Iran implements first stage of subsidy cuts

19 December 2010

Fuel and power prices rise to ease government subsidy burden

Iran’s long-delayed overhaul of its economy has started, as the government implements the first phase of subsidy cuts, beginning at midnight on 19 December, the government announced.

Tehran’s previous attempt at implementing gasoline rationing in 2007 faced a severe reaction from the general population. Announced several days before being implemented, queues at petrol stations extended for miles as Iranians attempted to stockpile fuel ahead of the new quotas.

Ahmadinejad called the cuts the “biggest surgery” Iran’s economy had experienced in half a century

Police and security forces were deployed across main squares and fuel stations in Tehran to prevent any violence, but they have so far proved unnecessary, according to sources in Tehran. President Mahmoud Ahmadinejad made the announcement in an emotional address live on television at 10pm, calling it “biggest surgery” Iran’s economy had experienced in half a century, shortly before the new fuel price regime came into force.

Petrol prices rose fourfold to IR4,000 ($0.40) a litre for their 60-litre a month quota, from IR1,000 ($0.10) a litre. Any consumption above this comes at the cost of IR7,000 ($0.70) a litre. Industrial fuels, such as diesel and gas oil rose to IR3,500 ($0.35) a litre, from IR160 ($0.016) a litre, a near 20-fold increase.

Analysts had expected a much more gradual change, with prices doubling in the first year of the five-year plan before being gradually ramped up by 18-20 per cent each year. Subsidies were planned to begin in September (MEED 3:9:10).

Iran’s stock exchange index fell 0.9 per cent at the end of the first day of trading following the announcement. Ali Meshayaki, head of investment research at Tehran-based Turquoise Partners, says he had expected a drop of up to 3 per cent, but adds that it is still too early to assess the full impact.

The government has repeatedly talked about cutting subsidies for food, fuel and electricity, which cost the state up to $100bn a year. The $347bn budget for the current Iranian year, which began on 21 March, includes provisions to phase out $20bn of energy subsidies, with cash handouts being given to poor Iranians to offset the impact of higher prices.

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