The Iranian government kicked off the week by slashing state subsidies on food and fuel, doubling the cost of bread, tripling the cost of electricity, and quadrupling the cost of gasoline for its citizens. The subsidies, in place for decades, allowed Iranians to pay far below world market values for goods. For example, after midnight on Sunday, the price of gasoline jumped from about 38 cents a gallon to $1.44.
Iranian President Mahmoud Ahmadinejad announced the start of the plan during a live speech Saturday, giving Iranians just a few hours to prepare for the cuts. He called it the “biggest surgery” to the nation’s economy in the last 50 years. Iran plans to gradually remove all subsidies for its citizens over the next five years, which the government estimates will save it $100 billion a year.
Iranian drivers line up at a gas station in Tehran on Sunday.
While the latest round of sanctions imposed on Iran this year for its nuclear program has most likely expedited subsidy reform, the move appears more politically motivated than anything. The subsidy cuts are expected to hit Iran’s middle class the hardest, which tends to favor Ahmadinejad’s opponents. Additionally, the president’s two predecessors, Mohammad Khatami and Ali Akbar Hashemi Rafsanjani – now members of the opposition – both tried and failed to carry out the same economic policy changes.
Moreover, the money saved from the subsidy cuts will be dispersed as cash handouts. While this plan is supposed to help ease the tension of increased prices, critics expect the president will use the funds as a political tool to bolster his position. Indeed, the agency allocating the money will have little to no parliamentary oversight and will be able to hand out varying payments to people it sees fit. No doubt these handouts will lead to cronyism.
While cutting subsidies may help the Iranian economy – plagued with high inflation, unemployment, and sanctions – the reform is really just another tool for the president in his attempt to consolidate power by rewarding his supporters and punishing the opposition.