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Iranian lawmakers block cuts to cash handouts

Iran's parliament has dramatically weakened the administration's proposed plan to end cash subsidy payments in a politically motivated backlash against the cost-saving effort.
Iranian rial banknotes bearing a portrait of the late founder of the Islamic Republic of Iran, Ayatollah Ruhollah Khomeini, sit on the stand of an Iraqi money dealer on June 19, 2014, in Arbil, the capital of the autonomous Kurdish region of northern Iraq. President Hassan Rouhani said on June 18 Iran would do whatever it takes to protect revered Shiite shrines in Iraq against Sunni militants fighting the Baghdad government. AFP PHOTO/KARIM SAHIB        (Photo credit should read KARIM SAHIB/AFP/Getty Images

The discontinuation of cash handouts for a large segment of Iranians has become a controversial issue in the initial draft budget for the next Iranian year (beginning March 21). Some suggest that this prospect contributed to the grievances that caused the protests in late December. On Feb. 22, the new framework of cash handouts was finalized as part of the ratification of the coming Iranian year’s budget law. But what are the actual changes introduced by lawmakers, and what are their consequences for the Iranian economy?

President Hassan Rouhani’s administration has been facing a major dilemma in continuing the subsidy reforms that started in 2010. It was predicted that the cash handout program would be revamped after Rouhani’s re-election in May 2017. The changes involve the lifting of subsidies on a variety of things like electricity and water in exchange for monthly cash payments to citizens. To protect the lower income classes and reduce the financial burden on the treasury, the government has had to look for ways to close the income gap.

When Rouhani presented his budget to parliament on Dec. 10, he pointed out that poverty eradication would be one of his main objectives. One of the tools to achieve this goal was to ensure that the financial resources directly paid out to most Iranian citizens were utilized effectively. In fact, government officials calculated that a continuation of monthly cash payments in the amount of 455,000 rials (about $12.50) per person would only be feasible if the recipients were halved. The budget draft included an allocation of 230 trillion rials ($6.9 billion) to cash handouts, enough for payments to only 42.1 million citizens in the next Iranian year. As of November 2017, 76.3 million Iranians (out of a population of 81 million) were receiving cash handouts and the government was suggesting to cut down the number to 42.1 million next year. For years, the administration had tried and failed to exclude the upper income classes. The administration's plan in the new approach was to concentrate on the lower income classes (workers, civil servants, single-parent households, people registered with the various state welfare organizations). Those who felt wrongly excluded could appeal.

During the parliamentary deliberations, one of the reasons the majority of lawmakers rejected the draft budget was the plan to cut cash handouts.

It is not clear whether the parliamentarians were reacting to popular demands or whether they were convinced that cash handouts would be positive for the Iranian economy. The sad fact about populist politics is that the cash handouts may be one of the few tangible deliverables lawmakers may be able to show their constituents when they start their re-election campaigns at the end of 2019.

The amended version passed by parliament, including the amended framework for subsidy reforms and cash handouts, is now awaiting approval by the Guardian Council. According to the parliamentary decision, the following will take place in the new budget cycle:

The total budget for cash handout transactions will be increased to 300 trillion rials (30% more than the original plan), which means that about 55 million Iranians could receive monthly cash payments. Additionally, parliament has allocated a budget of 70 trillion rials to extend financial support to those families whose household income is below the poverty line. The amended version also allows the government to allocate a further 50 trillion rials to the cash handouts if needed.

There are a few other nuances in the final budget law that should be noted:

  • The parliament’s version is sparse and opaque about the financial resources that will make future cash handout payments possible. The administration had planned to increase the gasoline price by 50% to 15,000 rials and the diesel price by 33% to 4,000 rials per liter, partly to finance the cash payments and also to cut down on fuel consumption. The lawmakers deleted that reference from the final budget, but has allowed the government to increase fuel prices by 10%. But a 10% increase on par with inflation is not likely to reduce consumption, and large cities will continue to suffer from air pollution.
  • As the original law is very clear that the financial resources for cash handouts have to come from additional income generated through higher fuel and energy prices, the lawmakers had to get creative. The parliament turned to indirect earnings from energy-related transactions, such as exports of electricity, and a surplus of government revenues from gas sales and gas exports.
  • The government has been tasked with discontinuing cash handouts to the higher income strata “gradually,” creating additional headaches for the treasury. Also in the parliament’s version, those families who believe that they should still receive the payments can complain to the Ministry of Cooperatives, Labor and Social Welfare.

There is no doubt that parliament’s pushback against the administration's plans to rationalize state spending is politically motivated. While administration officials are concerned about the financial impact on the treasury, parliament member Hamidreza Haji Babaei claims that based on the categorization of some income as “revenues related to subsidy reforms,” the government would generate about 1,000 trillion rials, of which only 370 trillion will be paid out to citizens.

Haji Babaei has forgotten two important facts: First, the original law on the removal of subsidies stated that the additional income from increased fuel prices would be used for three activities: cash handouts, investments in energy efficiency and deposit into the treasury to enhance the government’s ability to invest in infrastructure and job creation. Second, inflationary effects must be taken into account when determining how much the “additional revenues” would be. Haji Babaei’s calculation is still based on the price comparisons of 2010.

All in all, the administration's plan to reduce poverty and also to create jobs have been severely undermined. The original budget would have caused some social discontent, but from a macroeconomic perspective, the potential for new infrastructure investments and job creation would have justified the shock. However, the parliament’s amendments have diminished that potential.

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