Tavakoli: Government’s subsidy plan “terrifying”, “crippling” for Iranian people

In a recent piece entitled “Report to the people: What happened during the passing of the second phase of the targeted subsidy plan” on the centre-right Alef website Ahmad Tavakoli, head of the Majlis Research Center, delivered a scathing analysis of President Mahmoud Ahmadinejad’s economic policies as well as the impact of economic sanctions on Iran.

The pretext for the article was the debate between Ahmadinejad and the Majlis (Iran’s legislature) over the implementation of phase two of the targeted subsidy plan. In phase one of this plan, the Iranian government reduced subsidies on a whole range of basic commodities used by consumers and industry including refined gasoline, natural gas, diesel fuel, electricity, water, and wheat. During the second phase of the plan, the Ahmadinejad administration is seeking to further reduce subsidies on basic commodities in order to generate earnings of 1,350 trillion rial (approximately 110 billion USD) which could be used elsewhere in the government’s budget. The chart below illustrates just some of the price increases sought by President Ahmadinejad.

Phase Two of the Targeted Subsidy Plan

Commodity

Phase One price per unit IRR (Current)

Phase Two Price per unit IRR (President)

Phase Two Price per unit IRR (Majlis)

Price increase as percentage (President)

Price increase as percentage (Majlis)

Natural gas

800

2,800

1,000

350%

125%

Refined gasoline

4,060

15,000

6,060

370%

149%

Diesel fuel

1,500

9,000

3,000

600%

200%

Electricity

450

1,300

700

289%

156%

Tavakoli called the consequences of such price increases “terrifying”, stating that it would be “crippling” to a population already under severe economic strain. He gave a number of statistics to back up his argument. He charted the precipitous decline of real gross domestic product (GDP) growth, which he claimed had fallen from 5.8% in 1389 (2009-2010), to 2.0% in 1390 (2010-2011), to 0.4% in 1391 (2011-2012). Next, he cited statistics that showed the number of insured workers had dropped from 736,436 in 1386 (2006-2007) to 209,148 in 1390 (2010-2011). Finally, he said that the percentage of “bounced checks” had risen from 5.0% in 1386 (2006-2007) to 12.8% in 1390 (2010-2011).

He claimed that these statistics show that Iran is currently experiencing “stagflation”, an economic illness which is characterized by stagnant growth, high inflation, and high unemployment. He said that phase one of the targeted subsidy plan had increased inflation, the government’s mismanagement of the economy had led to a nearly unprecedented devaluation of the currency and that economic sanctions had made imports more expensive, a situation which he felt is “making the people scream [in anguish].”

The Islamic Republic has been under one sanction or another since the Islamic Revolution of 1979. However, economic sanctions have begun to take an increasingly larger toll on Iran since 2006, when the United States was able to convince partners on the United Nations Security Council that Iran’s controversial nuclear program posed a sufficient concern to impose multilateral sanctions. Since then, the web of UN, US, and European Union economic sanctions has only expanded, making it increasingly difficult for Iran to carry out international financial transactions and conduct international trade.

Moving forward, Tavakoli stated that with this experience in mind, the government should approach phase two of the targeted subsidy plan with much greater caution. He said that Majlis was likely to only authorize 540 trillion rial (approximately 44.1 billion USD) of subsidy cuts in the next budget, just 40% of the 1,350 trillion rial figure the government is seeking.

Editor’s Note: Tavakoli’s analysis highlights the ongoing tension between the Ahmadinejad administration and the Majlis. However, it is potentially more revealing about the extent which domestic economic mismanagement and international sanctions are crippling the Iranian economy. While the Islamic Republic often fails to gather or obscures critical statistics, Tavakoli is in a position to have access to relatively accurate data and thus probably provides a reliable analysis of the situation.

Can the downward spiral of the Iranian economy be taken to mean that the regime will readily accede to Western demands on its nuclear program? As Risa Brooks and other scholars have highlighted, sanctioned regimes often employ defensive measures to lessen or eliminate the pressure of sanctions. In the case of authoritarian regimes such as the Islamic Republic, this can mean shifting the burden of sanctions to ordinary people and empowering the key constituencies that form the pillars of the regime. Economic sanctions are not a straightforward game, and the increasingly comprehensive measures being taken against Iran may have the power to “cripple” the Iranian people, but at the end of the day may not bring the results that the US, EU, and their allies seek.