IRAN: AHMADINEJAD TAKES ANOTHER RUN AT GASOLINE SUBSIDY

C O N F I D E N T I A L SECTION 01 OF 03 RPO DUBAI 000382

SIPDIS

E.O. 12958: DECL: 9/16/2019
TAGS: ECON PGOV PREL IR
SUBJECT: IRAN: AHMADINEJAD TAKES ANOTHER RUN AT GASOLINE SUBSIDY

REFORM

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CLASSIFIED BY: Alan Eyre, Director, Iran Regional Presence
Office, DoS.
REASON: 1.4 (b),(d)

1. (C) SUMMARY: President Ahmadinejad has opened his second
term intending to pursue gasoline subsidy reform. Although the
Majlis refused to endorse the proposed reforms at the end of his
first term, this time Ahmadinejad seems to have the support of
Supreme Leader Khamenei, and the government is feigning
flexibility by publicly offering alternatives. In reality,
however, Ahmadinejad wants his politically unpopular proposal to
remove subsidies and provide cash payments to targeted
low-income individuals pushed through the Majlis. Gasoline
subsidies are the third rail of Iranian politics, and
re-introducing such a controversial program amid continuing
political instability and Ahmadinejad's personal unpopularity
hints at the economic reality of Iran's weaker foreign reserve
and current account deficit position, and the recognition that
continued massive subsidies for gasoline are not sustainable.
Even with the Supreme Leader's support, the proposal will be
unpopular, and knowledgeable IRPO contacts have said that any
Western-led gasoline sanctions might give Ahmadinejad the cover
he needs by allowing him to blame sanctions for any and all
gasoline-related problems. End Summary.



PROPOSED `SHOCK AND AWE' PACKAGE FAILED TO `SHOCK AND AWE'




2. (C) Towards the end of its first term the Ahmadinejad
administration pushed a `targeted' gasoline subsidy reform bill,
coupling subsidy removal with cash payments to low-income
populations. The Majlis refused to endorse the bill due to
questions about Ahmadinejad's political motive in an election
year, the possible increase in inflation that cash payments
might trigger, and the overall rushed manner in which the
administration demanded that funds be allocated to execute the
program. In addition, the lack of enthusiasm for reform
reflected strong public support for maintaining subsidies.




3. (C) One journalist who interviewed Majlis members about a
gasoline reform program told IRPO that the deputies widely
perceived Ahmadinejad's first-term reform package as an
irresponsible attempt to "shock-and-awe" the public with
economic reform intended to reverse putatively elitist oil
wealth distribution, consistent with his campaign pledge to 'put
Iran's oil wealth on the table of ordinary Iranians.' The
reporter added that while Majlis members protested the package
largely for their own political reasons, many recognized that
cash handouts to sub-sections of the population identified as
lower-class would add to inflation.



GASOLINE DOWN THE DRAIN




4. (U) While the Ahmadinejad plan to couple the end of gasoline
subsidies with cash payments to the lowest nine groups of
income-earners in Iran (to be determined by survey if the
legislation is passed) did not find favor with legislators, most
recognize the severity of the economic impact the current
program creates. The current subsidy program provides Iranians
a monthly 100 liter quota per personal vehicle and 300 liter
quota per business vehicle at $0.35 per gallon. This price
represents one-fifth the market price and a direct cost to the
government of between USD 3-6 billion a year. The gasoline
subsidy program also fuels wasteful consumption (the growth in
the rate of gasoline consumption is twice that of the growth in
the rate of GDP) and an annual USD one billion (1.8 billion
liters) smuggling operation of gasoline out of the country as
well as a large internal black market for gasoline. As a
result, the program hampers state revenues and indirectly erodes
Iran's oil export market. In total, the program is estimated to
consume 10-20 percent of GDP annually.




5. (U) Current economic data also indicates that it is becoming
increasingly difficult for the government to fund the subsidy
program through the Oil Stabilization Fund (OSF). An ongoing
current account deficit, a projected fiscal deficit of over 13
percent (USD 42 billion) to GDP for the current year, and an

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increasingly larger budget required to support other government
expenditures means the government has repeatedly raided the OSF
not only to fund the gasoline subsidy program but various other
government expenditures as well. Head of the Majlis Economic
Commission Gholamreza Mesbahi-Moghaddam told the Mehr News
Agency in March that the OSF had declined to USD 23 billion, far
short of the projected USD 42 billion projected deficit for
2009/2010. The government has tried to increase state revenue
recently by pumping 200,000 b/d beyond its OPEC-allocated output
quota as well as by aggressively offering bonds in the domestic
market. Neither action is enough to meet the large deficit gap
which means the subsidy program remains an increasingly large
drain on revenues.



THE ALTERNATIVES




6. (U) The government has announced the continuation of the
subsidy program through October but also has proposed three
possible options on gasoline going forward in the second half of
the Persian year (October through March). The first would
continue the current subsidy program. By the Ahmadinejad
government's estimation, this option would require the Majlis to
approve an additional USD three billion in funding. In the
second scenario, reduced quotas of subsidized gasoline would
force consumption down by 10 percent and require an additional
USD two billion in funding. The last option would enact the
proposed "targeted" subsidies and with the exception of cash
payments would mean no more subsidized gasoline quotas. While
the end of subsidies would best address Iran's bleak fiscal
situation, it is difficult to determine where the funds for cash
payments would come from or how much the administration is
looking to spend on them. On September 15, head of the State
Headquarters for Management of Transportation and Fuel, General
Mohammed Rouyanian tried to quell rumors that the government
plans to cut the gasoline quota by half for the remainder of the
year, announcing in state media, "the government has yet to take
a decision."



KHAMENEI LIKES TARGETED SUBSIDIES




7. (C) While seemingly willing to offer alternatives, the
government's intention seems to be to implement the same
targeted subsidy program it introduced previously and for the
new program to begin in the second half of the current Persian
year. The simultaneous release of the alternative options for
gasoline subsidy reform with a statement by the Supreme Leader
requesting that the government complete targeted subsidies in
this term is an clear indication that the government plans to
press hard on the issue, as is a recent statement by Ahmadinejad
that he will seek passage of his subsidies bill at the start of
Mehr month (September 22). In a speech to the new cabinet on
September 7, Supreme Leader Khamenei said, "Currently the
government is paying fewer subsidies to the poor and paying more
to the wealthy. Making the subsidies targeted, which has been
mentioned, is truly an important measure." He then complained
that previous governments failed to enact such reforms and
instructed the new cabinet to act, saying "Now, those
governments have gone but you have to pursue such a thing."



COMMENT




8. (C) The government has wanted to eliminate the gasoline
subsidy for years, the logic goes, because it is a large drain
on revenues and encourages waste, but has feared the public
backlash that would result. In assessing the repercussions of
Western gasoline sanctions against Iran, the strong consensus
among informed IRPO contacts is that that gasoline sanctions
would help Ahmadinejad politically, giving his administration
the political cover it needs to eliminate subsidies and allowing
the government to blame higher prices and less supply on the
United States, while at the same time putting the country on a
stronger financial footing. It would also help to strengthen

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the IRIG financially by giving them another profitable source of
black market profits. END COMMENT.
EYREA