Iran Confronts an 'Economic Evolution': Ahmadinejad's Plan to Curb Government Subsidies Threatens to Alienate Recipients

A motorcyclist buys fuel in Tehran. To blunt the blow of gas prices quadrupling without the subsidies, the poor will get as much as $70 extra a month.
A motorcyclist buys fuel in Tehran. To blunt the blow of gas prices quadrupling without the subsidies, the poor will get as much as $70 extra a month. (By Hasan Sarbakhshian -- Associated Press)
By Thomas Erdbrink
Washington Post Foreign Service
Thursday, December 4, 2008

TEHRAN, Dec. 3 -- Gasoline? It's 36 cents a gallon. Laundry detergent? Fifty cents for a standard-size box. Milk? About 20 cents a quart. These prices are so low because Iran's government spends half its national budget to subsidize many of life's necessities. Not for long.

President Mahmoud Ahmadinejad has launched a sweeping economic restructuring plan that would end many of these subsidies within a couple of months. To blunt the blow of gasoline prices quadrupling and similar increases for other goods, he also proposes to give as much as $70 a month to poor Iranians.

Ahmadinejad, a populist leader with a working-class background who came to power three years ago, is staking his political future on his ambitious plan, which threatens to alienate Iranians who have benefited from the subsidies. Known abroad for incendiary rhetoric and his defense of Iran's nuclear program, Ahmadinejad's domestic political standing relies more on his largely unfulfilled promises to use Iran's oil wealth to improve the lives of poor people.

Some aspects of the plan, such as a sales tax, have provoked unrest, forcing Ahmadinejad to slow its implementation. The president had said he would present a bill on subsidies to parliament on Wednesday, but the introduction of the legislation was postponed without explanation.

Many members of Iran's urban middle class fear that the plan will ruin them. "If the subsidies are stopped, my family will be pushed into poverty. What the president plans to pay us in return will be far too little," said Payman Vatandoust, a technical manager at a battery factory in Tehran who like many highly educated Iranians did not support Ahmadinejad in 2005.

Vatandoust's worries are shared by several Iranian leaders, many of them adversaries of Ahmadinejad who accuse the president of proposing the cash handouts to boost his popularity in advance of presidential elections set for June.

Ahmadinejad says his "economic evolution" plan will narrow the gap between rich and poor and eventually will help bring down inflation, which has risen to an annual rate of 24 percent, according to Iran's Central Bank.

By opening up Iran's closed economy, making trade easier and promoting privatization, Ahmadinejad wants to turn the country into a regional powerhouse, echoing the economic transformation that China began three decades ago. Ahmadinejad says he will bring about similar changes in Iran in three years.

The rapidly falling price of oil presents the opponents of Ahmadinejad's plan with a dilemma. Either they relent and support the proposal or they press the government to continue spending $90 billion a year -- half of the country's national income -- to pay for the subsidies. Economists contend the status quo is untenable.

In October, when oil was selling for $70 a barrel, Central Bank governor Mahmoud Bahmani warned of a huge budget deficit if the price did not rise. "If this rate continues until the end of the year, $54 billion of expected oil income won't materialize," he told the official Islamic Republic News Agency. On Wednesday, Iranian oil was selling for $42.

Ahmadinejad says his plan will allow the government to save what it spends on subsidies and raise revenue through more aggressive taxation. "Because of this plan, the main part of our dependency on oil price fluctuations will be cut," the president said Tuesday on state television.

Ahmadinejad's plan also serves his political agenda, analysts said. Iran's 1979 Islamic revolution brought to power Shiite clerics and their supporters, who relied on an unorthodox mix of capitalism and socialism in their attempts to make the economy less reliant on the West.

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