Muted Response to Iranian Subsidy Cuts

Friday, 25 February, 2011

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Yasaman Baji

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 litre, up from 40 cents, while diesel has gone from 1.6 to 35 cents a litre.

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 metre, 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-centred 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 dollars. Only households in which each member’s monthly income was less than 130 dollars were eligible for the compensation, although Economy and Finance Minister Shamsoddin Hosseini pointed out that this encompassed 70 per cent 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 computerised 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 Majlis, 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 programmes 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 programme.

Trade Minister Mehdi Ghazanfari warned that anyone who disrupted implementation of the plan would face prosecution for “economic corruption”, an offence 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 per cent 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 seven per cent fall in electricity consumption and five per cent 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 realise 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 three dollars 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.