Iran�s High Inflation Could Derail Targeted Subsidies Plan

The issue of inflation has become almost a daily feature in the Iranian press and some officials now claim this is a direct result of the government's failure to manage the economy effectively. As it affects Iranians in all walks of life, this problem has delayed, if not postponed indefinitely, the implementation of the second phase of the subsidies reduction plan, a major element in President Mahmoud Ahmadinejad�s economic policy. MEES editors report.

The Central Bank of Iran (CBI) has announced that the inflation rate for the year ending 20 June 2012 had risen to 22.4% from 22.2% in the year ending 19 May and 21.8% in the year ending 19 April. This apparent stability of the official inflation rate is in sharp contrast with facts in the market place, where officials, independent analysts and the average man on the street continue to complain about the rising prices of staple goods and the high cost of living. To judge from peoples� comments in the media, the inflation rate in the real economy could be double the official rate at over 40%.

Iran�s Supreme Leader Ayatollah Ali Khamenei has designated the current Iranian year, which started in March 2012, as the �year of domestic production and support for Iranian capital and labor.� Last year was labeled as the �year of economic jihad� and aimed at encouraging Iranians to fight western economic sanctions. But mere slogans are unlikely to counteract the poor performance of the economy, spiraling inflation and unemployment. Although the government claims to have created some 2.5mn jobs in 2011-12, the unemployment rate according to reliable sources was still around 20% last winter, with many young people and university graduates out of work, according to Economics Professor Fereydoun Khavand of the Paris Ren� Descartes University, writing in a recent article.

With the high cost of living affecting all Iranians in different ways, newspapers are being urged to reduce their coverage of news about inflation in order to minimize the negative psychological fallout. Moreover according to a UK-based Iranian language television station, some religious leaders in Tehran have started to praise the virtues of austerity and modesty and have called on people to emulate the simple lifestyle of religious imams of the past. But many low income Iranians complain that while the clergy preach austerity, some members of the theocracy in the country continue to enjoy opulent lifestyles. With the thin line separating the secular from the religious lifestyles in Iranian society, some of the clergy are popularly believed to be involved in lucrative businesses which allow them to amass great wealth and live the high life.

A source in Tehran tells MEES that the current economic problems in the country are also due to measures taken by the government in the past few years, to neutralize and eliminate institutions which guarantee accountability, transparency and proper planning. The absence of such regulatory mechanisms has given certain power groups in the country a free hand to do whatever suits their interest. But in turn this exacerbates conflicts between them, and brings up accusations and counter accusations of malpractice. So when economic and other problems erupt, finding a suitable solution is not possible because of the conflict of interest, the source adds. Perhaps a good example of such situations is the $2.6bn banking fraud case which is unlikely to be resolved because the parties involved have threatened to expose each other publicly, as the Tehran media has reported (MEES, 7 November 2011).

Government Blamed For High Inflation

Iranian parliamentary speaker Ali Larijani has said that inflation in the country is being caused by the government�s disregard of parliament�s recommendations. He told Mehr News Agency on 27 June, �the rise in prices of essential products, such as bread, milk, meat, as well as real estate, was caused by the lack of appropriate measures inside the country, and by hostile measures of the enemies outside. It was not just a tactical move that during the discussions about the targeted subsidies plan, the Majlis suggested that either the 30% of income [from savings after withdrawal of subsidies] should be allocated to the manufacturing sector, or the plan should be implemented gradually.�

Another deputy from Tehran, Alireza Mahjub, blamed the steep rise in prices on the targeted subsidies plan and welcomed the delay in the implementation of the second phase of the plan. Mr Mahjub stated on 25 June �our main problem right now is the implementation of the second phase of the targeted subsidies plan, which is the main reason behind the closure of manufacturing units that can not afford to pay their workers� wages. If the plan continues to be implemented in its present form, it will first damage manufacturing units and then affect the lives of all workers� I believe the second phase will mean a new phase of price hikes.� The first phase of the plan, launched in December 2010, involved a steep rise in utility and energy prices, which made some manufacturing industries uneconomic and forced them to close down. The plan was originally intended to be implemented over a five year period during which all subsidies would be phased gradually.

Meanwhile a special committee in parliament is set to address the problem of the high cost of living and the sanctions imposed on Iran. Deputies have requested a meeting with the president after parliament�s summer recess to discuss the problem of inflation, according to parliamentary deputy Hossein Haji-Delijani on 11 July. �Considering the increase in the prices of essential goods, including foodstuffs, clothing etc, a group of deputies intends to discuss these problems with the president,� he said, adding that in addition to price rises, the deputies will discuss obstacles facing the production sector and imports of unnecessary foreign goods into Iran.

With regard to imports of consumer goods, Prof Khavand notes that the government in recent years has pursued a policy of importing cheaper products from countries like China as a remedy for inflation. But this in turn has led to the collapse of local manufacturing industry in Iran and to an increase in unemployment. He adds were it not for current high oil prices, Iran would have drowned in a �whirlpool of inflation and recession.�  

Targeted Subsidies Plan In Doubt

Tehran has delayed the second phase of the targeted subsidies plan for some time because of the uncertain outlook for the economy. Parliament originally gave the green light for the launch of the second phase in May, but this was not possible with the economy under pressure (MEES, 21 May). Some reports claim that government savings from the withdrawal of subsidies in the second phase will not cover the planned cash handouts to registered recipients. Officials have called on some recipients to voluntarily relinquish their claim to the cash handout in a bid to lower government disbursements. The government has decided to raise wages for state employees by 15%. This is significantly lower than the official inflation rate (22.4%), let alone the real rate, which could be twice as much.

The planned meeting of parliament and the government after the summer recess will have to review the next phase of the plan and decide whether this could be launched at all as economic conditions deteriorate further. At the same time there is mounting opposition for the plan in parliament and among other officials. Last week Iran�s First Vice-President Mohammad Reza Rahimi confirmed to the Iranian Labour News Agency (ILNA) that the second phase of the plan �has been stopped because of internal and foreign elements.�

Iran has entered yet another phase of economic sanctions with the embargo on Iranian oil exports that came into effect on 1 July. According to the International Energy Agency (IEA) in its July Oil Market Report , sanctions could force a cutback of around 1mn b/d in Iranian crude exports from the summer onwards, compared with 2011 (MEES, 16 July). The Iranian government as usual is in denial about the effects of the sanctions imposed because of the nuclear standoff with the west, and insists that the economy is healthy. CBI Governor Mahmoud Bahmani told Mehr on 1 July that Iran earns adequate foreign exchange revenues of some $150bn � oil export revenues at $100bn and non-oil export revenues at $40-50bn � which would be used to weather the latest trade and financial curbs. Following the oil embargo, Mr Larijani acknowledged on 17 July that tightened sanctions are hurting Iran, estimating that 20% of the country�s problems are due to them. 

An early indication of the effects of the oil embargo on the economy is the foreign exchange market, where the official rate is still quoted by the CBI as $1=IR12,260, while the black market rate hovers around $1=IR20,000. A deterioration of this rate in the near future would indicate that the latest oil embargo and the new US sanctions announced on 12 July are beginning to hurt the economy. Iranian Minister of Economic Affairs and Finance Shamsodin Hosseini has called for a single rate and said that this should be the first priority of the government. But this cannot be achieved under present conditions, according to Economics Professor Hashem Pesaran of Cambridge University, who told the Tehran daily Donya-e-Eqtesad, that the recent increase in the gap between the market and official foreign exchange rates is due to Iran�s high rate of accumulated inflation, saying that �of course I believe that the increase in sanctions has had an effect on the increase in the exchange rate of the dollar, but the main factor is the difference between Iran�s accumulated inflation with that of other countries.�

© Copyright MEES 2012.