Iranians braced for higher prices as subsidies are cut

There are inflation fears over cash handouts given to compensate families, as Iranians wait for the announcement of higher, less subsidised prices of fuel, electricity and bread.

TEHRAN // Millions of Iranians began an anxious countdown yesterday to the announcement of higher, less subsidised prices of fuel, electricity and bread.

The government began transferring the first cash handouts to special bank accounts created by heads of families eligible to receive compensation for the higher prices.

The president, Mahmoud Ahmadinejad, has promised to reveal the new prices and the exact amount of monthly cash compensation next week.

The government is transferring 810,000 rials (Dh285) per person to the special accounts, but it remains unclear how often the payments will be made.

Behrouz Moradi, the managing director of the Subsidy Reform Organisation, said the money being deposited, which cannot be withdrawn before the new prices go into effect, could be intended for only one month, or up to four months.

Analysts said the total sum the government is handing out in the first stage is more than 40,000 billion rials.

Mr Ahmadinejad's government has been preparing for more than three years to implement what the president has called "a major economic surgery". The reform will eventually relieve the government of paying more than $100 billion in annual subsidies to importers or service providers to keep down the prices of many commodities including fuel, electricity, bread and other foodstuffs as well as some services.

The parliament passed legislation requiring the government to cut subsidies by 20 per cent a year over a period of five years starting in March, the beginning of the fiscal year, but the plan's implementation has been delayed until now.

Half of the $20 billion the government will save by slashing subsidies in the next five months must be dispensed as compensation, according to the legislation.

More than 61 million people have signed up to receive the government cash compensation, but bank accounts have been set up for only 80 per cent of them so far, according to government officials. They said the remaining people will be given a chance to set up their accounts later.

Many people are sceptical about the efficiency of the cash handouts in maintaining their purchasing power.

"The government is promising that the cash handouts will cover the new expenses and families with less consumption or wastage will even have a surplus to save. I'm impatient to see if this can really happen," Reza, 49, a civil servant with a family of four, said.

"The prices of some commodities and services have already begun to rise, even before the new prices become effective. I wonder what can stop them from soaring uncontrollably when the new prices come into effect," he said.

Ayatollah Ahmad Jannati, a senior cleric who supports the president, has warned the cash handouts and subsidy cuts will fuel inflation, which the government said rose to 8.9 per cent in September, a fraction of what most analysts believe the true figure to be. "The government must not do anything to dissatisfy the nation. There are grounds to expect we will have high prices," he told his Friday prayer congregation in Tehran last week.

Mr Ahmadinejad, however, assured Iranians on Sunday that the government has taken measures to regulate the market if the prices of essential goods increased substantially

"I assure those who have hoarded goods hoping to sell them at higher prices that they will lose because there won't be a considerable change in the market," he said in Ardabil in north-western Iran.

But at least one analyst warned that the subsidy cuts and cash handouts will add to the country's current economic woes.

"Cutting subsidies isn't a good idea in an economy under the strain of domestic shortcomings and of increasing international sanctions.

"Inflation as high as 40 or even 50 per cent is a real danger," an analyst in Tehran said.