It was probably just fallings now that eased air pollution in Tehran last month, but the improvement might also be a sign of early success in the government’s efforts to reduce gasoline consumption by removing costly subsidies of fuel, along with electricity and even bread. President Mahmoud Ahmadinejad has skill fully used widening United States-led sanctions — which have impeded Iran’s gasoline imports — to win popular acceptance of the need to phase out subsidies of energy and other everyday items, estimated to cost $100 billion annually. Previous governments have tended to shy away from economic reform, fearing that Iranians regard cheap fuel as a birthright.
Figures from Shana, the oil ministry news agency, put average daily consumption of gasoline at 55.4 million liters in the week ending January 7, a 12 percent drop from the week before a new pricing system was introduced on December 19.
President Ahmadinejad called December’s move the “biggest surgery” in Iran’s economy for 50 years and said he plans to phase out all subsidies by 2013, the end of his presidential term. The subsidies, in place since the Iranian Revolution, have encouraged over-consumption and contributed to budget deficits, and their removal has been encouraged by the International Monetary Fund as a move towards liberalization.
The government is maintaining a range of price controls and has threatened to arrest merchants going beyond prescribed levels, while also stockpiling rice, cooking oil and detergents. With 80 percent of goods moved by road, higher prices for fuel could easily boost inflation. The hikes are steep. Before December 19, motorists paid the equivalent of 10 cents a liter for a monthly quota of 60liters of gasoline and 40 cents per liter for any more. As of December 19, the60-liter quota is 40 cents per liter and any petrol above the quota is 70cents. The price of diesel jumped from 6 cents to $1.32 per gallon, although truck-drivers are temporarily allowed to buy a monthly tank of fuel at the old rate. The price of flour for bread has increased 40-fold, although the cost of a loaf has been pegged at 30 cents, up from 10 cents. Consumers have not as yet received utility bills, but many Iranians are already wearing a sweater rather than turning up their gas fire. While some boost to inflation is inevitable, the government has leeway as the current level of 10.1 percent for the Iranian month ending on December 21 is well down from nearly 30 percent in late 2008and 25 percent in late 2009.
The likely fiscal benefits are further good news for Ahmadinejad; calculations in the Iranian media suggest the president is aiming to save $15 billion to $20 billion before the end of the Iranian year in March. Parliament has mandated the distribution of these savings, with 50 percent in targeted payments to individuals, 30 percent in grants to industry and 20 percent to be retained by the government. These direct payments to individuals and industry are intended to ease the burden of the higher prices. Despite the scheme being delayed until the final three months of the year, the president has already allocated $84 per eligible individual and promised another $84 before March. With 60 million people eligible for payments, according to the government, this would amount to $10billion for the current year.
It will take time for new patterns of consumption to emerge, but already there are indications that the higher costs are impacting overall usage. Initial figures for four petroleum products — diesel, petrol, fuel oil, and kerosene — from December 19 to 27suggested an overall drop of 38 percent, but there were marked variations among different kinds of goods, with fuel oil and kerosene consumption increasing with the cold weather in January. Gasoline imports are down to around 100,000tons per month, just 20 percent of last year’s levels. They were falling even before December’s price hikes, following a shift in production at petrochemicals facilities to gasoline.
President Ahmadinejad, then, has many reasons to be cheerful. “I sincerely thank the entire nation and kiss everyone’s hands,” he told a rally in Alborz province. “I proudly declare to the whole world that Iranians have achieved the most beautiful sympathy, trust and understanding in their cooperation with this law.”
GARETH SMYTH is the former Tehran correspondent for the Financial Times