Tuesday, March 10, 2009

Iran’s Majles Strikes a Blow to Ahmadinejad’s Economic Plans

Farideh Farhi

While most of the recent Iran news has focused on the prospect of an Iran-US rapprochement, the country's domestic scene has been consumed with a major fight over economic policy. This week the fight came to a head as the whole Majles began deliberating on the country’s budget for the next fiscal year as well Ahmadinejad’s attempt to reform the country’s bloated subsidy system.

The best evidence for how contentious economic policy has become is the fact that only about 10 days left before the Iranian New Year – after which the whole country literally comes into a stand still for a couple of weeks – the details of the budget for the upcoming fiscal year beginning on March 21 are yet to be approved.

The set up for a confrontation began when Ahmadinejad introduced his budget bill to Majles rather late and he did so along with his very ambitious targeted subsidies bill which calls for the suspension of all energy subsidies, their replacement with direct cash subsidies to the lowest 7 income brackets, and sharp prices increases particularly for gasoline and diesel fuel.

Majles deputies, particularly those with a long history of expertise on economic issues, not only found the budget numbers unrealistic, at times even fabricated, but also worried about the connection between the proposed budget and presumed savings generated from ending subsidies and the inflationary impact of the government’s proposed hikes in energy prices.

Economists have been even more critical of government numbers. Mohammad Sattarifar, the former head of the Planning and Budget Organization, went as far as to say that the budget was not even worth analyzing because the administration will be forced to come back to Majles with many amendments and changes. He pointed out that the projected revenues from increasing energy prices does not even take into account the amount of energy consumption by the largest consumer of energy in Iran which is the government itself!

The proposed budget assumes revenues of about $34bn from price hike and subsidy cuts and a distribution of about ¼ of that amount as cash deposited directly to people’s bank accounts immediately after the June election. This time frame was promised to allay the fear that cash subsidies were intended to buy votes.

The large combined Majles committee created to examine the two bills considered government assessment of revenues as exaggerated but, after Ahmadinejad threatened to pull out his targeted subsidies bill in its entirety, agreed to lower the amount of expected revenues while still allocating the government the amount it said it needed to implement the cash subsidies program.

However, by the time the budget bill came to the floor of the whole Majles, prominent economists as well as the Majles Research Center had already voiced concern about the inflationary shock the drastic increase in energy prices would entail. The general outline of the budget was approved in a short session despite significant opposition but today the targeted subsidies component of the budget bill was rejected in its entirety in a 132-102 vote.

It must be considered truly ironic that a president elected on a social justice platform is now being accused by a coalition of prominent conservatives and reformists as the promoter of “shock therapy” that will harm the poor and middle class in significant ways (note the picture on top of this post reproduced from Alef website which is run by Ahmad Tavakoli, a prominent conservative deputy and head of Majles Research Center. It uses a hand to show the need to stop “shock therapy” written in Persian).

Left hanging is the fate of the budget which still needs to be approved in a more detailed fashion. As mentioned, Ahmadinejad's budget numbers are very much linked to subsidy cuts. His administration also took a “take it as is” attitude and refused to address Majles’ concerns about the inflationary impact of sudden price hikes. Now it is not clear how Majles' rejection will affect the budget and whether, as threatened, Ahmadinejad will abandon any attempt to make energy prices more realistic or begin working with Majles to reach a compromise on gradual price increases.

Timing is also a factor because the Guardian Council also needs to approve the budget by the end of the year. Its task is to make sure that - as demanded by the Constitution - all sources of spending are clearly specified. The Council’s spokesperson, Abbas-ali Kadkhodai, has already voiced his concern about the timing, stating that if the budget is not approved by the end of the year, by law the government cannot have any expenses on the first day of the upcoming year unless some sort of temporary appropriation is agreed upon on a monthly basis for necessary current expenses.

It is worth noting that the budget process in Iran is usually messy, quite raucous, and a source of open conflict between Iran’s legislative and executive branches. Even Akbar Hashemi Rafsanjani, without a doubt post-revolutionary Iran’s most powerful president, was often stunted in his budget plans by Majles. But the lateness and chaos that has characterized this year’s budget process – occurring in the midst of drastic drop in oil prices and global economic crisis - has taken the conflict to another level.

It has also highlighted the difficulty even conservatives have in accepting some of Ahmadinejad’s ideas and his rather aggressive style in dealing with people who worry about the impact of his policies.

Majles’ decisive rejection is a major setback for Ahmadinejad. The manner in which Ahmadinejad manages to work himself back into Majles’ good graces will be important in convincing key conservative players to back his candidacy for presidency. It is hard to believe that the events of this week have made conservative unity behind his candidacy more likely.


Anonymous said...

is it possible to organize this blog so that you can click a side-bar and have all the posts from one particular author come up? Because I really enjoy your posts, but I have to look back to find them. it would help if they could be organized all in one place.


Farideh Farhi said...

Sorry Joe! Got to talk to Juan Cole about it. But I think it hard to do. Thanks for the kind words though...

Anonymous said...

thanks as always for your great insight.
I know most folks are upset about Ahmedinejad's subsidy reduction plan, but what is to be said about the fact that the subsidy system is indeed archaic as is the general tax system, making his economic plans actually quite sensible according to general theories of liberal economics and in line with the most sound advice for countries dependent on oil revenues.

Farideh Farhi said...

You are quite right anonymous. Ahmadinejad, a critic of neo-liberal economic plans, is now pursuing policies that the World Bank should probably be quite happy about at least in terms of reduction of subsidies, making them targeted, and imposing the value added tax. The problem, however, is that his government has also lacked fiscal discipline. Hence, his budgets have been expansionary, his attempts at lowering the interests rate and provisions of short-term loans inflationary. On top of all this almost everyone questions the veracity of budget numbers or at least the extent to which they are relatistic. So Majles was both dubious about the numbers as well as concerned about the inflationary shock of sudden price increases. Yet I am not convinced that Majles knows what it is doing either. The budget bill that was ultimately passed keeps the price of rationed gasoline at the current level but mandates the sale of imported gasoline at imported prices. This will increase the share of gasoline sold at free market prices from 2 to 3 percent to about 30 percent and should be considered an intermediary step in getting rid of gasoline subsidies. It is not yet clear what will happen to subsidies for diesel fuel, electricity and so on. My take is that the Majles folks were hesitant to go for drastic changes before election (especially when election results are hard to predict) and even had worries that the government would use cash subsidies to buy votes. But the fundamental problems of too much subsidies and government deficits remain and sooner or later they need to be addressed.

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