Gasoline prices quadrupled and bread prices tripled after the cuts came into effect Dec. 19, part of President Mahmoud Ahmadinejad’s bid to boost Iran’s ailing economy by reducing the massive drain on the state budget from the subsidies.
The so-called economic “surgery” has long been in the works, but was repeatedly delayed over concerns of a repeat of gas riots in 2007 and serious political infighting during the standoff with the West over the Islamic Republic’s nuclear program.
However, the timing of these first painful steps — months after the UN Security Council slapped a fourth round of sanctions on Iran this summer over its refusal to halt uranium enrichment — suggests those penalties could be starting to squeeze the nation’s economy.
The economic shock of the cuts has brought heavy criticism from reformists and even from some hard-liners — Ahmadinejad’s political base — who say the price hikes are too fast and steep. Security forces flooded the streets of Tehran immediately following the plan’s implementation to counter any possible backlash from a population already struggling economically. And while consumers have grumbled about the cuts, there has been no serious outbreak of protests or violence so far.
Saying the country can no longer afford the largesse, Ahmadinejad has vowed to eliminate all of the subsidies by the end of his term in 2013. The government says it is paying some $100 billion in subsidies annually, although experts believe the real amount is about $30 billion.
The current cuts aims to reduce Iran’s high fuel consumption, which has forced the country to import about half its fuel needs. One of the world’s biggest crude oil producers, Iran lacks refining capacity, meaning it has to look abroad for gasoline, though it has been rushing to increase refining.
This is a particularly pressing concern in light of the most recent US sanctions, which seek to block the import of pump-ready fuel to Iran.
Vice President Mohammad Royanian said Wednesday on state TV that “overall, there has been a 20 percent fall in fuel consumption” since the cuts were enacted. Gasoline consumption now stands at 50 million liters (13 million gallons) a day and diesel consumption at 42 million liters (11 million gallons) a day, he said.
He also praised a rationing program that has been in place since 2007, saying that without it consumption would have passed 105 million liters of gasoline a day (27 million gallons) “given an increase of new cars and motorcycles by 6 million during this period.” Before the cuts, subsidies ensured Iranians some of the cheapest gasoline in the world, at about 10 US cents a liter (38 cents a gallon).
But under the reduced subsidies and the rationing system, each person can buy up to 60 liters (15 gallons) a month of gasoline at the equivalent of 40 cents a liter ($1.50 a gallon), and for any amount above that the price is about 70 cents a liter ($2.70 a gallon). Bread that used to sell at the equivalent of 3 cents a loaf now runs 10 cents.
Consumers have complained about the price hikes, but there have been no signs of the violence that erupted in 2007 after the government imposed limits on the purchase of subsidized gasoline.
For now, Iranians instead appear to be adjusting to the new prices and trying to cut back on wasteful habits acquired when gasoline was dirt cheap.
“People are more cautious now,” said Hashem Aghaei, the manager of a gas station in northern Tehran. “They try to save their quotas and use every single drop of fuel.”
Reza Mahmoudi, a driver, said before the cuts he would use his car daily, but has since scaled back to twice a week “to pay less for the fuel.” Under the subsidy-cut plan, the government says part of the budget savings will be returned to the people through cash payments. Every family member has already received the equivalent of about $80 for two months to tide them over while they adjust.
But some experts warned it simply may take time for Iranians to feel the full weight of the cuts.
“The government thinks there will be no problem simply because there has not been any negative reaction by people so far,” said Ahmad Bakhshayesh, a politics professor at Tehran University.
“That is not right. If there will be big changes in the bills, problems will appear, especially for those who have constant and regular incomes such as government workers and private sector staff.”
