C O N F I D E N T I A L SECTION 01 OF 02 RPO DUBAI 000531

SIPDIS

E.O. 12958: DECL: 12/10/2019
TAGS: ECON IR PGOV
SUBJECT: IRAN: GUARDIAN COUNCIL RETURNS SUBSIDY REFORM HOT POTATO
BACK TO MAJLIS

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

1. (C) SUMMARY: On December 9 Iran's Guardian Council (GC)
announced that it would not ratify President Ahmadinejad's
targeted subsidies bill but instead return it to the Majlis for
more work. The GC has not yet said why it rejected the bill,
but did signal earlier in the week it would do so after Speaker
Ali Larijani sent the bill forward with contradictory language
as to who (executive or legislative branch) would control
revenues derived from subsidy reform. Ahmadinejad had been
strongly opposed to the Majlis submitting the bill to the GC
until this issue was settled, but on December 2 Larijani sent
the bill forward, hoping the GC would resolve the ambiguities in
favor of the Majlis. The GC's decision to return the bill to
the Majlis means the politically charged issue remains for the
moment unresolved. This ongoing tussle between President
Ahmadinejad and the Majlis over subsidy reform has now spilled
over into deliberations over the upcoming year's annual budget
and also the next Five Year Development Plan, both of which
relate to the fiscal year starting in March of 2010. END
SUMMARY.




2. (SBU) In a December 9 interview with state media outlet IRNA,
GC Spokesman Abbas Ali Kadkhodai said the GC had studied the
targeted subsidy bill and "it was found to have problems, so it
will be sent back to Majlis." He said further details would be
provided at a Saturday, December 12 news conference (NOTE: On
December 7 Kadkhodai had signaled this rejection when he told
press that after an initial look at the bill, the GC "already
foresees problems." END NOTE.)



SHOW ME THE MONEY

--------------




3. (C) Eliminating the current subsidies system is expected to
garner USD 100 billion in savings, and the President and the
Majlis are tussling now over who will ultimately control that
money, with President Ahmadinejad insisting his government
should receive it and have full control over how to distribute
it to lower-income Iranians.




4. (C) While concurring with the President's stra

tegy to
eliminate subsidies and distribute cash, the Majlis disagreed
with who should appropriate those funds. Specifically,
Ahmadinejad took exception to Article 13 of the bill, which
states, "The government is required to deposit all the resources
obtained through the implementation of this law (eliminating
subsidies) into a special account with the General Treasury
called Directing Subsidies. One hundred percent of the funds
deposited will be allocated in the framework of the annual
budget laws...and the government is required to show the credits
for each of the expenditures in the annual budget."



THE BUILD-UP

--------------




5. (C) Tensions over control of the funds first spiked when
President Ahmadinejad made an uninvited November 3 appearance at
the Majlis after passage of Article 13. There, he made an
unscheduled speech on the Majlis floor and admonished MPs for
making changes to his original subsidy reform bill and demanded
executive control. At the same time, he submitted a letter to
Speaker Larijani withdrawing the bill. Both sides quickly
scrambled to salvage a solution and on November 8 MPs voted to
approve Article 16 of the bill giving the executive body full
control of the savings derived from eliminating subsidies and
also ratified the entire bill. Numerous MPs who voted against
the final article commented on the contradictions between
Article 13 and 16. Reformist daily Aftab-e Yazd reported
December 3 that although Larijani initially balked at a
government suggestion a special committee to work out a solution
determining that it was "not possible to reconsider

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ratification," a separate committee compromised of three
government officials and three MPs was convened to determine how
to resolve the contradiction.




6. (C) Tension flared again when Ahmadinejad made personal
appearances at each of the joint committee's meetings chastising
MPs for changing the original bill he submitted in 2008.
According to official news agency Mehr, in a November 11 meeting
Ahmadinejad said, "Iran will emerge as an economically
prosperous nation in five years if the subsidy bill is
implemented just as the administration has devised it."



TIPPING POINT

--------------




7. (C) Larijani's decision not to accept a report by the
joint-committee that a new regulatory agency (appointed by the
President) be set up to implement the program may have set the
stage for the GC's rejection of the bill. Concurring with the
head of the Majlis Research Center Ahmad Tavakkoi, Larijani
cited violations of parliamentary procedure as the reason no to
accept the recommendation. As a result, he chose to keep the
bill MPs originally ratified and forwarded it to the Guardian
Council for final ratification.




8. (C) Larijani's decision occasioned a very strong Government
response, with Ahmadinejad declaring that he was "recalling" the
bill. Ahmadinejad's representative in the Majlis, a former
Larijani aide, went further and targeted Larijani in an
interview with conservative new agency Mehr saying, "the
Speaker's Council delayed solving the problems of the Subsidies
Bill for three weeks...it is not justifiable suddenly to refer
the bill to the Guardian Council."




9. (C) In the one week interim since the subsidy reform bill was
submitted to the GC, Ahmadinejad and his representatives have
taken a harder public line on other matters related to public
finance as a way to build pressure, stating repeatedly neither
the draft for the upcoming 1389 annual budget (starting March
21, 2010) nor the next Five-Year Plan (also scheduled to start
in March 2010) will be submitted to the Majlis until the subsidy
reform bill is passed. On December 8, Ahmadinejad ratcheted up
the pressure further, saying that the government demanded the
fate of the subsidy reform bill be resolved in the coming week.




10. (C) COMMENT: It is unclear whether Ahmadinejad's pressure
tactics will lead GC members and MPs to acquiesce to his
demands. The GC decision to send the bill back to the Majlis
seems to be in the government's favor, although without specific
GC feedback about sought-after revisions, it is difficult to
determine who 'won.' Additionally, how the Majlis and
specifically Larijani will respond is not certain. Larijani's
response to Ahmadinejad's refusal to submit a budget and
Five-Year Development Plan has grown more bellicose in recent
weeks, and he has made clear that he expects the Supreme Leader
to resolve any conflicts. Additionally, the country's Audit
Court recently announced plans to expand monitoring of 'illegal'
government spending outside of the budget as well as continued
efforts to investigate if the government misappropriated funds
from the Oil Stabilization Fund in previous years. The move
underscores the growing politicization of all matters related to
public finance as well as the rising tide of discontent across
the political elite with Ahmadinejad's actions in the economy,
past and present. If the Supreme Leader's fails to wade in, it
is possible that important public finance issues will remain
unresolved. END COMMENT.
EYREA