It is now approaching its second (and as yet uncertain) phase. In the meantime, public debates regarding its basic structure, its major accomplishments, and the wisdom of its continuity are the subject of heated public debates in and out of the Majlis.
This brief review attempts to present an updated sketch of the results – based on official statements, newspaper stories and scattered observations by private analysts at home and abroad.
With no official reports on the program’s operation yet published, the most onerous task faced in preparing this analysis has been the difficulties of: (1) obtaining sufficient data on the program’s finances; (2) reconciling contradictory statements by government officials made on various aspects of the program (including its exact number of beneficiaries); and (3) closing the unbridgeable gaps between official claims, on the one hand, and observed realities on the other. As a top priority in the “Great Economic Surgery” scheme announced by President
Ahmadi-nejad in 2008, the Majlis passed the Subsidies Targeting Act on January 5, 2010, designed to raise domestic prices of some 16 subsidized consumer items to their international levels within five years. These subsidies – covering mostly gas and oil products, electricity, water, bread and milk had originated during the Iran-Iraq War of 1980-88 when most domestic prices were fixed in order to control inflation.
With the gradual rise in world prices of raw materials, and particularly that of crude oil (pushing up the revenue from Iran’s oil exports from less than $10 billion in 986 to $128 billion in 2008), the implicit or notional value of the subsidized items began to climb rapidly. By the time of the subsidy act’s passage, the implied worth of energy and other products sold at fixed prices by Iranian state agencies was variously put at $90 billion to$120 billion (depending on the daily crude oil price in the market). The actual budgetary (i.e., out of pocket) cost to the treasury, however, was less than $30 billion.
The 2010 statute authorized the government to raise prices of subsidized items to world levels gradually, within five years. One half of the revenues received from upward price adjustments had to be given in cash or non-cash payments to targeted con sumers facing higher prices.
Some 30% of new revenues had to go to energy-intensive industries as an incentive to acquire new technologies and/or cover the higher costs of their no-longer subsidized inputs. And the final 20% was the treasury’s share to cover the administrative costs of the program and other budgetary needs.
Disregarding the legislature’s recommendation for a gradual five-year approach, Ahmadi-nejad in late December 2010 announced drastic increases in energy, water, power and bread prices to go into effect immediately. And unable to find a satisfactory formula to determine eligibility for welfare assistance, it was decided to give some 455,000 rials a month to all registered applicants – electronically deposited in the bank account of the family head.
Dissatisfied with the government’s haste in implementing the original statute, the Majlis, in the course of approving the March 2011 – March 2012 budget, made a number of specific changes in the initial act. First, the government was allowed to increase prices by no more than 20% during the course of the year. Second, the consumers’ share was increased to 80% from the previous 50% in order to maintain financing of the monthly cash payments. The share of production units was reduced to 20%. And, the 20% share of the Treasury was totally eliminated. The budget document projected some $54 billion to be saved from raising prices during the year, out of which some $40 billion was earmarked as welfare payments to consumers, $4 billion was appropriated as aid to state power companies, $6 billion had to go to city transport means, and the rest was to be used for administrative expenses.
On December 19, 2011, the first anniversary of the program, Ahmadi-nejad and some of his cabinet ministers celebrated the occasion by highlighting the scheme’s “success” in a live television broadcast. The president called the program an “historic manifestation of successful government/people cooperation” that could serve as a “model” for “more than 100 countries that had already asked for our guidance.”
The program’s achievements, he added, show that the Iranian people can conquer any heights and reach any summit proving the skeptics who warned about the reform’s dire consequences clueless and wrong. He attributed the program’s success to three factors: diligence on the part of program officials; the people’s confidence in their gov ernment; and, above all, the Hidden Imam’s assistance.
The minister of economy and finance, in turn, chided those who were predicting “70-500%” inflation resulting from price adjustments by claiming an additional cost of living increase of only 7.3% in the 12-month period, part of which was also due to higher import costs. He reproached those who were predicting a recession by stating that the annual GDP growth rate had been higher than that of the year before, and that the Tehran Stock Exchange had experienced a rise of 6,000 points instead of a predicted decline. As a matter of public welfare, too, he continued, the government expected only 60% of the population to become
better off, while actually 80% have been true beneficiaries.
The minister of industry and commerce, in his turn, talked about successful protection of industrial units after the reforms.
The minister of agriculture boasted that the reforms had shortened a 20-year perspective for optimum farm efficiency down to merely three-to-four years and added that agricultural imports had declined 18%. The secretary general of the Subsidies Reform Headquarters bragged about the uniform monthly cash payments resulting in a 56% welfare improvement for low-in-come families, but only a 5% gain for the wealthy. He also predicted that, in the absence of any unpredictable shock, inflation would top no more than 21.6% by the end of the year (March
2012). Finally, a top government consultant cited some (undocumented) figures showing that: the highest 5% of income earners had their cost burden increased by 39% while the burden for the poor was only 5%, and for the “middle class” 12%.
Left untold were the eagerly awaited information regarding the program’s financial budget, specific data on consumption of higher priced energy and other items; the magnitude and nature of assistance to production units; steps taken by productive units to improve their efficiency in order to make up for their higher input costs; and the impact of higher prices on the international competitiveness of Iran’s energy intensive exports.
The accuracy of the positive claims made is also impossible to ascertain due to: (1) the absence of independent, non-governmental research organizations to offer corroborating evidence;
(2) the refusal by reporting officials to offer any further information or elaboration on the reform operation beyond their brief and scripted announcements; and
(3) the failure of the figures provided by various sources to add up. A highly critical Majlis report and widespread complaints by the private business community seem to cast much doubt on these claims.
(This is the first installment of a multi-part series.)