Iran Finally Passes Targeted Subsidies Bill

C O N F I D E N T I A L SECTION 01 OF 03 RPO DUBAI 000019

SIPDIS

E.O. 12958: DECL: 2020/01/27
TAGS: PGOV IR PREL ECON
SUBJECT: Iran Finally Passes Targeted Subsidies Bill

REF: 09 RPODUBAI 468; 09 RPODUBAI 503

CLASSIFIED BY: Vinay Chawla, Economic Officer, DOS, IRPO; REASON:
1.4(B),(D)


1. (SBU) SUMMARY: On January 5, the Majlis passed the Ahmadinejad
administration's Targeted Subsidies Plan (TSP),with the Guardian
Council approving it on January 13 and the President signing it
into law on January 24. The bill stipulates that subsidies be
removed and prices on staple goods, fuel sources and utilities be
liberalized over a five-year period. Its passage ends a protracted
debate between the Majlis and Ahmadinejad that centered over who
would control and disburse the monies saved by eliminating
subsidies, with the eventual compromise that the executive branch
will directly determine how to distribute the savings, with
required reporting on spending to a Majlis audit committee. While
the administration can claim a legislative victory, it must now
deal with widespread public concern over a spike in inflation as a
result of the legislation, in addition to anxiety over
implementation of targeted cash payments. END SUMMARY.

THE HISTORY


2. (SBU) President Ahmadinejad originally submitted a TSP as part
of a bill in early 2009 but the Majlis refused to act on it, the
conventional wisdom being that it did not want to give Ahmadinejad
new sources of money to disburse before the June 2009 Presidential
election (reftel A). The bill went to a Majlis committee and
re-emerged on the legislative agenda in October 2009. Following
the Guardian Council's rejection of the first version of the TSP
December 12, the Majlis passed a revised version January 5 that
contained a key compromise that settled a dispute over control of
subsidy savings. The Guardian Council ratified the new version
January 13, and the Majlis formally endorsed and forwarded it to
President Ahmadinejad January 16. Ahmadinejad officially enacted
the TSP on January 24.


3. (C) The first part of the plan authorizes the government to set
a new pricing mechanism that will lead to fully liberalized prices
over five years for many staple goods, fuel sources and services
that are now provided at a subsidized cost (reftel A). These staple
goods and services include sugar, rice and bread; fuel sources
include gasoline; gas and gasoil; utilities include electricity and
water. (NOTE: Due to fluctuating energy prices, estimates of the
cost of Iran's subsidy program vary but most analysts agree that
Iran spends between USD 80 to 100 billion a year on subsidies,
approximately 30 percent of the country's annual budget and 11
percent of GDP. Energy subsidies alone account for approximately
80 percent of the subsidies. END NOTE.)

MAJLIS FOLDS


4. (C) For months President Ahmadinejad and the Majlis wrangled
over who would control disbursement of subsidy savings. Originally,
MPs insisted that all subsidy savings go into the national treasury
and government requests for funds come through the annual budget
process (reftel B). After Ahmadinejad (on more than one occasion)
threatened to pull the legislation unless his government had full
control of the funds, the Majlis agreed to a compromise that seems
to largely favor the President. The revised plan establishes a new
government organization 'The Targeted Subsidies Organization' (as
Ahmadinejad had originally stipulated) to administer the subsidy
savings with "oversight" from the Majlis. A Japanese diplomat who
recently served in Iran and follows its economy closely said he was
surprised by the Majlis' concession, asking rhetorically "Who in
the Majlis thinks the "current administration is 'capable' of
taking charge of such a vast scheme?"


5. (C) The Majlis did include a provision in the legislation
requiring the new subsidy savings disbursement organization present
a report every six months to a Majlis audit organization.
Additionally, MPs stipulated in the legislation that exactly half
of the subsidy savings be distributed to all Iranians and the
remaining half be spent on infrastructure, business loans/grants,
and grants to individual provinces. As the law is now written the
executive branch has the authority to allocate and distribute cash
payments to poorer Iranians and individual businesses.

NEW LAW, NEW PROBLEMS


6. (C) An increasing amount of public concern over the new TSP has
focused on its expected inflationary effects, especially as it
relates to utilities. Reformist press sources have reported that
the head of the Tehran Water and Sewage Authority predicted the

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cost of water bills will increase 21 percent after the start of the
new Iranian calendar year (March 21). Some websites reported the
total increase would be closer to 400 percent, with electricity
also expected to double or triple. With respect to inflation in
other sectors, state semi-official news agency ILNA published
January 12 a poll of a 100 private investors in which all
participants concurred that implementing the plan "will result in
high inflation, reduced exports, and decreased competitiveness
among domestic producers." In a separate report, ILNA reported
January 13 that the semi-official ' House of Workers' labor
organization warned "about the inflationary effects of the planned
removal of subsidies." A labor activist predicted the TSP will
lead to major inflation, layoffs, and "we believe this will spark
huge labor actions, in somewhere between three months to a year."
A member of the Tehran Chamber of Commerce, predicted higher
inflation attributable to the TSP may appear as early as the month
of Bahman (January 21 - February 21)."


7. (C) Central Bank of Iran (CBI) Governor Mahmoud Bahmani has also
acknowledged the prospect of higher inflation after earlier
predicting Iran's inflation rate would drop into the single digits.
Radio Farda quoted him January 19 as saying, "implementing the
subsidy bill will definitely lead to increases in prices and
inflation. When the Central Bank promised to lower inflation and
make it one-digit it was in view of the economic conditions of last
year, but if the subsidies are removed, CBI will not be able to
work a miracle and reduce the inflation rate." Bahmani's
contradictory comments reflect those of other officials who are
trying to respond to growing public discord in the days since the
TSP was passed.


8. (C) Questions on who will receive subsidy payments and how much
they will receive have been met with contradictory or no response
from various government officials. A household economic survey
conducted last year by the Statistical Center of Iran (SCI)
clustering Iran's population into ten economic groups formed the
basis for determining who would qualify for cash subsidies when the
legislation was first written. In terms of the number of people who
will receive a cash payment though and how many are in each decile,
the legislation left it to the government to determine. Since the
TSP's ratification, government answers in the press have swung
daily between 50, 70, and 100 percent of the population. The SCI
website that citizens can use to update their survey data has been
inaccessible due to a "high volume of traffic on the site,"
underscoring lack of government preparation. BBC Farsi reported
that more than 10 million Iranians did not complete the survey last
year, many because they feared the supposed cash payment program
was really a ruse to collect taxes.

I CAN'T HEAR YOU


9. (C) President Ahmadinejad has sought to defuse growing public
anxiety over any negative repercussions of the plan. In a recent
speech where he sought to address concerns over inflation he said
that "I guarantee that within three years, there will be no poor or
unemployed person in Iran once this law is put into practice." When
asked by one reporter January 24 about the contradictory numbers
that the government issued with regard to who qualifies for cash
payments, Ahmadinejad responded, "No contradictory comments were
made in this regard on the part of the officials. They might have
made different comments, but there are no contradictions on the
issue of targeting subsidies. Everything is clear and
transparent."

SMELLING BLOOD


10. (C) Political and government factions concerned with their own
interests have attempted to capitalize on the President's
'out-of-touch' response by escalating concerns the government's
economic management. In addition to semi-government, technocratic
organizations that have questioned liberalizing prices before
liberalizing other parts of the economy, political elites have also
joined the fray. Reformist daily newspaper Etemad analyzed Majlis
Speaker Ali Larijani's surprisingly harsh comments in a January 20
article. According to the article, "the strong criticism leveled by
Larijani against the government include his criticism of growth in
liquidity and inflation and the decrease in investment, gross
domestic production and per capita income from 2005 to 2009." In a
January 17 editorial about the TSP, conservative newspaper
Jomhuri-e Eslami described "honesty as the master key" and one that
is "the missing link which officials ignore." In an apparent shot
at Ahmadinejad, the editorial goes onto say, the TSP "has been

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depicted over-optimistically as a miraculous reform scheme that
will present a bright and dreamlike future for all people and will
root out poverty...instead of elaborating on the problems that this
plan will cause for the people." Editorials published in other
media outlets representing different political factions have made
similar comments since the bill was ratified.


11. (C) Given the growing political risk of implementing such a
program, IRPO contacts seem somewhat surprised by Ahmadinejad's
strong charge forward, though they do point to his ideological bent
as the most likely driver, along with his desire to control new
revenue streams. One pro-market Iranian economist warned that
while implementing the TSP provides a unique opportunity made
possible "by a populist administration courageous enough to raise
prices to market levels, but which also happens to enjoy the
credibility among the poor," the government's plans are "highly
flawed and will cause a backlash...and the mixing with other
grievances could be serious." He went on to say, "Getting more
revenues does not seem right given the potentially high political
price and I am skeptical full pricing will occur." Another
economist who has worked in Iran and follows Iran's economy closely
believed the government is pressing forward in spite of the
warnings because Ahmadinejad is confident that by giving out cash
to the population, the discontent will be eased. According to our
contact, Ahmadinejad additionally perceives the TSP as "his
brainchild" and has faith that "he is doing the right thing" based
on the relatively tepid protests against the price hikes on
gasoline introduced in 2007. In terms of implementation, our
contact argued that given the complexity of the reform, the
government will continue to pursue a "trial-and-error" approach.
Indeed, a January 24 admission by the Commerce Ministry
spokesperson that it is stockpiling staple goods in the event that
price liberalization causes prices to skyrocket only underscores
how little the government really understands what will happen when
new prices are announced.


12. (C) COMMENT: President Khatami tried to push through subsidy
reform and couldn't do so, and it does seem ironic that the most
important pro-market legislation in revolutionary Iran was passed
under the Ahmadinejad administration. How much the TSP will truly
liberalize the economy and improve the economic standing of
Iranians in the long-term will be determined through its
implementation. The early indications are that much like the
country's foreign policy, government action on the TSP seems to
move in one direction and then is contradicted by a move in
another. What is consistent is Ahmadinejad's populist messaging in
defense of whatever action the government takes. The IRIG seems
ill-prepared to respond to public fears and criticism or is intent
on implementing the TSP in a way that will have very negative
effects on the economy. In such a scenario, it may be forced to
backtrack on some of its price liberalization policies. The fiscal
implication will be a pull back on cash payments as well, a move
that could increase discontent with the IRIG. END COMMENT.
EYRE