Hurdles to economic reform in Iran

08 August 2008
President Ahmadinejad’s plan for economic change offers little in the way of new ideas, but faces some major challenges.

To great fanfare, Iran’s President Mahmoud Ahmadinejad announced his plan for economic change in two TV appearances at the end of June. After the launch of the plan, the president held a two-hour meeting with 100 economists, who were each given five minutes to voice their opinions. Ahmadinejad predicts the plan will quickly lead to Iran having “a first-rate economy”.

The plan centres on the reform of several key areas of economic and fiscal activity: subsidies on food, energy and medicine; taxation; customs; banking; exchange rates; and the distribution of goods and services.

There is also talk of dropping several zeros from the currency. At the beginning of the Islamic revolution, one US dollar was equivalent to 75 rials. Today, one dollar buys approximately 9,160 rials. It will now be up to the newly appointed Economy Minister Shamseddin Hosseini to put this into practice.

However, the broad talk of change is accompanied by little detail of the proposed reforms or how they are to be carried out.

Despite the government’s efforts to present its plan as unique and bold, the reality is that these areas have been earmarked for reform by previous presidential administrations.

Lowering rates

Even before the publication of the latest plan, the Ahmadinejad government was taking action over some of its provisions.

Over the past two years, the government has been forcing the private banking sector, which it holds responsible for the surge in property prices, and in turn the exacerbation of class differences, to lower the interest rate it pays to account holders and bring the way it handles interest and loans into line with Islamic financing values.

The government, similar to its predecessors, has been trying to reform a tax code that is full of exemptions for different industries. It has also tried to strengthen the institutions responsible for collecting taxes.

Despite increases in the amount of funding to these institutions, the government claims about 50 per cent of the taxes due to it are not regularly paid.

The most controversial part of the economic plan is the elimination of subsidies, which keep the prices of food, medicine, paper, electricity, gas and petrol artificially low. At the time of the revolution, subsidies were seen as a key mechanism for achieving social justice.

The government intends to introduce a more targeted system of social welfare. It says it will use the money it will save by eliminating subsidies to make cash payments directly into the bank accounts of those who meet the criteria for various social welfare programmes.

There is little debate over the need to eliminate the vast and complex system of subsidies and to target social welfare more directly.

The previous Khatami government made a big step in this direction when it established the Organisation of Social Welfare, which provides some form of aid to 60-70 per cent of the population.

The Ahmadinejad administration argues, as did previous administrations, that subsidies offer excessive help to industry and business by keeping the price of petrol, natural gas and electricity artificially low.

It says that the system does not create incentives for industry to adopt less fuel-consuming technology or other forms of energy conservation. It also argues that the middle and upper classes benefit more than the lower classes from government-subsidised energy, medicine and food.

At the same time, government-subsidised petrol and electricity prices have not only helped spur usage but also deprived these sectors of capital.

Parts of Iran today endure power cuts of up to four hours a day, and Iran has to import about 50 per cent of its petrol due to the lack of domestic refining capacity. Overall, critics of the subsidy system say it lowers productivity and economic growth while maintaining a heavy financial burden on the government.

However, replacing subsidies will not be straightforward. One of the greatest problems in the targeting of subsidy and social welfare is the lack of institutions able to collect, analyse and store the personal information of its citizens, including details of their income and property ownership.

In many parts of the country, the information that is collected, such as property transactions, is not stored electronically or shared between institutions.

Ahmadinejad is continuing the work started by Khatami in regard to gathering this data, but much work remains before the government’s own target date of October.

In an attempt to make up for this deficiency and to get money to the people as quickly as possible, the government has distributed application forms for the new social welfare payments to post offices across the country.

The answers given on these forms will determine the amount, if any, of state help the applicant can obtain. The problem is that the government does not have enough data on its citizens or the institutional capacity to verify answers given on the forms.

Ahmadinejad faces political hurdles in addition to these structural ones. The current budget passed by the Majlis (parliament) has no provisions for cash handouts to the population, especially given the size of payments the government is planning. It claims it needs to target approximately $90bn in subsidies.

This figure has confused economists and politicians, who question where such a figure comes from, as it is not in any previously issued government statistics or budget.

The government does not have the legal right to spend any money not allocated to it by the budget without parliament’s approval.

Despite the government parading its intention to end subsidies, it has failed to name the subsidies that will be cut or by how much.

In particular, it has not said how it intends to deal with the politically sensitive topic of subsidised agricultural goods such as flour.

Ahmadinejad’s latest moves could yet prove to be simply an electoral ploy in the run-up to the presidential elections, which are due in the spring of 2009.

There is widespread discontent with his performance on the economy, with rising inflation and unemployment.

The policy of social welfare payments will allow him to say that he is keeping a promise made during his first presidential campaign to deliver the benefits of the country’s oil wealth to the common people.

The presentation of the economic plan could also distract attention from the government’s past failed economic policies and focus the debate on its plan for change.

Two weeks after the meeting between Ahmadinejad and the economists, the central bank released its latest inflation data.

The figures explain the political troubles facing the president: the price of imported rice is up 110 per cent year on year, domestic rice is up 115 per cent, eggs 48 per cent, tomatoes 60 per cent, tea 32 per cent, sugar 25 per cent, cooking oil 48 per cent and beef 102 per cent.

Economic reforms

The planned timetable of economic reforms could lead to inflation rising even further as more cash enters the economy.

The first social welfare payments made directly to eligible individuals are due to take place in the autumn, while subsidy cuts are scheduled for after the presidential elections.

At the same time, the Economy Ministry has only just gained a permanent minister since the resignation of Davoud Danesh Jafari in March, after disagreements with Ahmadinejad over monetary policy.

Hossein Samsami was initially appointed as acting economic minister for the three months allowed by law. On 5 august, parliament approved the appointment of Hosseini as the permanent minister. Hosseini has held a series of mid-ranking bureaucratic posts but is not well known.

It is unclear whether he will be as sup-portive of Ahmadinejad as Samsami, who once said of the president: “He is as a very clever person.

Despite not studying economics, he correctly understands issues of economics. Economics is a science of logic and people who are clever are also logical. When economic issues are discussed in the government, Ahmadinejad says, ‘I have not studied economics but it seems to me that it [the answer or policy] must be this way’. I then see that he is correct.”

While not everyone will agree with this characterisation, there is broad agreement with the plan’s diagnosis of the major problems affecting the economy.

However, given the poor economic performance of the Ahmadinejad government to date, there is a belief that the economic plan is, at best, a populist electoral ploy or will be a disaster if implemented by Ahmadinejad.

  • Zhand Shakibi is a lecturer in the government department at the London School of Economics.

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