Wednesday, October 21, 2009

Aggravation of Poverty in Iran as Rial Rating Decreases: Outcomes of Subsidy Elimination

Based on recent reports of the Central Bank, over the past 37 years Iran's liquidity has increased by 6424 times, and the index of inflation during this period has seen a 464 time increase. The decrease in the value of Rials has been the most true inflation index of the same period.
This means the purchasing power of a One Thousand Toman bill which for the first time was released in 1350, was in 1387 equivalent to 21 Rials, said to be it's true value in 1350. In other words, the purchasing power of 1,000 Tomans in 1387 is equivalent to 21 Rials in 1350.
However the average salary of an employee which in 1350 was equivalent to 750 to 1000 Tomans - to maintain its purchasing power - should have increased by 464 times. In other words money that represented buying power in 1350 should have the potential value equivalent to 464 Thousand Tomans today.
A large 1000 Toman bill, which today only equals to 2 Toman in 1350 not only reduces the value of the national currency, but based on expert opinion shows the necessity of a reduction of three zeros from the national currency to strengthen its position.
The reduced value of a national currency is a reflection of extreme inflation, that Iran's economy has been facing over the last three decades; Iran after the Revolution experienced a 50 percent inflation in the last four years has been faced with a whopping 20 percent increase in inflation which according to International Monetary Fund's predictions is to continue in its ascending course over the next year.
This is not the first time the removal by necessity of three zeros from the national currency will be considered by Iranian experts. But this time, regulating this plan for the second time will occur with the approval of the General Assembly. An assembly bill to eliminate subsidies is not irrelevant but it raises a concern that the most immediate consequence of the implementation will be a leaping increase in inflation and therefore further reduction in value of the national currency.
Iran's Economic Commission has anticipated that the implementation of an elimination of subsidies bill, at minimum will increase the inflation rate by 10 to15 percent, however Parliament claims that by implementing some compensating methods, the burden can be somewhat diminished for the low-income community.
President of the Economic Commission Gholamreza Mesbahi Moghadam stated: “Simultaneous to the process of subsidy elimination, each household of five will receive 110,000 Tomans in cash assistance to help with inflation.”
Massoud Myrkazmy, the Islamic Republic’s Minister of Oil who is in support of the bill stated that in reality eliminating the gasoline' subsidy by 11 percent based on the current rate of inflation, would add to the production rate by 8 percent and between 10 and 11 percent to the government's current costs.
Before Parliament's hardliners including Ali Larijani, had even opposed the so called cash assistance idea for compensating households, arguing that the execution of this bill is bound to first increase the rate of inflation by 60 percent and a second cash payment of 20 thousand per month to low income households is the equivalent of increasing liquidity by 80 percent, especially with respect to Article 13 of this bill, “increase wages for all legislation employees of higher wages and workers of the country”, will be forced to end from the time of enforcement.

With the introduction of the Elimination of Subsides Bill in Parliament ten months ago, president Mahmoud Ahmadinejad stressed "Reduced prices, particularly the price of oil has given us the opportunity to run the project and encouraged the Government to present it to Parliament”.
With these words the President of Iran would implicitly acknowledge that first of all with the significant decrease in oil prices Government does not have the ability to pay 110 billion Tomans in various subsidies and secondly, if the subsidies are not removed today, perhaps there is not much time for this project to be achieved.
Mahmoud Ahmadinejad after passing the bill to eliminate subsidies, reinstated his recent message. He said: “Continuing the existing process is impossible and we will not even be able to continue the funding for four years. We may reach a deadlock soon.1 million 650 thousand barrels of oil and gas together, the equivalent of 4 million 200 thousand barrels of energy are being distributed daily around the country at the subsided price." And this oil production considering that Iran's output fell to the level of 1347 is not sustainable.
Tabnak, a news agency close to the Expediency Council Secretary Mohsen Rezai, recently announced that the electricity company is now under the Department of Energy and that even before the passing of the subsidies bill had silently removed government subsidy payments for customers and has been receiving the full price of electricity from customers.
Experts believe that the size of the subsidies is so widespread that the outcome cannot be accurately predicted. Because, it will not only cover existing subsides, but most production and especially those of government or the public network such that removal not only affects consumption, but also the country’s production.
Even if officials do not acknowledge it explicitly, the main reason for removing subsidies, especially fuel subsidies to also reduce fuel production and oil prices, comes from having insufficient oil revenues to cover the extreme costs of the state’s economy that itself is a major obstacle on establishing a truly free economy.
So far with the help of subsides the government has been selling each barrel to the people for the price of 5 Dollars. If they eliminate subsidies and sell each barrel of oil at its real price – for example 60 Dollars per barrel by default, inevitably two questions must be addressed: 1) whether the workmen of Iran get paid based on international market wages to be able to tolerate this inflation. And 2) how do they propose to get the extra 55 Dollars a barrel from the people and do they have a plan to prevent further problems which might occur with these changes?
What is clear is that the government – in the widest sense of the term – not only averts from elimination of subsidies, but this plan, by further reducing the value of the currency will deeply affect the widespread low income groups and bestow more poverty upon them.

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