President Mahmoud Ahmadinejad declared in June that his administration intends to cut the expensive subsidies and plans to redirect them to the poorest segments of the society. On October 11, the conservative parliament overwhelmingly gave its seal of approval for the introduction of steep cuts in energy and food subsidies.

The government plans to increase energy and utility prices and compensate low-income families with direct cash payments.
Some analysts have criticized Ahmadinejad for the planned subsidy cuts, claiming it will result in soaring inflation. However, his plans have been supported by pundits who believe that redirection of the subsidies to the poor will help close the gap between the rich and the poor segments of the society.
There are also economists who believe that there was no other choice but to cut the expensive subsidies, which cost some $100 billion a year. The subsidies cover oil, petrol, natural gas, electricity, water, bread, transport, and telephone services.
“Under the current circumstances about a third of the country’s income is directly or indirectly paid in subsidies,” Shamsoddin Hosseini, the Minister of Economy, told the parliament.
The bill requires the Guardian Council’s approval before it can be implemented.
-------- Inflation fears
The government plans to remove the subsidies by Nowruz (March 21, 2010) and expects a jump of 15 percent in prices. Traditionally every Nowruz brings along a hike of 20 percent in prices. Adding the two, at least a jump of 35 percent is expected after Nowruz.
Jam-e Jam Farsi daily, which is affiliated to IRIB, quoted Deputy Energy Minister, Abbas Aliabadi on Oct. 22, saying that the electricity per kilowatt hour costs 45 tomans but with subsidies it is billed to the public at the rate of 7.60 tomans. So if the subsidy is removed the price of electricity will jump six-fold.
Aliabadi added that last year the funds for the electricity subsidy were allocated from the FOREX basket of the country. However, this year “we’re not allowed to use FOREX and the Energy Ministry is bound to face budget deficits.”
Even though subsidies require the approval of the Guardian Council and the government plans to implement the cuts from Nowruz, but the price of some of the commodities in the market have already soared.
The October 21 issue of Tehran Emrooz daily wrote that the subsidy on the flour used for the Western style sandwich bread was removed on October 23. The previous administration’s ministry of commerce had announced this before the Ramadan period. This plan was confirmed by the new Minister of Commerce, Mehdi Ghazanfari.
As a result, the prices of the sandwich bread jumped approximately 100 percent even before the enforcement of the subsidy law. The Tehran Emrooz wrote that the administration has done so without the approval of the Guardian Council. The newspaper added that the demand for the sandwich bread has dropped in other provinces.
-- Subsidy cuts long overdue
Speaking to a panel at the Mehr News Agency office, the Chairman of the Tehran Chamber of Commerce, Industries and Mines, Yahya Al-e Eshaq said that redirection of the subsidies is not a new issue and it was brought up some 20 years ago.
Al-e Eshaq pointed out that the project requires the cooperation of the Majlis (Iran’s Parliament), the administration, and other governmental bodies in order to be implemented properly. He warned that if this project is politicized it would turn into the biggest historical blow.
Bringing the price of gasoline to the international level will have several positive impacts. First of all it will reduce the traffic and pollution in the major cities. For many this is the number one complaint.
Secondly, the gasoline prices on a global scale will force the domestic automakers to produce fuel-efficient cars. At present, the average mileage for the domestically manufactured car is over 10 liters per 100 kilometers. In Europe, the average is 6-7 liters per 100 kilometers.
Right now regular rationed gas at the petrol pump can be bought at one cent (100 tomans) per liter with a limit of 100 liters per month per car. If the consumption exceeds 100 liters, then one can buy openly for approximately 4 cents (400 tomans) a liter.
Iran daily reported yesterday the chairman of the Fuel and Transportation Management Committee, Mohammed Royanian, saying that there is the possibility for reduction of winter ration gasoline from 100 to 80 liters per month. He said that the new ration would continue until the end of the Iranian year (March 21, 2010). Whether Royanian was preparing the public for the removal of gasoline subsidies or not is open to speculation.
The present gasoline prices do not encourage the auto industry to produce fuel-efficient cars. It also encourages anyone with a car to be able to drive at a very low cost creating traffic jams and hazards.
Those who were in Tehran when the government introduced the gasoline rationing system some two years ago will remember the peace and calm and the fresh air it brought with it. Of course, they will also remember the public reaction to the rationing, which resulted in riots and burning of several gas stations by the angry mob.
In order to avoid confusion and chaos the government should take appropriate measures to redirect the subsidy cuts towards public transportation system.
The real impact of the subsidy cuts will only be felt when it is fully implemented. And we can only evaluate its long term impact after passage of time. In the short term, after implementation it will be the talk of the town, especially during taxi, metro and bus rides.