The Iranian welfare state and its discontents

The Islamic Republic's economy is a sieve. Every cent poured into it disappears down some unaccountable hole.

By Potkin Azarmehr

"You need to stop the hemorrhage first and foremost before you can do anything else with the patient." So declared President Hasan Rouhani during an interview on Iranian state TV last week. The patient in question is the Iranian economy, and the hemorrhage Mr. Rouhani was referring to is the Islamic Republic's runaway inflation rate.

Iranian consumer prices rose 23% in March, according to the country's central bank, down from 45% in June 2013, when Mr. Rouhani came to power. The International Monetary Fund and others have lauded his administration's efforts to stabilize the economy, yet Iran is still beset by serious and systemic economic challenges.

While the Tehran regime is eager to blame international sanctions, many of Iran's economic troubles trace their origins to the mullahs' own mismanagement and their desire to gain popularity through handouts to an otherwise unhappy Iranian public.

Mr. Rouhani highlighted some of those challenges in another recent TV interview, painting a catastrophic picture of the Iranian public fisc as he inherited it from the Mahmoud Ahmadinejad government. He said his budget should have included some $7 billion per month for day-to-day expenditures, including $3 billion per month to pay state-employee salaries. In fact, he said, his team found $500 million to spend per month. The government owed some $67 billion to banks, retirees and private contractors, among others; public grain silos were nearly empty; GDP was contracting; unemployment was skyrocketing.

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Iranian President Hasan Rouhani Associated Press

The new president said Iran's economy was undergoing an "inflationary recession," and he placed much of the blame on Mr. Ahmadinejad's Hugo Chávez -style public-housing and welfare handouts, which drove down the value of the Iranian currency, the rial, by forcing the central bank to borrow and print money.

Yet these deficits had come about in a time of historically high oil prices and during an eight-year window in which Iran earned an estimated $600 billion in oil revenues.

Where had all the money gone? Iran's economy at times seems like a sieve; every cent poured into it disappears through numerous unaccountable holes.

One of the bigger holes is a monthly cash-handout program, which was instituted after the Ahmadinejad government cut long-standing price subsidies for energy and consumer goods in 2010. (Mr. Rouhani plans additional cuts to remaining fuel subsidies, which will likely put more upward pressure on the price of consumer goods.)

The payments had quickly proved a major headache for the previous government, and Mr. Rouhani has been desperate to cut the number of recipients. Among other suggestions, Mr. Rouhani's government considered instituting means-testing to limit who receives these handouts. But ultimately the regime resolved on making a direct appeal to the public not to draw the handouts unless absolutely necessary.

The regime's media organs went to work. It's a patriotic and religious duty not to apply for assistance payments, they told the people. Public-service announcements have featured Islamic Republic officials, celebrities and ordinary people proclaiming that they won't register for cash payments to help repair the Islamic Republic's broken public fisc.

Economists appeared on state TV showing charts and slides to convince people that the country's oil income is actually limited—that people shouldn't assume that just because Iran is an oil-producing country, they can expect more from the state than it already offers them.

It's worth contrasting these belt-tightening messages with the late Ayatollah Khomeini's fiery, populist speeches before and during the 1979 Islamic Revolution. Back then, Khomeini and his comrades would tell Iranians that if the shah spent just one day's oil income on the people instead of buying arms from the U.S., every citizen would have a decent standard of living. Thirty-five years later, with oil prices in double and sometimes triple digits, Iranians are told to lower their expectations.

In the end, the public-relations push didn't bear fruit. On April 19, the official Mehr News Agency reported that the number of those registered to receive cash had surpassed 70 million. Iran's population is estimated to be 76 million.

Mr. Azarmehr is an Iranian writer living in London.