Iran Feature: The Squeeze of Ahmadinejad's Subsidy Cuts (Baji)

Yasaman Baji writes for Inter Press Service:

Owners of industrial and agricultural enterprises who initially welcomed Iranian President Mahmoud Ahmadinejad's plan to reduce subsidies by lifting the price-support system for basic goods have now become its chief critics.

Six months after the controversial plan took effect, these producers are still awaiting the promised financial support for their companies and worry that, with the sharp rise in fuel prices, they will not be able to stay afloat. 

"What do people think? That we make so much profit that despite astronomical cost increases we can still produce?" asked one food producer in exasperation, who spoke to IPS on condition of anonymity. "The reality is that sectors of production can't continue and are reducing their production, if not being shut down altogether." 

Since the main objective of the subsidy reduction plan was to improve economic productivity and promote greater efficiency in energy use, many Iranian economists have argued that subsidies for productive enterprises, particularly in the manufacturing sector, were more important than cash subsidies to individuals and families. 

The Targeted Subsidy Law, passed after months of contentious negotiations between the government and the parliament, or Majlis, provided for the distribution of revenues generated by price increases to both people and to productive enterprises. Half of the additional revenue was earmarked for individuals and families in the form of cash subsidies, while 30 percent was to go to industrial and agricultural enterprises. 

But when price increases, particularly for highly subsidised fuel and basic foodstuffs such as wheat, went into effect in December 2010, the government's main concern was the public reaction. Hence, a concerted and largely successful effort was made to prepare the population for the reform and placate people through a system of cash subsidies of approximately 40 dollars a month per individual to be directly deposited into the bank accounts of heads of household. 

Industrial and agricultural producers largely supported the plan as a way to ease the burden of the price-support system, which is estimated to cost the government between 70 and 100 billion dollars, on the assumption that they, too, would be compensated for the higher prices. Prices were raised, some as high as 400 percent, without popular protest, but the plight of producers, which also had to cope with the price increases on fuel, was largely neglected, and that is now causing growing concern. 

According to a recent interview with Jamshid Pajouyan, an economist who supported the Targeted Subsidy Law, in Donyaye Eghtesad, the country's most important economic daily, giving the right signals to the private sector was supposed to be the cornerstone of the plan. 

"Revenues generated from targeting subsidies should be spent in realising the objective of improving producers' strength and to achieve higher and sustainable economic growth for the whole economy," he said. 

On the contrary, producers have had to deal with a one-two punch that has sent them reeling due to the way the plan has been implemented. 

First, the government is spending all the generated revenue on cash subsidies to the people, leaving nothing to help enterprises adjust to their increased cost of production. In fact, the Audit Court, an organisation directly responsible to the Majlis and tasked with keeping tabs on government revenues and expenditures, has already accused the government of dipping into other funds to pay for cash subsidies, possibly in violation of the law. 

Second, the government, preoccupied with the potential public backlash from loss of subsidies, has implemented a price-control regime that prohibits producers from passing along their increased costs of production to consumers. 

The resulting squeeze has proved ruinous to many firms, a trend that has now been taken up by the Majlis. 

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