The government pushes forward with the liberalisation of energy prices but continues cash payouts, which have become a lifeline for the poor and unemployed

Iranian households have weathered a series of economic disasters since December 2010, when the implementation of Mahmoud Ahmadinejad’s subsidy reforms led the prices of fuel, utilities and groceries to skyrocket. In a nation buckling under the weight of sanctions and stagflation, this week’s implementation of the second phase of subsidy reforms is fueling fear of further economic instability. Billed as a necessary liberalising measure by President Hassan Rouhani’s centrist government, the state’s removal of some $16 billion in fuel subsidies has found few supporters among members of the public, many of whom are too concerned with making immediate ends meet to accept the government’s mantra of short-term pain for long-term gain.

Long prescribed by the International Monetary Fund as a necessary step toward market competitiveness, the removal of government subsidies on energy, food and medicine has proved an economically costly undertaking for both the previous and current administrations. At an estimated cost of $40-100 billion annually, the subsidies - a holdover from Iran’s 1980s wartime economy - have strained government coffers and fostered inefficient energy use. But a decade of inflation and low job creation meant that Iranians grew increasingly dependent on them.



To pad the financial impact on households, the Ahmadinejad administration introduced in 2010 its now-infamous plan of per capita payments to a majority of the population, as well as direct payments to affected industries. In the ensuing panic, the prices of gasoline, heating gas and staple food items tripled overnight. While barely palpable in upper and middle-class households, the cash subsidies lowered labor incentives for low-income families, causing further dependence on government handouts. They also infused the already overheated economy with extra cash, devaluating the currency, slowing production and leading to rampant inflation that is still being felt now, over three years later.



The new government now finds itself in an impossible situation: It has to push forward with the liberalisation of energy prices while also continuing the cash handouts, which have become a lifeline for the increasing number of poor and unemployed. Unlike the oil-rich Ahmadinejad administration, Rouhani’s debt-ridden government is under pressure to cut spending while addressing mounting environmental and socioeconomic problems: traffic and air pollution in large cities, infrastructural backwardness in the provinces, water scarcity, and a nationwide youth unemployment rate of nearly 30%.



For now, the amount of the monthly cash payout to each applicant remains unchanged at 45 thousand tomans (less than $15), financed by the removal of some 48 thousand billion tomans ($16 billion) in energy subsidies. Top income earners have been asked not to apply this time around, but enforcement is difficult due to the profligacy of unreported incomes. Subsidy applicants have had to declare income and provide bank account information. The government may access the bank accounts and fine applicants in case of discrepancies. Over three million people have forfeited their subsidy applications, according to government figures. Still, some 73 million people applied for the phase-two subsidies, and over half of them declared monthly incomes below $300.

Meanwhile, Iranians are bracing themselves for the inflationary fallout. Prices of subsidised gasoline, available to motorists based on a monthly quota, rose by 75% on 25 April, from 400 to 700 tomans ($ .16 - .28) per liter. Unsubsidised gasoline prices increased 42%, from 700 to 1000 tomans. The cost of heating fuels had already been raised 25% earlier in the year.



The experience of 2010 has led Iranians to believe that the fuel hikes will have wider consequences like higher food prices, rents and other living expenses. Tehran taxi fares, among the first harbingers of the widespread inflation in 2010, fluctuated wildly in the week before 25 April. Drivers on popular rush-hour lines from north Tehran’s Vanak Square doubled their fares, ignoring transport regulations asking drivers to cap fare increases at 30%.

To prevent panic and arbitrary price hikes, pundits have emphasised the smaller scale of current reforms. The economic daily Donya-e-Eghtesad published a front-page article comparing the current situation to the price increases of 2010, noting that the 75% gas price increase was considerably lower than the 300% surge of 2010. In a separate editorial, economist Ali Dadpay said that the new phase of subsidy reform was “not a failure,” but “an experience.”



Rather than focusing on Iran’s current political and macroeconomic issues, Dadpay highlighted the unrealistic national assumption that access to cheap goods and services is a natural consequence of resource wealth. “We think we have a right not to pay the real price of commodities and expect the government to create cheap and abundant markets...For this reason, it should be said that even the cancellation of three million subsidy applications is a big step,” he writes.



But Dadpay also notes that Iranian policymakers have given their constituents little reason for confidence in long-term economic prospects. “Our society has learned to look at short-term horizons, because for many of us, the long-term outlooks are meaningless,” he writes. “When we are pessimistic about the future, the most natural thing for a consumer is to seize the largest possible share of existing resources and maintain the economic flexibility to confront future fluctuations.”



This mindset is shared by citizens like Ali, a septuagenarian who supplements his modest pension by driving his rusting Paykan up and down the southern stretch of east Tehran’s Shariati Street. As passengers pile in and out of the vehicle, Ali apologizes to each one and asks them to pay an extra 200 toman ($.06), up to 40% more than the standard fare, because of the higher gasoline prices.



When one passenger suggests that the subsidy reforms may improve the quality of Iran’s substandard gasoline, Ali’s features twist into toothless scowl. “Quality?” he barks. “Forget quality. First, we have to stay alive.”

The Tehran Bureau is an independent media organisation, hosted by the Guardian. Contact us @tehranbureau. This article was originally published without a byline