Why Iran's Ahmadinejad is pushing to cut popular government subsidies
President Ahmadinejad is seeking to cut $40 billion in government subsidies to create, in effect, a slush fund that critics say will be used as a political tool to keep voters and his political allies happy.
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Calls for subsidy cuts as early as 1992
Domestic economists and lawmakers have privately called for subsidy cuts since at least 1992. They advocated spending part of the savings on cash handouts, which would leave the government with extra funds and enable Iranians to pay fair market prices for energy – allowing Iran to invest more in its aging oil infrastructure.Skip to next paragraph
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But many economists claim the lack of transparency about how the government will ultimately disburse the cash payments could cause massive hikes in inflation.
“Everybody agrees we need to get rid of our subsidies because it puts too much unhealthy pressure on the government. But nobody knows how the groupings are going to be determined and who will actually get the payments,” says the Tehran-based analyst. “[The methodology] with which Ahmadinejad actually goes about doing it could have a fundamentally catastrophic impact on the economy.”
Economists predict the president will seek an addendum to the subsidy bill allowing his government to start implementing the subsidy plan during the second half of the Iranian new year, which began on March 21.
“The government is allowed to allocate $20 billion for this year, but how it does so is up to the government,” says a former economic official in Tehran. “The government wanted a free hand and didn't want to go through the budget, and they got that. There will be another addendum.... They may just start in the second half of the year.”
Ahmadinejad's move could hurt economy
For now, Ahmadinejad appears to be in a strong position, with the tacit backing of supreme leader Ayatollah Ali Khamenei, who has final say on all state affairs. The Iranian president won a small victory in early April after Ayatollah Khamenei made a public statement supporting a compromise between the parliament and Ahmadinejad.
“Ahmadinejad keeps running back and saying we are in a state of emergency; that we have internal issues so we need to show a strong government moving forward with its programs. This is pure politics,” says the analyst. “[But] this is an economy that works in a trickle-down process, and is slowing down. To do this now, at this point in time, may be the last thing the economy needs.”
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