Iran Eliminates Subsidy For Food And Medicine Amid High Inflation
Iran’s parliament on Sunday decided to scrap an annual $9 billion subsidy for essential food and medicines, despite warnings of more inflation and hardship.
Iran’s parliament on Sunday decided to scrap an annual $9 billion subsidy for essential food and medicines, despite warnings of more inflation and hardship.
The idea to eliminate the subsidy emerged after hardliner president Ebrahim Raisi (Raeesi) assumed office in August and could count on backing from conservatives and ultra-conservatives in control of Iran’s parliament.
The subsidy was introduced in April 2018 when former US president Donald Trump signaled his intention to withdraw from the Obama-era nuclear agreement with Iran known as JCPOA, and Iran’s national currency began to nosedive. Prices for imported goods skyrocketed and the government decided to provide cheap dollars to importers of essential goods to keep prices low.
But the measure proved to be controversial as reports emerged of large-scale corruption. Many entities applied to receive the cheap dollars for importing food, animal feed and other essential goods but ended up importing luxury cars or nothing at all. Some have charged that billions of dollars went to waste at a time when US sanctions slashed Iran’s foreign currency revenues, making US dollars crucial for the survival of the economy.
Hardliners picked up the banner of opposition to the subsidy, also as a weapon against centrist president Hassan Rouhani. Once they formed a majority in parliament in 2020 and took the presidency in 2021, they made it a priority to scrap the indirect subsidy.
However, it was not an easy decision to make. Annual inflation has been hovering around 40 percent for more than a year and food prices have risen much faster than that. Consumption of many food items such as meat and fruits have sharply declined as the impoverished middle calls had to slash spending amid declining purchasing power.
Politicians and reportedly security agencies have been concerned that eliminating the subsidies, with no prospect of lower inflation, would lead to political unrest, endangering the entire regime.
The danger could not be underestimated. A hike in gasoline prices in November 2019 led to serious nationwide unrest with authorities deciding to use brute force to suppress protesters. Security forces were ordered to shoot live ammunition, killing hundreds of unarmed people.
Perhaps for this reason the parliament itself did not vote to eliminate the subsidy, rather it agreed to allow the presidential administration to do as it wants. Some Iranian newspapers said the legislature decided to pass on the buck to the government.
But this is not the end of massive subsidies the state provides to consumers. While the 9 billion dollars was a heavy burden on the government’s budget of around $40 billion, Iran provides massive energy subsidies, which are called “hidden subsidies.” These take the form of cheap gasoline, electricity and gas, which are regarded as domestic resources, offered to an underpaid population, much like the old Soviet system, where housing and energy were cheap, but people earned small salaries compared with their counterparts in many other countries.
The energy subsidies were estimated to total around $60 billion annually before the Iranian currency lost its value against the US dollar. The Raisi government would love to eliminate these subsidies too and they have started reducing the gasoline subsidy on an experimental bases in the free trade zone on Kish Island. By raising prices, the government will earn around $5 billion more annually.
Currently a gallon of rationed gasoline sold by the government is around 22 US cents, while unrestricted gasoline is 44 cents. This is multiple times cheaper that the going rates in other Persian Gulf oil producing countries.
Eliminating these subsidies will lift a drag on the economy, but the question is that it might backfire amid high inflation when people have lost so much of their purchasing power.
Their conversation with Sharq newspaper, published on March 5, was recorded before the Russian invasion of Ukraine, obviously, without considering developments sparked by the ensuing international crisis.
Both diplomats are now working in academic and energy fields. Ali-Akbar Salehi was Iran's Foreign Minister (2009-2010) and (2011-2013) and nuclear chief (2013-2021). Abbas Maleki was the head of the Foreign Ministry's think-tank, the International Studies Center and deputy foreign minister (1980-1997).
Sharq's reporter Zeynab Esmaili, asked whether in 30 years Iran will be a developed country or a poor state crippled by water shortages and environmental crises, as current condition point to. Salehi said it is difficult to predict, however, it is a matter of good governance. If the government is not bothered by the needs of the people, one could say for sure that the country has no future.
In the 1979 revolution the people wanted a change in the style of governance and wanted to get rid of despotism, Salehi said. The chaos brought about by the revolution continued with debates about whether political reforms were more important or economic development. Should progress be put before economic justice? Or justice before freedom? Was freedom more important than security?
Salehi’s emphasis on good governance belies a general perception in Iran that the Islamic Republic has pursued harmful policies for too long and its ability to propel the country toward prosperity is highly questionable.
Salehi emphasized that having large oil reserves is not a substitute for good governance.
“Our roadmap to the future should be based on good governance, knowledge, democracy and attending to the needs of the middle class,” he said.
Maleki also emphasized good governance and the importance of planning. “Plans tell us where we are headed,” he said. So, if we wish to be at a certain point in 2050, we should start working today. But Maleki stressed that government control is better than leaving affairs in the hands of the private sector, claiming that Iran’s response to natural disasters have been more efficient than in the United States where private companies run the infrastructure, such as power and water.
International surveys of economic performance contradict the view that Iran’s government and economic system perform reasonably well.
Maleki also emphasized that developing fossil fuel resources are important for Iran’s near future.
Salehi agreed with Maleki by saying that oil and gas can revive Iran. “We have one percent of the world's landmass but 11 percent of its oil and 17 percent gas resources,” he said. There is no value in these resources unless we turn them into an engine of development. There are gigantic gas and oil reserve under Bandar Lengeh, but the port city has no pipelines. We should turn the reservoirs of Yadavaran and Azadegan oil fields into money. And there are a lot of resources still untouched in the northern part of Iran. Energy is capital but it is not endless. It will end one day. So, Iran should use it rationally.
However, looking at the record, Iran has sold well over one trillion dollars of oil in the past four decades but because of its centrally controlled economy and inefficient governance it has little to show for it compared with regional counties such as Turkey that has no oil or the United Arab Emirates.
Asked why Iranians believe that the government has left them to their own devices or in other words has let them down. Salehi expressed hope that the system can still correct itself, but the young generation is mostly hopeless about the future of the country and they blame policies pursued in the past three decades since Supreme Leader Ali Khamenei has ruled the country.