Will Iran price hikes fuel discontent?
The honeymoon with the new government is over. Iranians are coming back from their New Year holidays to see their utility bills go up, some by 24%. Petrol prices are also due to rise, a move that usually prompts discontent and triggers inflation.
Starved of cash, President Hassan Rouhani’s government has no choice but to cut state subsidies for fuel and energy. “It’s like squeezing juice out of a crushed fruit. My finances are already pushed to the limit,” says Gholamreza, complaining over the phone from Tehran about this week’s 20% increase in household gas prices.
The Iranian New Year started on 20 March, and with it came a hike in utility prices. Electricity bills have gone up by 24% and those for water by 20%. Gholamreza, who lives in a religious district of south Tehran and prefers to use only his first name, is worried about the impending rise in the price of petrol.
“If the cost of transport goes up, I would only be able to commute by bus,” says the 40-year old, who works as the caretaker of an office block in affluent north Tehran.
Hand-outs for all
In an attempt to reform the economy three years ago, Iran started to cut hefty state subsidies for fuel and energy. Estimated at around $60bn (£36) a year, these subsidies were blamed for making petrol cheaper than bottled mineral water. To curtail a rate of inflation that topped 40% last year, the government of Mr Rouhani put the subsidy reform on hold when taking office in August.
The parliament had given the government permission to increase prices for utilities such as water and electricity by around 40%. In Iran, the state supplies water, electricity, cooking gas and most fuels. When first cutting the subsidies, the populist former president Mahmoud Ahmadinejad distributed the revenues from price hikes as cash hand-outs to all Iranians.
But the law required the government to invest half of that revenue in public transport, the healthcare system and in improving energy efficiency for manufacturing. The other half should have gone to families with low incomes, to help them pay for their bills.
However, as there was no proper tax database to identify low-income families, Mr Ahmadinejad decided that everybody should receive cash hand-outs. And the government made Iran’s Central Bank print the money to pay for it.
First Vice-President Eshagh Jahangiri says the number of people who are claiming monthly benefit of 455,000 rial ($15; £9) exceeds Iran’s population of 75 million. Mr Rouhani’s deputy has pledged to stop paying high-income families any more. With a family of five, Gholamreza gets $75 in cash every month from the state. That is equal to a quarter of what he earns every month.
“I hope that I will continue receiving this. Something is better than nothing,” he says. But it amounts to a huge bill that the government cannot afford any more. According to Mr Jahangiri, the country has saved $33bn by cutting some subsidies in the past three years, but has paid over $43bn in cash hand-outs.
Iran has branded its subsidy reform as “major surgery” for the economy. The International Monetary Fund welcomes the increase in Iran’s domestic energy prices and says the reform is a priority.
Economists support the reforms but have been criticising the way they were carried out. Nader Habibi, an Iranian economist at Brandeis University in Massachusetts, United States, says the devaluation of the rial has offset the savings from previous subsidy cuts. “The real price of utilities has declined, and as a result, the cost of government price subsidies has sharply increased,” says Mr Habibi.
“The government is faced with large budget deficits. The price adjustments for utilities were inevitable.” Three years ago, 10,000 rials could buy $1. Today, a dollar is worth 30,000 rials. Petrol is sold at Iranian pumps for only 30 cents per litre, almost one third of its price in the region. The government says price adjustment would also help stop petrol being smuggled over the border to neighbouring countries and could reduce domestic consumption.
According to the Iranian parliament’s research centre, the government has to almost double the price of petrol to reach its budgeted subsidy saving this year.
“I will not vote for Rouhani next time if he does that,” says Gholamreza.