Iran implements first subsidy cuts

19 December 2010

Scrapping subsidies will lead to higher inflation in the short term, but is essential for economic growth

Planned for September, Tehran has finally launched its subsidy removal plan – a painful but necessary move if the government is to overhaul its stagnating economy. The cuts are expected to release as much as $20bn from the budget, which will be a big relief for the regime.

Iran’s culture of subsidies has lead to an inefficient pattern of consumption, leaving it vulnerable. US sanctions have targeted gasoline imports, prompting major suppliers to cut sales since the summer. President Ahmedinejad may not admit it, but sanctions have undoubtedly played a role in the sudden decision.

Without reforms, the soaring cost of Iran’s subsidies would prove unsustainable and inevitably lead to a major economic crisis. However, the way the reform programme has been implemented so far raises serious questions about the timing and severity of future cuts.

Prior attempts were deeply unpopular and ended in violence. The removal of subsidies will lead to higher inflation in the short term and, potentially, rising unemployment and even unrest, but it is essential for long-term growth.

Ahmedinejad rose to prominence as a defender of the poor and an opponent of Tehran’s rich middle classes, yet has been given the task of getting to grips with the subsidies system. Already alienated since the contested June 2009 elections, he risks losing his traditional base. It is an unenviable position to be in.

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