy ministry reported a 7 percent fall in electricity consumption and 5 percent each for water and gas in Tehran.

Nevertheless, many fear these measures will not be enough to save them from punishing utility bills later this spring.

"Until they have their water, electricity and gas bills in their hands, people won't realize what this plan means," an economic journalist commented.

In other parts of Iran, people carried on with their lives after the initial rush to the banks, apparently unconcerned about the wider impact of subsidy cuts.

The declining subsidies on fuel will mean higher transport costs, making goods more expensive in the shops.

In towns where there is no mains gas supply, people are now paying 32,000 rials or about $3 for gas cylinders that formerly cost them under a third of that amount.

"It will take two to three months for the real impact of this project to play out on people's lives, and that's the point at which their reaction should be surveyed," an Iranian economist said.

Another economist, who believes the subsidy reform is a much-needed step, said the government would be wise to use the intervening period to build public support, communicating accurate information and avoiding threats.

"The government needs the people's cooperation for the success of this project, so it must be honest with them," he said.

Yasaman Baji is the pseudonym of an Iranian Journalist based in Tehran.

Copyright © 2011 Mianeh

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12 Comments

Looks as if it was well-planned and well-executed in a repressive environment. It will certainly improve the availability (not the affordability) of energy, water, food and space on the roads. Someone knows what he is doing in Tehran. I wish America's free marketeers would allow us to raise energy prices so effectively, to pay for the significant security costs they entail, thereby reducing the flow of financial resources to Iran!

Daniel Serwer
www.peacefare.net

Daniel Serwer / January 8, 2011 1:34 AM


The reason that plan supposedly went off smoothly is the mere apathy from the general population to express their opposition through any meaningful political and social channel.

Frustration, a sense of the helplessness and distrust runs deep under the skin of society.

Would you think NewsPapers have gut to speak up without the fear of being shot down and people to protest , after seeing all that brutal response from the government to an obviously legitimate demand right after the elections.

Agnostic / January 8, 2011 2:16 AM

Mr. Peacefairy.net, Hello. Did anyone expect anything but a muted response?What happened to people when they responded to the rigged elections?Some were murdered immediately and others put in prisons and tortured.Unbelieveable how fast people forget the truth about Iran.This report is rushed in favor of Ahmadinejad's government.Accurate reports from halo AN? That is comical.

Tooth fairy / January 8, 2011 3:07 AM

In a way it seems the sanctions have whipped everyone into shape. They've made the government into a leaner more efficient machine. Or so it seems at this point.

Sarah / January 8, 2011 4:11 AM

So far, so good. An encouraging report but for those wishing ill will upon the people of Iran.

Pirouz / January 8, 2011 4:20 AM

I am sure Ms. Sarah if you don't have too much to eat you will be whipped to shape too in no time.The cost of transportation alone affects the cost of every item in the market.Prices on absolute necessities have already sky rocketed while wages have remained the same and new job opportunities nonexistent.Dear Sarah, I suggest a crash course in Econ 100.This is a bankrupt government grasping for air.

Dream of Big Mac / January 8, 2011 5:46 AM

Sarah,

The economic plan had nothing to do with the sanctions. Although you are correct to assume it benefits Iran under the current sanctions regime, these plans were announced in the first term of Ahmandinejad. He was criticized for postponing them till after the re-election. All long before any sanction. In fact, many economists, including the IMF had urged Iran to cut the subsidies for years, but previous presidents did not have the political will to do it. Former President Khatami even talked about it, but never proposed anything.

Anonymous / January 8, 2011 10:25 AM

I've been fascinated by the diametrically opposed reactions/actions of the Bolivian and Iranian public and their leaders during the implementation of similar subsidy cuts in both countries.

See a report and analysis of the Bolivian approach here:
http://www.enduringamerica.com/home/2011/1/1/bolivia-amidst-protests-government-withdraws-subsidy-cuts-on.html

http://www.enduringamerica.com/home/2011/1/2/bolivia-analysis-the-failed-attempt-to-cut-fuel-subsidies.html

catherine / January 8, 2011 2:03 PM

Anonymous IMF has urged Iran for years but such measures must be carried out with other parallel measures to enhance people's economic status such as investments in private sector.Iran's economy is in the hands of IRGC.Ahmadinejad's assistant Mohammad Reza Rahimi whose job is to combat economic fraud stands accused of conducting fradulent deals before the court.You are talking about a hopelessly corrupt system that is running out of cash.You can't enhance the economy by just asking people to eat less rice and bread or tighten their belts when their livelihood is being stolen right before their eyes.

Dream of Big Mac / January 8, 2011 5:51 PM

What did you guys expect a revolution? As a famous Persian saying:

KHOD KARDEH RA TADBEER NIST.

gooya / January 8, 2011 6:23 PM

Dream of Big Mac

That may be one interpretation. But the IMF dissagrees with you. Recently, CNBC did a three part show on Iran's economy and sent a team there which included an investment company. They were impressed with Iran's production levels, and the investor company's executive, a guest at CNBC, said "we would invest there if we could." The programs main thrust was that the sanctions did NOT show any effect and that Iran's private sector was continuing to grow as did the stock exchange. Privatization of Iran's industries have been going on for at least over 4 years, and were accelerated in the past 2 years. By the end of Ahmadi's first term, Iran had given out $4billion of small loans to small business, something that had never been done Iran's history.

One does not have to be an IR supporter to recognize a few points others are pointing out. Is there corruption in Iran and the IRGC related companies are profiting? probably you are right. The two are not mutually exclusive. Thanks.

Anonymous / January 10, 2011 10:28 AM

Anonymous

what production levels? what are they producing? explain in more detail.
Also you say IMF doesn't agree with me yet you use CNBC as an example???? what is the relationship?
You talk about privatization but fail to mention the benefits always go to the friends of the family namely mullahs/IRGC and never to the ordinsry Iranians.The level of corruption is beyond imagination.

Dream of Big Mac / January 10, 2011 11:35 AM