Economy

Trouble Ahead? Subsidies in Iran Could be About to End

May 10, 2022
Ehsan Mehrabi
5 min read
The Raisi administration abruptly ended flour subsidies last month, leading to a surge in the price of bread
The Raisi administration abruptly ended flour subsidies last month, leading to a surge in the price of bread
The government could be poised to end subsidized exchange rates for the Iranian rial
The government could be poised to end subsidized exchange rates for the Iranian rial
The decision comes at a time of already severe inflation and food insecurity
The decision comes at a time of already severe inflation and food insecurity
The first protests over the hike in the cost of commodities broke out in Khuzestan last week
The first protests over the hike in the cost of commodities broke out in Khuzestan last week
Officials appear to be hoping that memories of the brutal crackdown on dissent in November 2019 keep the majority of affected citizens off the streets
Officials appear to be hoping that memories of the brutal crackdown on dissent in November 2019 keep the majority of affected citizens off the streets

On Saturday, May 7, the Iranian newspaper Hamshahri reported that the government plans to repeal all domestic food and fuel subsidies, apparently without a Plan B. The report predicted that after the recent repeal of flour subsidies, the next to be axed could be cooking oil, followed by gasoline.

The Raisi administration knew from the get-go that it was running at a vast and growing deficit: one even a late revival of the JCPOA would not patch up in time. Scrapping subsidies, seen by many as an inevitability in the present climate, has been rendered more urgent by Russia’s invasion of Ukraine: the two countries are significant suppliers of sunflower oil and wheat to Iran.

Heshmatollah Falahatpisheh, a former chairman of the parliament’s National Security and Foreign Policy Committee, recently compared the current situation to an episode in the life of the Prophet Mohammad when he and his followers were under economic siege and had to live under very difficult conditions for three years. They, of course, emerged victorious.

“It seems,” Falahatpisheh went on more soberly, “that in a situation where there is no hope that the JCPOA will be revived and the government cannot get at its blocked assets, it has been forced to move towards ending the subsidized exchange rate to manage expenses, and to take care of the budget deficit.”

The government-subsidized or “official” exchange rate confers far higher value on the rial than the open market rate. Currently, a dollar sells for 28,780 tomans on the open market, and less than 4,200 on the subsidized one. This better rate is offered for importers of what the government considers “essential goods”.

 

Isn’t the Government Worried About Riots?

On May 5, shortly after flour subsidies abruptly ended and the price of bread skyrocketed, the first protests ensued in Khuzestan. The internet was cut off in major cities as horrified households and business owners took to the streets, and an as-yet unknown number were arrested. Despite the suppressive tactics, videos of the marches – and the violent reaction from riot police – have spread far and wide.

Since the time of Akbar Hashemi Rafsanjani, all major protests in Iran have been related to subsistence, up to and including the nationwide November 2019 protests. Perhaps aware of this, directors at Islamic Republic of Iran Broadcasting (IRIB) have ordered newscasters not to talk about the rising cost of living, or even cite Iranian newspaper headlines about the issue. In a recently leaked audio recording, the managing editor of Radio Farhang (“Culture”), a radio station owned by the IRIB, can be heard saying price hikes are a “security” issue and telling his program hosts to avoid the subject until things cool down.

After the November 2019 protests, in which hundreds or potentially thousands were killed in the brutal state crackdown, the state has been surer of itself in how it tries to manage economic unrest. Some officials believe the specter of November 2019 dissuaded people, and in effect prevented last year’s protests in Isfahan and Khuzestan from spreading throughout the country.

There has also been greater focus on prevention. In Khuzestan this weekend, a number of political prisoners who had earlier been released on bail were summoned back to prison. There were also reports that security forces raided the homes of a number of civil rights activists, in a bid to warn them off taking part in protests.

 

Anticipating a “War Economy”

One of the issues the government has yet to deal with is the reintroduction of electronic coupons, which allow recipients to buy necessities at subsidized prices. They are reminiscent of the ration cards used during the eight-year between Iran and Iraq in the 1980s, with good reason; the Islamic Republic perceives itself as now being in a similar situation.

Especially since the rapprochement between Israel and Turkey, many Iranian officials feel they are under siege. The return of the Taliban to power in Afghanistan, the fall of Pakistani Prime Minister Imran Khan (who was somewhat friendly towards the Islamic Republic) and the destabilizing effect of Russia’s onslaught on Ukraine have added to this pervasive sense of insecurity.

Government officials, however, believe that ending subsidies has to be done. The Khatami administration might have been popular, the current thinking goes, but it did not succeed in reforming the subsidies system, whereas the less well-liked Ahmadinejad administration to some extent did. For Raisi and his cabinet, perceived unity in the ruling establishment is more important than popularity.

 

Another Trap for Raisi?

One of the much-talked-about subjects in the past two years has been the question of who will succeed Ali Khamenei as the Supreme Leader of the Islamic Republic when he dies. Some observers believe the election/appointment of Ebrahim Raisi to the presidency was a prelude for him to succeed Khamenei.

Others saw it as a trap: Raisi took on the chief executive role during a disastrous period for the country and his failure to deliver, and thus elimination from the race, seems just as likely. In this game, the one who controls the action seems to be Supreme Leader’s son Mojtaba Khamenei. Ending subsidies could well be just another trap sprung for Raisi to hasten his downfall.

Government officials might not be worried about wide-ranging, protracted protests. But others are, including supporters of the government. The Student Basij has warned people are not in a position to accept these sudden, ill-planned price hikes all at once, and social unrest will follow. And several MPs, including Jalil Rahimi Jahan-Abadi of the parliament’s National Security Committee, have warned the government not to test people’s patience. There may not be much left.

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