A bold move

The Economist

“PHASE two of the Iranian targeted subsidy plan” is as clunky in Farsi as it is in English, but it rolls off the tongue of every Iranian. On April 28th President Hassan Rohani raised petrol prices by 75%, from 4000 to 7000 rial ($0.16 to $0.28) per litre. Hikes on staples are due this week.

This, the second round of cuts to the subsidies on petrol, gas and electricity, as well as staples, was due in June 2012. Former president Mahmoud Ahmadinejad repeatedly delayed it, thanks in part to a feud with the parliament. Although Mr Rohani’s cuts come at a time of slow economic growth and high inflation, both the state and the people are more supportive of him than his predecessor.

Like many oil-rich countries in the region that lavished funds on their people, Iran needs to cut the huge cost of subsidising its growing population. An estimated $40-100 billion is paid every year to keep Iranians, poor and rich, supplied with cheap energy, water, fuel and basic foodstuffs. Consumption has soared. Shopkeepers in the semi-arid valleys of Tehran spray their stoops every hour to drive away the dust. Cars clog the country’s roads. Studies put Iran’s energy consumption 80% above the average in the Middle East. Worse, billions of dollars are squandered every year by smugglers taking Iran’s cheap fuel across borders to Iraq and Pakistan.

Iranians hope subsidy reform will be better executed that under Mr Ahmadinejad. In the first round of cuts in 2010, half the money saved was supposed to be redistributed to Iran’s poor. But the government did not have good enough data to work out who should qualify for help. With the nation still reeling from the tumult following his re-election in 2009, Mr Ahmadinejad opened the cash handouts to all. This ate into money earmarked for industry so Iran’s oil, gas and petrochemical sectors, targeted with sanctions in 2012, accrued large debts. The sanctions also sent the rial crashing, causing huge inflation in Iran’s import-dominated economy.

This eroded away two-thirds of the value of the monthly payments of 450,000 rial, today worth less than $17. “Four-hundred-and-fifty-thousand rials can’t even buy a pair of Chinese-made boots for my son,” says Hamid, an unemployed father of six living in a two-room apartment in the suburbs of Esfahan. “I’d give up my payments if jobs came. But we still have sanctions so the jobs will never come.”

Earlier this month the president stopped all payments and, supported by famous Iranian actors and sports personalities, asked richer Iranians not to reapply. But the government says only 3m people have forfeited their right to apply for a handout; 73m people asked for it. Iran’s highest-ranking Shia clerics issued a fatwa last week saying that the claiming of payments by the rich is “religiously problematic”.

Mr Rohani has the country on his side for now, but rising prices will only be tolerated for so long. The government is banking on reaching a deal with world powers over its nuclear programme that would give Iran relief from sanctions. If that doesn't happen, both Iran and Mr Rohani’s political capital will suffer.