AHMADINEJAD'S WINGS GET CLIPPED ON ECONOMIC POLICY

S E C R E T SECTION 01 OF 03 RPO DUBAI 000168

SIPDIS

DEPARTMENT, PLEASE PASS TO TREASURY FOR S. VINOGRAD

E.O. 12958: DECL: 4/14/2019
TAGS: ECON EFIN PGOV IR
SUBJECT: AHMADINEJAD'S WINGS GET CLIPPED ON ECONOMIC POLICY

REF: RPO DUBAI 000121

DUBAI 00000168 001.2 OF 003


CLASSIFIED BY: Ramin Asgard, Director, Iran Regional Presence
Office, DOS.
REASON: 1.4 (b),(d)

1. (S/NF) Summary: Iran's Majles dealt President Ahmadinejad a
series of setbacks on economic policy in March that signal the
forging of a broad-based opposition to the President's populist
economic policies. These defeats have hurt, but probably not
crippled, his plans to distribute cash and economic benefits to
voters before the election in June, but they magnify his lack of
accomplishments on the economy, a key issue in the election.
The reform of Iran's massive subsidies, and the inefficiencies
they encourage, will remain part of the public debate as shown
by the Supreme Leader branding the new Iranian year as the "year
of reforming consumption." End Summary.




2. (S/NF) On March 12 Iran's Majles approved the budget for the
new Iranian fiscal year (1388) that began on March 21, following
a lively debate that saw the centerpiece of President
Ahmadinejad's economic program, subsidy reforms, defeated in a
preliminary vote. However, a more significant defeat for
Ahmadinejad, according to an Iranian contact who is an
Ivy-League educated economics professor at the American
University of Sharjah in the UAE (please protect),was the
Majles' creation of separate entries in the budget for each of
the development projects that Ahmadinejad has awarded during his
visits to Iran's provinces. By creating separate budget line
items, instead of aggregating the projects in a single fund that
Ahmadinejad could disburse at his discretion, the Majles now has
more ability to oversee the funding for these projects. This
change created thousands of new line items and was the basis for
the President's claim that the Majles' numerous amendments had
exceeded its constitutional authority. The Guardians Council
rejected this claim when it approved the Majles' version of the
budget one week later.




3. (S/NF) The defeat of Ahmadinejad's subsidy reforms, a
proposal that would have raised the prices of subsidized goods -
especially energy - and distributed cash payments to targeted
segments of lower-income Iranians, received more media attention
than the increased scrutiny of development projects. Some
critics were concerned that a hasty implementation of the cash
payments would have been a shock to Iran's economic system. A
separate contact, a UAE-based Iranian economic consultant,
summarized the proposal for direct cash payments as a naked
attempt to buy votes - especially in rural areas - because the
payments would have started before the June election, while the
energy prices hikes would not have occurred until after the
election.




4. (S/NF) Our academic contact, however, was pleasantly
surprised by the overall package of reforms, commenting "the
program would make up for all his past mistakes in economic
policy." The subsidy reforms were similar to policies the
academic suggested seven years ago, and which the World Bank
(one of his previous employers) and the International Monetary
Fund have recommended to Iran for several years. Liberalizing
energy prices would have been a large step in combating the
waste, inefficiencies, and rent-seeking that plagues Iran's
economy, and he described one anecdote of these distortions: On
Iran's eastern border there are many people whose "job" is to
fill up a car with a tank of subsidized Iranian gasoline and
then drive it over the border to sell at a higher price.




5. (S/NF) A third setback for Ahmadinejad last month was the
Majles' revival of Iran's Management and Planning Organization
(MPO),whose main task is drawing up the annual budget and
overseeing its implementation, according to our academic contact
in Sharjah and a report in the Iranian press. Ahmadinejad
dismantled the upper echelons of the MPO in 2006, a move widely
criticized as consolidating power over the budget inside the
President's office, but MPO offices in the provinces were
maintained, according to an MPO employee from Khorasan-e Razavi
who was in Dubai to apply for a visa. The MPO employee has
continued to assemble the province's annual budget request to
Tehran - presumably to the President's office - since 2006, and
in her opinion the restoration of a national MPO to its pre-2006
form will depend heavily on who is elected President in June. A
restored MPO is unlikely to have a significant impact on
economic policy before the June election because the drafting of

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next year's budget will not begin until later this year, and its
first opportunity to impact policy is probably the Fifth
Development Plan, a five year plan that is currently being
drafted, and which has historically been an MPO-produced
document. A separate contact who is an economics professor in
Yazd believes that restoration of the MPO is "the first thing
that needs to be done" to improve Iran's economy, and notes that
many former MPO officials were signatories to a series of open
letters that criticized Ahmadinejad's economic policies.




6. (S/NF) Identifying the personalities or groups responsible
for the defeats of the President's policies is difficult, and
the fear of becoming targets of criticism will inhibit public
claims of victory. Majles Speaker Ali Larijani's influence has
certainly been enhanced, and he has the support of the Supreme
Leader and conservative allies, although our academic contact in
Sharjah is not a fan of his political or economic policies. The
influence of scholars at Allameh Tabatabai University, who favor
strict adherence to Iran's five- and twenty-year development
plans and a restoration of the vital role of the MPO in the
economy, provide the theoretical underpinning for many
conservatives in the Majles, is also on the rise. Former
Central Bank Governor Tahmasb Mazaheri is primarily responsible
for recent declines in inflation and a downturn in the Iranian
real estate market, according to the IRPO contact, and the
continuation of Mazaheri's policies under the current Central
Bank Governor, Mahmud Bahmani, is another sign that the
President's room to maneuver on economic policy has been
diminished. Mazaheri was fired when the head of Ahmadinejad's
"Quick Return" loan program complained that the Central Bank was
not funding that program, but most beneficiaries of these loans
used their funds to speculate in real estate instead of
investing in the new businesses for which they were intended - a
separate contact estimates 75% of these loans have failed.




7. (S/NF) Ahmadinejad's disregard for government-approved
economic plans, especially Iran's Fourth Development Plan
(currently in its fifth and final year),is key to understanding
his recent sparring with the Larijani and the Majles over the
budget, according to a Professor of Economics at Yazd University
who is a supporter of former President Khatami and who has
received a fellowship to teach at a U.S. university. The
President's disregard for the Fourth Development Plan - which
called for a gradual lifting of energy subsidies - is
politically motivated because it bears the fingerprints of two
of his rivals: former President Khatami's administration
drafted the plan, and it was approved by Ali Akbar Hashemi
Rafsanjani's Expediency Council, after the Guardians Council
failed to ratify the plan. Other examples of Ahmadinejad's
disregard for the law are his suspending - on his own authority
- of the Majles-approved Value Added Tax (VAT) last fall, and
his setting aside of the Fourth Development Plan's roadmap for
the privatization of state-owned enterprises, according the Yazd
academic. Ahmadinejad's main problem is his egotism, in our
contact's opinion, and he thought one of the last lines in
Larijani's letter to the President defending the Majles' actions
perfectly summarized the speaker's own feelings towards
Ahmadinejad, "you should follow the law."




8. (S/NF) The hidden hand of the Islamic Revolutionary Guard
Corps (IRGC) is another possible interpretation of Ahmadinejad's
recent setbacks in the Majles, according to a separate contact
who is UAE-based Iranian businessman in the paper industry. He
believes the IRGC has been amassing political and economic power
since the smashing of student protests in 1999, and a cardboard
factory he invested $4 million in was confiscated by the IRGC.
Describing the direct cash payment plan and the promises of
development projects in the provinces as Ahmadinejad's "vote
collection plan," the businessman believes that the IRGC worked
behind the scenes to thwart these programs and prevent
Ahmadinejad from using public funds to increase his popularity
in the run-up to the election. The IRGC has decided that it
does not want Ahmadinejad to be the public face of Iran to the
West for the next four years, but it has not yet decided on who
it does want to support in the June election, the IRPO contact
contended.




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9. (S/NF) Ahmadinejad will persevere in his efforts to
distribute cash and economic benefits to lower-income Iranians
despite the setbacks in the Majles because his priority in
economic policy has always been social justice - even at the
expense of economic development - according to a political
counselor at the Japanese Embassy in Tehran who met with IRPO
Officers on his way back to Tokyo. Since the budget defeat,
Ahmadinejad has been noted in Iranian media as continuing to
distribute free potatoes to crowds that gather for his speeches,
and distributing approximately $10 to employees of the Ministry
of Foreign Affairs to attend a Nowruz speech. Confrontations
over redistributive programs in a prospective second Ahmadinejad
term would also continue because of the poor relationship
between the President and Majles Speaker Larijani, according to
several IRPO contacts. In terms of electoral politics, the
Japanese diplomat warned that Iran's economic performance may
not hurt Ahmadinejad with the many voters who distinguish their
personal financial situation from the performance of the
country's macroeconomic indicators.




10. (S/NF) Comment: The bruising that Ahmadinejad suffered last
month reveals the difficult political landscape Ahmadinejad
faces in the weeks before the June election, and which he would
face in a prospective second term. We are struck by the
spectrum of factions that IRPO contacts report either authored
Ahmadinejad's defeats or have welcomed them, from conservative
allies of Larijani, to IRGC elements, to reformist academics.
Even the supporters of one of Ahmadinejad's first initiatives -
distributing "justice shares" of stock in privatized state
companies to lower-income Iranians - realize that it is an
evident failure. Now that most of the his populist schemes,
such as directing cash payments to lower-income Iranians, or
distributing development projects during his tours to the
provinces, have run into roadblocks, our academic contact in
Sharjah assessed Ahmadinejad's accomplishments over the past
four years by commenting "the emperor has no clothes." Having
clipped Ahmadinejad's wings during the budget process, Larijani
and other conservatives in the Majles may feel more empowered to
confront the President on issues like government corruption.




11. (S/NF) Comment (Cont'd.): Iran's massive subsidy program
will continue to distort Iran's economy and burden government
finances as several of IRPO's contacts have observed, and the
Supreme Leader's Nowruz message that criticized Iranians'
extravagant and wasteful consumption of bread, water, and energy
- all of which are subsidized - will keep the issue on the
political agenda. We think the political landscape following
Ahmadinejad's setbacks in March suggests that the IRIG will
avoid any comprehensive action on subsidy reform and will take
incremental steps, such as using media campaigns to encourage
conservation or quietly cutting subsidies on discrete items like
detergent powder (see Reftel),to address this issue. End
comment.
ASGARD