x Abu Dhabi, UAEThursday 18 January 2018

Iranians braced for end to fuel subsidies

President Mahmoud Ahmadinejad promises "the great surgery of the economy" will not hurt, but many fear the move's knock-on effects.

TEHRAN // For nearly three years, Iran's president, Mahmoud Ahmadinejad, has made repeated promises that "the great surgery of the Iranian economy" will not hurt much. But anxiety is high among millions who want to know how their lives, jobs and businesses will be affected by the first incision.

The so-called "surgery", a plan to reduce government subsidies for fuel and food, has been delayed several times since March when subsidies were supposed to be slashed in accordance with parliamentary legislation. There are now indications that it is finally about to begin, possibly within days.

The government pays more than $100 billion (Dh367bn) a year in subsidies for fuel, services and food, such as cooking oil, flour, and milk. Many economists have said that artificially keeping down the price of fuel, for example, is bad for the economy because it encourages a black market trade in Iranian fuel with neighbouring countries. Another problem with artificially low energy costs is that it enables industrial companies to use machinery that is not energy efficient. If fuel is sold at international prices, companies and people will be encouraged to use electricity and fuel more wisely and national resources won't go to waste.

To soften the blow of the loss of subsidies to the working class, the government has launched a programme to pay people who qualify about $40 a month in special bank accounts. Last week, the government finished transferring two months of payments to the accounts of about 60 million people. The money cannot be used until the subsidy cuts take effect.

Mr Ahmadinejad has not released details on the subsidy reduction scheme and people who rely on the subsidies to make ends meet are worried about the scheme's impact.

"I'm very anxious to find out whether or not the rise in prices will be compensated fully by the $160 a month that the government is paying to my family. I can't stop worrying although he says there will be no pressure on low-income people like me and there will even be some money left to save," Reza, 42, a gardener who earns $300 a month said.

Reza and his family live in a 35-square-metre flat in a working-class suburb of Tehran. His two children are in high school. Transportation by bus to a posh housing compound in northern Tehran where he works costs him about $35 a month. Their electricity and gas bills are now about $5 a month each. He has no idea how much he will have to pay for utilities and transportation after subsidies are removed.

"I don't own a car to worry about the price of gasoline, but everyone says once the price of fuel goes up all other things will be more expensive too. A big rise in the costs of food, health care and transportation will be a big problem for my family," he said.

At least 14 million Iranians have not signed up to receive the government compensation, as many of them presumably earn enough not to worry too much about a hike in energy and food costs. But nearly all are worried about the consequences of the economic reform the Iranian president is determined to push ahead in spite of strong opposition from across the political spectrum.

"I won't be able to keep my business if there is a drastic increase in the price of fuel and foodstuff," Mohsen, 56, who runs a pizza parlour in a middle-class district in north-west Tehran, said.

Higher electricity and gas prices will push up the costs of running the business, a higher petrol price will mean higher delivery costs and there is bound to be higher inflation that will increase the costs of most food ingredients and labour. But his worst fear is the loss of patrons who will not be able to afford to eat out as inflation rises, he said.

Shahnaz, 39, a mother of three, is concerned about being able to keep her job as hairdresser at a salon in western Tehran. "My employer says she may not be able to afford electricity bills because businesses like hers are not compensated for higher energy costs. That may eventually mean that she may not be able to afford to keep me," she said.

Subsidy cuts are expected to affect the costs of production of many agricultural and industrial commodities including products such as cattle feed, cement and bricks, and vehicles and textiles.

The Subsidy Reform Law passed by the parliament in March requires the government to allocate some of the money it will save by not paying subsidies to industries to help them cope. The government says it has prepared assistance packages for the most vulnerable industries but the content of the packages has not been revealed.

Industries, some of which direly need to improve their energy efficiency in order to be able to cope with higher energy prices, use 16 per cent of all energy subsidies the government is paying now.

Subsidy cuts will affect not only Iranians but also many Afghans. More than two million Afghans reside in Iran, at least a million of them illegal immigrants. The majority of the Afghans work as labourers in agriculture and construction. They will not be paid any compensation for higher prices, so many may be forced to go back to their own country. A shortage of Afghan labour may push up labour costs for agriculture and construction.