The Arab Gulf States Institute in Washington's eighth annual Petro Diplomacy conference examined the upheaval in the oil and gas markets following Russia’s invasion of Ukraine and the role of Gulf Arab oil producing states in meeting the sudden demand surge.
On May 9, Iranian President Ebrahim Raisi announced his government’s plans for further subsidy cuts. The government claims that energy subsidies cost Iran about $100 billion per year. In a televised interview, Raisi argued that the current subsidy program is wasteful and does not assist the Iranian citizens who are in need, while imposing substantial pressure on the government’s budget. He claimed that subsidies have become a source of corruption and discrimination, which both the Iranian general public and the elite want to fight. He assured the country that his new subsidy reform program will have positive outcomes for the government and underprivileged Iranians.
Iran’s subsidy program was introduced in the 1980s during the Iran-Iraq War to alleviate economic hardships during that period. Since then, subsidies have imposed heavy pressure on Iran’s government budget. In 2010, the government of then-President Mahmoud Ahmadinejad started subsidy reforms as a policy response to manage pressures from U.S.-led sanctions targeting the government’s hydrocarbon export revenue. By 2010, when the country’s first-ever subsidy reform program was implemented by Ahmadinejad’s government, government subsidies – one-third of which were energy subsidies – were estimated as high as 25% of the country’s gross domestic product. In the early stages of the subsidy reform program, some government subsidies were replaced with targeted cash handouts, and nearly 95% of Iranians received payments.
The government has gradually cut down the list of those who qualify to receive cash payments. In the latest program, initiated under Raisi’s government, 30% of Iranians receive monthly payments of about $15, 60% receive about $10, and 10% do not receive anything. This reduction of subsidy support comes as inflation is soaring, and Iranians are seeing declining living conditions.
Economic Jihad and Politics of Entezar
As a trusted confidant of Supreme Leader Ayatollah Ali Khamenei, Raisi has been actively promoting Khamenei’s vision to revitalize the regime’s revolutionary values, or “re-revolutionize Iran.” Throughout the first year of Raisi’s presidency, his government has worked toward this vision in part by adopting a narrative to acknowledge the economic hardship that is the collective cost of standing against the West and appointing young, pious, and revolutionary ministers and senior civil servants.
One of the most notable characteristics of Raisi’s administration is the appointment of conservative religious technocrats who are loyal to Khamenei and trained to transform the country in accordance with the supreme leader’s vision. This vision is based on the concept of waiting (Entezar) – seeking to create a pious Shia society waiting for the 12th Shia imam, Imam Mahdi, to return from his centurieslong hiding to establish Islamic rule over the world. Khamenei is considered the guardian (vilayet e-faqih) and the leader of the society during the waiting period. Therefore, he is the deputy of the imam and has unlimited authority. An implicit message in the doctrine is that people should embrace, or at least accept economic hardship – including such regime efforts as subsidy reforms, given the external sanctions pressure Iran is under. Raisi and his team are significantly more outspoken about their embrace of the concept of Entezar than were officials and leaders under the government former President Hassan Rouhani. Iranian media has also been strongly promoting the concept. Khamenei has frequently called for the appointment of “young jihadi managers” as one of the pillars of the “Second Phase of the Revolution.” Khamenei has a vision for re-revolutionizing Iran, leading the country’s “economic jihad” during the period of hardship and economic isolation, and preparing society ultimately for the return of Imam Mahdi. There is a clear strong religious ideology among Raisi’s economic team, a reflection of Khamenei’s view that religious fervor can be marshaled to encourage people to sacrifice and submit to economic hardship.
Imam Sadiq University, the alma mater of most of Raisi’s young jihadi managers in charge of economic policymaking in Iran, has been a key institution in Khamenei’s vision. In the same way the University of Chicago was instrumental in promoting Milton Friedman’s neoclassical economic theories globally, Imam Sadiq University is influential in promoting the conservative Shia ideology of Entezar in Iran and forming the country’s new political elite.
In a statement before the June 2021 presidential election, Raisi claimed that “one of the highest priorities of his government would be to pay attention to underprivileged social groups.” However, through this vision of Entezar, Raisi’s administration is not looking at economic hardship during this period of waiting as a challenge that requires a solution. Such hardship is perceived as a self-sacrifice of the Shia society that is to be rewarded by Imam Mahdi.
Food Coupons are Back
The government claims that one of the main reasons for subsidy reforms is to stop arbitrage and smuggling of subsidized items to neighboring countries, where the price of the same goods (such as fuel and wheat flour) is significantly higher. Raisi’s latest subsidy reform program reduces wheat subsidies. According to the Iranian government’s official website, Iran consumes about 8.5 million tons of wheat per year, while the government has been subsidizing about 10 million tons of wheat per year, 30% of which is sold by bakeries to smugglers and transported to neighboring countries or confectionary shops. Confectionaries (cakes, pastries, etc.) are considered unnecessary goods and are therefore excluded from government subsidies. To curtail this illicit market, the government is introducing an electronic system (planned to operate on a mobile app) to track the exact amount of subsidized wheat flour that each bakery receives and ensure that the amount of baked bread that is sold to consumers corresponds with the amount of subsidized flour. The government argues that such a plan will save about $1.5 billion each year. However, design and maintenance of an electronic system that covers “every single bakery in the country,” according to the government’s website, will undoubtedly be costly and hard to implement, especially for rural bakeries with limited access to the required technology and internet service.
The Rouhani administration created a similar system when it began to reduce fuel subsidies. The government issued electronic fuel cards and allocated a limited amount of subsidized gasoline per vehicle. Rouhani also claimed that one of the aims for fuel subsidy cuts was to stop arbitrage and smuggling of fuel to neighboring countries. In practice, however, increasing the price of fuel in Iran, where minimum wage is about $120 per month, increased inflation and pushed low-income citizens into poverty.
Overall, the Iranian public has reacted negatively to the food subsidy reform. Many have referred to it as the “return of coupons,” a method that was used for food rationing during the Iran-Iraq War.
Iran has been under severe sanctions pressure for nearly two decades. And the war in Ukraine and the rise of global market prices are increasing food prices in Iran. According to the Statistical Center of Iran, the average inflation rate in June was 52.5%, reaching 58.2% in rural areas. More than one-third of the population has fallen into poverty. Any form of subsidy cut, even if combined with cash handouts, will undoubtedly exacerbate inflation growth. And with several rounds of nuclear negotiations between Iran and global powers failing to reach an agreement, the prospect of sanctions remaining has increased economic uncertainty and public anxiety. This has left Raisi’s government with few policy options to improve economic conditions.
In his first budget, Raisi planned to increase hydrocarbon revenue by 8.5% and tax revenue by 73% over the previous year’s budget. The government announced plans to implement a value-added tax in free trade zones and special economic zones. Like his predecessors, Raisi increased the country’s military and security budget and the Islamic Revolutionary Guard Corps was a “clear winner” here with a 131% increase in its budget.
Raisi’s new program reducing subsidies comes as Iranians are seeing a dramatic decline in their standard of living. The government called the removal of subsidies necessary “economic surgery.” Such political discourse being used to justify the move suggests the government is prepared to pay the social and political costs of inducing increased suffering upon the population, which has in the past responded to economic hardship with street protests, with the government responding in turn with violent clampdowns.
On May 23, a 10-story commercial building in the southern city of Abadan collapsed seemingly due to poor design and construction. At least 30 people were killed in the incident. It sparked protests in the city, which spread to other parts of the country. Tensions between the state and its citizens have been brewing for some time. The most violent clashes in the history of post-revolution Iran took place in November 2019 when hundreds of people were killed during demonstrations sparked by increased fuel prices or executed later on charges such as acting against national security. Corruption, nepotism, worsening living standards, and political oppression have increased public anger and frustration and widened the rift between the state and the citizens in Iran. These are the economic and social realities on the ground in Iran, which will fundamentally shape the public’s reaction to the government’s economic surgery and its use of religion to persuade people to accept hardship and not blame the regime. Many analysts inside and outside Iran question whether these government efforts will work, given the realities on the ground.
Raisi’s presidency is a critical time for the regime because of the rising public discontent. Demonstrators across the country have been chanting slogans attacking the Islamic revolutionary government in Iran and openly demanding regime change. Exiled Iranian opposition groups have been discussing creating a united front to help lead a transition from the current system. Whether or not such stances exaggerate the precarious situation in which the regime finds itself, these incidents are a clear manifestation of the legitimacy crisis that the regime has been struggling with for nearly two decades. After the disputed presidential election in 2009, the election of Rouhani was perceived by many (inside and outside of Iran) as a sign for change. He failed to deliver his main campaign promises, namely normalizing Iran’s relations with the West and improving economic conditions. The low turnout in the last presidential election that led to Raisi’s victory demonstrated the lack of trust in the establishment. Considering the heavy-handed response to any form of public gathering and demonstrations, regime change seems unlikely. However, the legitimacy crisis that the regime is facing goes beyond Raisi’s term in office. Moreover, public grievances will remain unless tangible changes are made.
All in all, despite the political rhetoric of submission to economic hardship as a form of resistance, and the appointment of jihadi managers in key political offices in Iran, Raisi has failed to provide a tangible economic solution to solve Iran’s economic crisis and protect underprivileged segments of society. In practice, the economic policies have focused on reducing the budgetary pressure on the government that is caused by the decline of oil revenue brought on by sanctions. Increasing taxes and cutting subsidies are among the classic market liberalization strategies that organizations like the International Monetary Fund have been promoting for decades. Moving forward, whether a nuclear deal is achieved or not, and regardless of the revolutionary vision of Iran’s supreme leader, the administration will be short on policy options other than reducing its own expenses to survive the economic hardship. Jihadi or not, Raisi’s team will have its hands tied by issues such as the global economic consequences of the war in Ukraine, long-term effects of sanctions, and overall economic mismanagement and structural problems in Iran. To survive the economic hardship, the jihadi managers of Iran will have to continue with the liberal market strategies that they consistently have condemned before, while relying on religious messaging from Khamenei and Raisi to persuade Iranians that such policies must be accepted as a part of Entezar.
is a non-resident fellow at the Arab Gulf States Institute in Washington. She is the Marie Curie Fellow at the German Institute of Global and Area Studies working on Iran’s economic diversification and economic resilience strategies.
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