Iran’s subsidy reform survives crucial hurdle
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…)
Anniversary blues for subsidy reform
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…)
Egypt: between populism and subsidy reform
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…)
Getting More from Less: Merging Ministries in Iran
The recent decision by the government to merge several ministries has ignited a fresh round of dispute between President Ahmadinejad and his conservative critics, but the controversy has been all about whether the president has the authority to merge ministries and very little has been said about the actual merits of the proposed mergers. It now seems clear that the Guardian Council and the Parliament will have their say on the merger (see this report in Persian), but in the highly politicized environment in Tehran, I doubt that the merits of the proposed reorganizations will get the attention they deserve. The stated objective — to cut down the size of the government — is unlikely to be realized beyond cutting the size of the cabinet. I am not aware of any downsizing dividend from the “dissolution” of the Management and Planning Organization two years ago. (Incidentally, that decision was made in a similar manner to these mergers, but at the time it was the reformers who questioned the government’s authority to change the line up of the ministries.) As far as I know, MPO’s bureaucracy is still in place. (more…)
Iran inflation accelerates, is the subsidy reform in trouble?
The recent inflation data from Iran’s Central Bank is higher than expected and has the potential to undermine the country’s bold attempt at subsidy reform. The latest published monthly increase in prices of 3.4% for Esfand 1389 (21 February-20 March 2011) is nearly twice what was reported for the same month last year (1.8%), and 30% higher than for the previous month of Bahman. The widely reported “12.4% annual inflation rate” for the year, or the year-on-year average, is misleading because inflation has been accelerating in recent months. The monthly inflation rate has increased steadily from 1.5% in Azar, just before the subsidy reform went into effect, to 3.4% in Esfand. Even the much higher month-on-month (Esfand 1388 to Esfand 1389) increase of 19.9% in the price level underestimates the extent of inflationary pressures: the annualized rate (=(1+monthly rate)^12) has gone in one month from 34% in Bahman to 49% in Esfand. These numbers probably overestimate inflation because of rising Nowruz expenditures, but the fact that the monthly increase in the price level this year is twice what it was last year suggests strongly that the annual inflation rate has at least doubled in recent months, to over 20%. (more…)
More on Iran’s subsidy reform
This oped of mine on Iran’s subsidy reform appeared on the Brookings website on Thursday. Suzanne Maloney of Brookings also wrote a nice piece on the same program, viewing it as a possible solution to Iran’s economic problems, which is a fresh approach instead of the more usual view that we have come to expect from commentators in Iran and the West — as the harbinger of economic ruin. I think the program’s initial success to raise prices at one go without mass protests is noteworthy, and perhaps a model for other Middle Eastern countries to follow, but its overall success depends on two things: (a) whether consumers will use the cash rebate to pay their energy bills and buy local goods and services, like health and education, or spend it on luxuries imported from China, like LCD televisions; and (b) whether producers can manage to stay afloat, by hook or crook, without shutting down or laying off many workers, long enough for the economy to adjust to the new price levels. Both of these depend on complimentary economic policies that the government will introduce in the next few months to improve the business climate in Iran. As usual, reform of the markets for labor, credit and foreign exchange are at the top of the list for action.
Tyranny of numbers 
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