AHMADI-NEJAD IS FORCED TO MAKE SOUND ECONOMIC DECISIONS

C O N F I D E N T I A L SECTION 01 OF 02 IRAN RPO DUBAI 000048 SIPDIS SIPDIS E.O. 12958: DECL: 7/16/2017 TAGS: ECON EFIN PGOV IR SUBJECT: AHMADI-NEJAD IS FORCED TO MAKE SOUND ECONOMIC DECISIONS REF: RPO DUBAI 0043 RPO DUBAI 00000048 001.2 OF 002 CLASSIFIED BY: Ramin Asgard, Acting Director, Iran Regional Presence Office - Dubai, Department of State. REASON: 1.4 (d) 1.(C) Summary. Populist President Ahmadi-Nejad is being forced to announce some very unpopular decisions - under the direction of the Supreme Leader - due to the enormous pressure the Iranian government is under to "fix" the economy. While public attention was still focused on gasoline rationing (reftel), government officials quietly announced an increase in the costs of electricity, gas, and water; and eliminated cement subsidies. Anecdotally, IRPoff was told by a single-source that cost controls in the dairy sector would soon be lifted as well. Most likely the government realized it needs to make the very unpopular decision of removing some subsidies - in the face of severe domestic criticism and a future third UN resolution - and is doing so as far ahead of the upcoming Majles election as possible. It is particularly noteworthy, that the removal of subsidies (as well as other measures like promotion of privatization) - across several sectors - is a departure from nearly three decades of Iranian public-sector driven economic policy. Such a market-oriented change in economic policy is an important - and long overdue - structural reform. It is in-line with the current 5-year economic development plan and follows the advice of international and domestic economists. Ahmadi-Nejad may be taking these politically risky economic measures to bolster Iran's economy in the face of current or anticipated international economic pressure. End summary. It is that bad -------------- 2.(C) According to multiple sources, the amount of criticism leveled against the Iranian government's economic performance is at an unprecedented level relative to recent years. Leaders are under enormous pressure to "fix" the economy, report contacts. Radio Free Europe reported that 50 Iranian economists met President Ahmadi-Nejad July 13 to personally express their dissatisfaction with his economic decisions, saying that his policies "lack any basis in science." Despite best efforts, the government's economic policies continue to backfire and cause discord. In just one anecdotal story of many, IRPoff was told that several private banks are under threat of bankruptcy after the recent government decree lowering interest rates - a decision for which Ahmadi-Nejad was severely criticized in the press. According to one Iranian economist, the decision has caused a run on all banks. People - not knowing what else to do - are putting their money in the real estate market - causing prices to jump yet again. The housing market in Tehran has gone up by 70% this past year alone, said an Iranian economic consultant. 3.(C) It appears the government is now realizing that it has to make structurally sound, yet domestically unpopular decisions in the face of a possible tightening of sanctions and the expected third UN resolution. The government is most likely trying to push these changes through all at once and as far ahead of the upcoming Majles elections as possible. The changes also track with Iran's 5-year economic development plan, which policymakers must pay some nominal deference to, even if it is often ignored. Most noteworthy is that the decision to remove subsidies tracks with the advice of international and domestic analysts and is unprecedented in the history of the Islamic Republic. Recent unpopular decisions -------------- 4.(C) After several earlier postponements, the IRIG announced on midnight June 26, that gasoline would be rationed as of June 27 (reftel). While the public was still reeling from the ramifications of the announcement, the General Manager of National Gas of Iran Seyyed Reza Kasa'izadeh announced July 4 that rates for electricity, gas and water would increase by 15% "next week." Referring to gasoline rationing at the inauguration ceremony for Shahid Reyis Ali Delvari Dam in Bushehr Province, Ahmadi-Nejad said July 5, "this type of conservation could also be applied to electricity consumption." Mehr news agency reported July 7 that the cement subsidy was being eliminated. IRPoff was told July 1 by an Iranian consultant that dairy farmers were finally given the green light to raise prices after several smaller farms went bankrupt earlier this year - allegedly the government has been artificially holding prices steady. The consultant claimed that prices of butter, milk, cheese, etc are about to increase 20-25%. (Note: Contacts have recently alleged that there is a RPO DUBAI 00000048 002.2 OF 002 butter shortage in general - which is why import tax on butter was just pushed down to 0%. Endnote) 5.(C) Comment. The fact that the government - under the direction of the Supreme Leader - appears to be acting on the recommendations of sound economic doctrine and advice from its own economists to remove some subsidies would seem to indicate that the government is at its reckoning point in terms of its domestic economic policy. It is coming to the realization that it can no longer continue its reckless economic policies - even with high oil prices. Instead, Iran may well be seeking to bolster its heretofore fragile economy through long overdue structural policy adjustments such as diversification, privatization, lifting of subsidies, etc., in an effort to withstand building international pressures. This policy change may augur needed adjustments to planned UN or international community economic sanctions approaches. ASGARD