Ahmadinejad's Subsidy Reductions Squeeze Iran's Producers

• by Yasaman Baji (tehran)
• Monday, June 06, 2011
• Inter Press Service

Six months after the controversial plan took effect, these producers are still awaiting the promised financial support for their companies and worry that, with the sharp rise in fuel prices, they will not be able to stay afloat.

'What do people think? That we make so much profit that despite astronomical cost increases we can still produce?' asked one food producer in exasperation, who spoke to IPS on condition of anonymity. 'The reality is that sectors of production can't continue and are reducing their production, if not being shut down altogether.'

Since the main objective of the subsidy reduction plan was to improve economic productivity and promote greater efficiency in energy use, many Iranian economists have argued that subsidies for productive enterprises, particularly in the manufacturing sector, were more important than cash subsidies to individuals and families.

The Targeted Subsidy Law, passed after months of contentious negotiations between the government and the parliament, or Majlis, provided for the distribution of revenues generated by price increases to both people and to productive enterprises. Half of the additional revenue was earmarked for individuals and families in the form of cash subsidies, while 30 percent was to go to industrial and agricultural enterprises.

But when price increases, particularly for highly subsidised fuel and basic foodstuffs such as wheat, went into effect in December 2010, the government's main concern was the public reaction. Hence, a concerted and largely successful effort was made to prepare the population for the reform and placate people through a system of cash subsidies of approximately 40 dollars a month per individual to be directly deposited into the bank accounts of heads of household.

Industrial and agricultural producers largely supported the plan as a way to ease the burden of the price-support system, which is estimated to cost the government between 70 and 100 billion dollars, on the assumption that they, too, would be compensated for the higher prices. Prices were raised, some as high as 400 percent, without popular protest, but the plight of producers, which also had to cope with the price increases on fuel, was largely neglected, and that is now causing growing concern.

According to a recent interview with Jamshid Pajouyan, an economist who supported the Targeted Subsidy Law, in 'Donyaye Eghtesad', the country's most important economic daily, giving the right signals to the private sector was supposed to be the cornerstone of the plan.

'Revenues generated from targeting subsidies should be spent in realising the objective of improving producers' strength and to achieve higher and sustainable economic growth for the whole economy,' he said.

On the contrary, producers have had to deal with a one-two punch that has sent them reeling due to the way the plan has been implemented.

First, the government is spending all the generated revenue on cash subsidies to the people, leaving nothing to help enterprises adjust to their increased cost of production. In fact, the Audit Court, an organisation directly responsible to the Majlis and tasked with keeping tabs on government revenues and expenditures, has already accused the government of dipping into other funds to pay for cash subsidies, possibly in violation of the law.

Second, the government, preoccupied with the potential public backlash from loss of subsidies, has implemented a price-control regime that prohibits producers from passing along their increased costs of production to consumers.

The resulting squeeze has proved ruinous to many firms, a trend that has now been taken up by the Majlis.

In recent days, Mohammad-reza Khabaz, a lawmaker from Kashmar, reported that water wells have been closed in southeastern Iran, while Mostafa Zolghadr, who represents Bandar Abbas, bemoaned the drop in the production of tomatoes and onions in southern Iran. Other Majlis members have complained about the growing number of layoffs or delays in wage payments.

According to the latest information, the government has so far spent at most 1.5 billion dollars for the 2010-11 fiscal year in support of producers, instead of the eight billion dollars that it should have given by its own estimate of revenues generated from increasing prices for fuel and foodstuff.

In an effort to force the government to pay producers, an angry parliament ended its debate over the budget by separating cash payments and producer support into different financial categories. But it also reduced the percentage to be allocated to producers from 30 to 20 percent of the revenues generated by the price increases.

In a meeting held by Iran's Chamber of Commerce, Industries and Mines six weeks ago, a representative of the Ministry of Industries acknowledged that the government was having difficulties in providing adequate support for producers and suggested that the government intended to offer low-interest loans instead.

But producers argued that such a strategy was unlikely to work in the present circumstances.

'Repayment of loans, even with low interest, is impossible since the government controls prices and keeps them fixed,' complained one cement factory owner who said his production costs had increased by 30 percent since the plan took effect. 'The government cannot say that low-interest loans are the same as helping producers transition to an economy without price supports and subsidies.'

But the government has been deaf to this argument. Mohammad-reza Mir- tajeddini, vice president for parliamentary affairs, said in an interview with Iranian Student News Agency (ISNA) that 'the government does not intend to give producers cash subsidies.'

Indeed, the government is in a bind. Worried about inflation and its consequences on an already- squeezed population, it has repeatedly promised that prices will not increase substantially, even though the latest Central Bank figures, however, show a distinct uptick in the inflation rate for the first three months of the fiscal year. Last year’s inflation rate was an already high 12.4 percent.

Another policy change the government has refused to entertain is lowering the value of the Iranian currency. Again worried about inflation, it has kept the exchange rate unnaturally high by continuously selling dollars in the market.

Domestic producers therefore have found themselves at a growing disadvantage in the competition with foreign producers in the face of much higher energy costs and an over-valued currency that encourages cheaper imports.

Indeed, Mohammad Nahavandian, the head of Iran's Chamber of Commerce, Industries, and Mines, called it 'payment of subsidies to foreign producers in Iran's domestic market.'

'A plan intended to help the economy by strengthening production and creating employment is turning into an anti-industry and production plan,' the owner of a large cable and wire factory, who asked not to be identified for fear of retaliation, told IPS.

Added to those concerns is the eventual fate of cash subsidies to people. According to the government's own statistics, more than 70 million Iranians out of a population of about 76 million have now signed up for cash payments.

'The government has yet to clarify how long it plans to continue these payments or whether they will ever become calibrated based on need,' noted an economics professor at Shahid Beheshti University, who also asked to remain anonymous. 'Officials in both the Majlis and government do not have a proper understanding of targeted subsidies and have turned the issue into a political football.'

© Inter Press Service (2011) — All Rights ReservedOriginal source: Inter Press Service