Iran to Cut Gasoline Subsidies

Iran’s state news agency IRNA reported today gasoline prices will be raised by 40 percent as of Tuesday as a result of cutting state subsidies. The price per liter for subsidized gasoline will now be 10,000 rials, or 35 cents ($1.32/gallon).

Iran Says It Can No Longer Afford Ahmadinejad’s Cash Handouts

Rouhani Administration Signals Intention to Cut Cash Allowances

Iran’s Minister of Labor and Social Welfare Ali Rabi’i is saying Iran can no longer sustain the billions of dollars neded to pay cash handouts enacted by former president Mahmoud Ahmadinejad, signaling plans to halt them.

The handouts began as a partial replacement after government subsidies on staples such as electricity, gas, water and bread were reduced or cut altogether. In an open letter published today, Rabi’I wrote that change was needed as the bill for monthly payments of 445,000 rials (around $14) to individuals was too high. 78 million Iranians, out of a population of 80 million, receive the cash each month, or nearly one billion dollars a month.

“We should face the reality; reforming the current allowance payment is a major step toward increased social justice,” Rabi’I wrote in his open letter.” (IRNA/The Guardian, 19 May)

As the government pushes the subsidy reform program, it continues cash payouts, which have become a lifeline for the poor and unemployed.

“Since 2010, 500,000 people have lost their jobs in development projects,” Rabi’I assed. “This is the result of (government) raiding development funds in order to pay cash allowances.”

File photo: Iran’s Minister of Labor and Social Welfare Ali Rabi’I (IRNA)
 

Rial Falling

Government Delays Subsidy Reforms

Today, the Iranian national currency traded at 34,000 rials per dollar. This is a new low during Rouhani administration. In June 2013, Rouhani’s surprise victory stopped the downward spiral of the rial. Since the beginning of 2014, however, rial has slowly lost ground and in the past week the trend has accelerated. Today’s rate is a loss of nearly 14 percent in the value of rial since Rouhani’s election. The failure of Vienna talks to produce a final nuclear agreement and the plunging oil prices are believed to be the main causes for the falling value of the rial.

Oil Prices have also continued their downward trend, with Brent crude trading at $70 a barrel. Between the loss in export levels after oil sanctions went into effect in 2012, and the recent drop in oil prices, Iran’s oil export revenues, its main foreign currency source, are a third of what they were only two years ago.

Meantime, Rouhani administration on Saturday decided to delay planned subsidy reforms. The government probably regards the subsidy cuts as politically inconvenient, expecting backlash. The decision to delay, however, will put added pressure on the value of rial and could reverse recent gains in the fight against inflation. These are indeed challenging times for the Iranian economy.

95% of Iranians Ask to Receive Monthly Cash Handouts

Costing Iran’s Treasury $1.3 Billion Monthly - Rouhani’s First Political Defeat

After weeks of unrelenting and aggressive media campaign, enlisting celebrities, sports heroes and religious figures, Rouhani administration could not convince Iranians to forego the 445,000-rial ($18) monthly cash handouts to help the country with its financial crisis. Fully 95 percent of citizens, 73 million people, have asked to receive the cash, which will amount to $1.3 billion monthly bill for the government.

Former president Ahmadinejad started the monthly cash handouts in a populist move to supposedly soften the blow of cutting energy and food subsidies. But the program produced 45 percent inflation; eating considerably into the purchasing power of the people it was intended to help. Rouhani, highlighting the fact and figures, hoped to convince people that the program was a bad idea. But neither his charm offensive, nor those of the celebrities whose help he enlisted, could convince the people to forego handouts. The citizens by their choice in effect handed Rouhani his first major political defeat.

The bad news came on the day the government's second phase of subsidy reform went into effect, practically increasing gasoline prices to $1.50 per gallon. The continuation of cash handouts to 95 percent of population and higher gasoline prices could now push the inflation much higher.

The rial, reacting to fear of high inflation, is losing its value against dollar. Meanwhile, the Central Bank of Iran (CBI) announced today that the cost of its basket of consumer and industrial goods is rising at a 32 percent annual inflation rate.

Iran Cuts Portions of Gasoline Subsidies

Rial Loses Value against Dollar on Fear of High Inflation

Iranian government announced that the second phase of subsidy reforms will begin on Friday 25 April. As part of the program, government’s subsidies of gasoline will be cut further than during its first phase.

Each car will be allocated 60 liters (15.8 gallons) of still-subsidies gasoline per month, at a cost of 7,000 rials per liter (28 cents per liter or $1.06 per gallon with a limit of 15.8 gallons a month). The new price represents a 75% rise in subsidized gasoline price from the previous 4,000 rials/liter. Every liter after the 15.8-liter monthly limit would now cost 10,000 rials (40 cents per liter or $1.50 per gallon, which would be the price people would pay most of the time.) 

The news of new gasoline prices and fears of higher inflation brought down the value of rial against dollar in open foreign currency exchange markets to its lowest level since Rouhani came to power in August. The Iranian currency was trading at around 33,000 per dollar today.

The second phase of subsidy reforms was to take effect in March 2012, but was pushed back over fear of high inflation. Iran consumes some 70 million liters (18.5 million gallons) of gasoline per day. 

Many economists believe that notwithstanding inflationary pressures, subsidy reforms are required to help bring back normalcy to a heavily subsidized economy.

Second Phase of Subsidy Reforms to Begin Next Week - Rouhani

Iranian President Hassan Rouhani said today the second phase of subsidy reforms will start as early as next week. He made the remarks at a gathering of Law Enforcement commanders in Tehran.

“The implementation of the plan was scheduled to be achieved within five years, but only the first phase was completed over the past three years,” Rouhani said. He added that the second phase will start “within the next few days.” (IRNA, 19 April)

The reforms are designed to gradually cut government subsidies of energy, utilities and food. The government says it would save some $60 billion annually when the reforms are fully implemented.

Many economists have hailed the plan as a necessary step for fixing the subsidy-driven economy; but there are serious concerns that the end of subsidies would mean higher prices across the board, reversing the recent gains in controlling the country’s high inflation rate.