In principle, the answer to this question should be yes. Rouhani’s administration professes to be pro-market and is eager to shift resources from wasteful consumption to economic growth. What better way to remove energy subsidies and use the proceeds to fund the cash-starved development budget? (more…)
The dominant view of the high inflation of the last three years blames it on the subsidy reform. (The latest high profile assertion to this effect came from a piece by Hashem Pesaran and Hadi Salehi Esfahani published by the Fars News Agency, to which Mohammad Ali Farzin, the former head of the subsidy reform program, responded by claming that only 10% of the inflation was due to the subsidy reform). Were it not for the fact that blaming energy prices for the destructive inflation of the last three years casts a long shadow over future policy on energy prices, the mere fact that it is wrong would not prompt me to bore the readers of this blog with yet another post on inflation. (more…)
President Rowhani has received well-deserved high marks in foreign policy for his management of the tough negotiations with P5+1 in Geneva, but his first attempt at dealing with Iran’s broken social protection system does not deserve a passing grade. I explain this in my latest post at Iran Matters. The food distribution plan that, according to an editorial in the conservative Keyhan newspaper, “could have been a gesture that the government cares about the poor … but instead it turned into insult and humiliation.”
The government seems to have made a hasty decision that transfers in kind are superior to cash, despite evidence to the contrary, as I argued in a recent post here. Tadbir, which is the motto of Rouhani’s government and translates into prudence and experience in Persian, should include economics research and the experience of other countries. Are there channels for this type of information to find its way into Iran’s policy circles?
Iran’s subsidy reform program of 2010 depended heavily on a monthly cash transfer for its social acceptance. About 450,000 rials per person has been paid to all Iranians every month since then without any condition, so people were free to do whatever they wanted with the money. We know little about what they actually did, but there is a sense in Iran that this was not the best way to redistribute the energy subsidies.
There is much talk of improving the targeting of the cash transfer program, but less motivated by a desire to improve its equity than by the desire to cut the program’s cost. The most talked about proposal is to limit payments to the poorer households only, for example, to the bottom 7 deciles. I have already warned in this blog that this is impractical, arguing that identification of people in the top three deciles is very difficult and likely not worth the cost. I believe that the same amount could be raised by some very practical measures, such as charging more for the gasoline sold to consumers in richer neighborhoods and with more expensive cars. (more…)
Ever since it took over the reigns of government in August, President Rouhani’s administration has been grappling with the challenge of closing the huge gap in the government budget that it has inherited from its predecessor, reportedly at about 800 trillion rials (about $33 billion) or more than one third of planned expenditures. This is no small challenge given the fact that half of the year is over and much of the expenditures have already taken place or been committed. So, to reduce the deficit the government has little choice but to raise revenue. Luckily, inflation started to slow down just before Rouhani took over and has stayed below the 20% annual rate for the last three months, down from twice that rate in previous months. The bad news is that the most praiseworthy of the Ahmadinejad programs, the subsidy reform, is in deep deficit. The program has other problems besides its revenue gap, but it is on life support and the chord will be cut unless this problem is taken care of. Good solutions are there, all involving further adjustment in prices, but to implement them the government needs to show courage. The idea that has been floating for some time to cut the payments to richer consumers is appealing but not practical.
Last week, in a post on the Lobelog.com I noted further signs of moderating inflation. Prices in the Iranian month of Dey (ending 20 January 2013) rose by 1.7%, compared to 2.5% the month before and 4.5% per month in the previous two months after devaluation. These are high rates of inflation on an annual basis (see chart below), but a sign that the Central Bank may have found a way to keep the growth of money supply below the rate of inflation. I was curious enough if this were the case to look up money supply data published by the Central Bank and here is what I found. For the quarter that ended on December 20, 2012, which covers the three month period after devaluation, the rate of growth of money supply was 20 percentage points below the rate of inflation. (more…)
The Central Bank of Iran has just released the Consumer Price Index for the month of Azar (ending on November 20, 2012), and it shows a much smaller increase in prices than the previous two months. The index rose by about 4.5% per month during the last two months (equal to 70% annually), but its pace moderated in Azar, rising by 2.5%. This is still a sizable increase (about 35% annually), but it may be a sign that the large devaluation of the rial during the last week of September has run its course and consumers maybe back in the territory that, unfortunately, they have come to regard as normal: prices rising by about 20% per year. This is, of course, conditional on no new shocks happening to the exchange rate or the money supply in the near future. (more…)
What is described as the second phase of Iran’s Targeted Subsidy Program appears to be on its way to implementation after the parliament approved to increase the size of the program to 660 trillion rials (about $54 billion using the official exchange rate), denying the government its request for a much larger program (1,350 trillion or $100 billion). The compromise allows the government to increase prices of subsidized goods and at the same time raise the monthly payment of cash to families by an as yet undetermined amount. Some reports suggested that the current cash rebate of 450,000 rials per person per month could increase by as much as one third for the remainder of this year, which ends on March 20, 2013. The timing of the second phase is unknown but there is no doubt that it will happen. Getting the parliament to authorize the second phase means that the subsidy reform program has passed a crucial test, all the more because the economy is under stress from the effects of past inflation, sanctions, and general macroeconomic mismanagement. The critics who wanted to stop the program on its tracks have had a field day in pinning various failures onto the reform program. For the time being they seem content with having slashed its extravagant proposed budget. (more…)
The anniversary of the subsidy reform, on December 20, 2011, arrived with fireworks, but not the kind the government had hoped for. In a day that President Ahmadinejad was addressing a conference of the first anniversary of the subsidy reform in Tehran, the rial fell by more than 5%, breaching the psychological 15,000 rials per dollar barrier. These two events are more than coincidentally connected. The rial has been weakened by the inflation unleashed by the subsidy reform, a cost of the reform that was both foreseen and justified. At the same time, the precipitous devaluation of the rial adds to uncertainty and macroeconomic instability that can undermine the subsidy reform. The real benefit from the reform derives from reduced demand for energy, which can only happen if households and firms are willing to change their behavior and invest in energy saving equipment, which in turn requires confidence that the post-reform energy prices will not be washed up in some cycle of inflation and devaluation. Remember, unsubsidized energy prices are equal their world prices multiplied by the exchange rate. With 15,000 rials to the dollar, gasoline (at 4000 or 7000 rials per liter) is 50% cheaper than it was a year ago when the new price was set, and is once again subsidized. (more…)
Cairo, June 14, 2011
This is my first trip to Cairo since the uprising that toppled the Mubarak regime. The airport was unusually quiet and all Mubarak pictures are gone, but otherwise there are few signs of a country that has just experienced its most dramatic social upheaval since the 1952 revolution. Egyptians like to think of the uprisings as Revolution (“al thawrah”) which in Arabic signifies deeper social change than “enghelab,” the word Iranians use for revolution. But what has transpired in Egypt’s first six months of “revolution” pales in comparison to Iran’s 1979 Islamic Revolution. There have been no executions or mass exodus of the rich, and not even an overhaul of the high echelons of the bureaucracy, as happened in Iran. Egypt’s judicial system has taken the lead in calling the members of the ancien regime to account. So far it is moving cautiously; only 45 individuals are currently in jail or standing trial for their alleged crimes, including Mubarak and his two sons. If the judiciary can satisfy popular demands for justice, Egypt has a good chance for a soft landing on this side of the uprisings, and its judicial system may emerge as a strong pillar of its future democracy. If it fails to do so, revolutionary justice may take over and all bets would be off about democracy and restoring the economy to its previously robust growth path. No one seems certain how Egypt’s revolution will end. As de Tocqueville has said, “in a revolution, as in a novel, the most difficult part to invent is the end.” (more…)