Subsidy Cuts Begin, Basic Commodity Prices Skyrocket

by MUHAMMAD SAHIMI in Los Angeles

19 Dec 2010 22:438 Comments

[ dispatch ] In a nationally televised program Saturday night, President Mahmoud Ahmadinejad announced the process of reducing and ultimately eliminating the subsidies that the government has provided over the past three decades to certain essential commodities such as oil, water, gasoline, and natural gas. He declared that gasoline will be provided at two prices: One for the monthly ration, which will be priced at roughly 40 cents/liter, and the other for what is made available at "market price," approximately 70 cents/liter. The government has also reduced the monthly ration of gasoline for vehicles used within cities by 10 liters (about 2.7 gallons). The price for the monthly ration of gasoline for cars used to transport people between cities, which used to be 750 liters/months at a price of roughly 10 cents/liter, has been increased to 40 cents/liter. The price of fuel oil will increase in two steps: Over the next two weeks, it will rise from 1.6 cents/liter to 10 cents/liter, followed by another jump to 15 cents/liter. (The market price, without subsidies, is currently 35 cents/liter.) Many industrial plants that use fuel oil may go bankrupt.

As soon as Ahmadinejad made the announcement, long lines formed at gas stations. People tried to buy as much of the cheaper gasoline as possible. Police and plainclothes agents saturated the streets of Tehran and other cities to prevent any demonstrations or riots. Reports indicate that traffic in Tehran was reduced considerably today. At the same time, there are long lines at ATMs, presumably because people have begun taking out the cash that the government deposited in their accounts in return for the subsidy cuts.

The increase in fuel prices is having an immediate effect. Bus fares and taxicab fares will be allowed to increase by 20 percent for the next two weeks, and by another 20 percent after that. Fares for intercity travel have increased by 125 percent. The price of gasoline for domestic airlines has risen by 200 percent -- though the government has announced that they are not allowed to increase fares, the cost of flying will inevitably rise. Naturally, such increases will raise the price of everything else.

The price of electricity has tripled from 0.75 cents/KWh to 2.2 cents/KWh. The price of water has similarly increased by a factor of three. The price of natural gas for home heating and cooking has increased by a factor of four, and for vehicle fuel by a factor of ten. The price of flour has increased by a factor of 40. But the government has warned bakeries that, for now, they are not allowed to increase the price of bread -- a basic nutritional item for Iranians -- under threat of prosecution. It is simply not clear how bakeries can pay the new price for flour without increasing the price of bread. In his television appearance, Ahmadinejad claimed that it is estimated that inflation will increase by only 10 percent.

For all the affected commodities, the government has announced that prices will depend on the amount of consumption. Those who consume less will also pay a lower price. While, in principle, this is a good idea as Iranians are notorious for wasting electricity and water, it is not clear how this scheme will be implemented, or whether the government will stick to its announced plans. There are already many disparities between the prices and what the government has announced and, as usual, the Ahmadinejad administration declares one thing, but does something else.

In a related development, Dr. Fariborz Rais Dana, a leftist economist who has criticized the process of eliminating the subsidies, has been arrested, apparently due to an interview he gave to BBC Persian.

In the interview, Rais Dana declared, "The government knows the cash that it gives to people will evaporate under inflationary pressure. Thus, after a while the cash will have no effect. The government will get rid of the huge expense [of the subsidies] and will spend the money on buying weapons or other things, and people will be on their own."

Questioning the government's compensation plan, he asked, "How can we decide who has more needs? If I get a million tomans [$1,000] a month, and someone else has children attending university, how can we have the same needs? If someone has a health crisis, what happens to the expenses? The Center for Statistics say that everybody filled out the forms that the government distributed among the people [to determine each family's needs], but I say that at most 30-40 percent of the people filled out the forms, and knowing that something big was going to happen, they probably lied."

"The government wants to give the money to special approved groups, and the rest of the people are on their own," he added. The elimination of subsidies "will create more unemployment, more poverty, and more misery. According to the Constitution, it is the government's job to create employment, to take care of poor people. About 30 million people do not have the health insurance offered by the Social Security Organization, and many have incomplete insurance. What is going to happen to them? This [the subsidies] is not a gift from the government to the people. It belongs to the people."

Five other activists, Abolfazl Tabarzadi, Fatemeh Arabsorkhi, Hadi Heydari, Mohammad Shafiei, and Alireza Taheri, were also arrested today. They have been accused of "planning for some gatherings."

Copyright © 2010 Tehran Bureau

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