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Iran fuel price hikes will be big test for Rouhani

Iran's President Hassan Rouhani speaks during an event hosted by the Council on Foreign Relations and the Asia Society in New York September
Iran's President Hassan Rouhani speaks during an event hosted by the Council on Foreign Relations and the Asia Society in New York September

By Parisa Hafezi

ANKARA (Reuters) - Looming fuel price rises in Iran will be the first major test of President Hassan Rouhani's ability to retain public support in the face of attacks from his hardline rivals.

Since he was elected in August, Rouhani has pleased many Iranians by reaching an interim agreement with the United States and the European Union on his country's nuclear program, and pursuing a deal that would end economic sanctions against Iran.

He has promised more social freedoms and repaired some of the economic damage of the sanctions; the rial currency has stabilized and sky-high inflation has started to come down.

But this could be threatened if Rouhani's government mishandles planned cuts in the massive state subsidies which keep domestic prices of gasoline and other fuels far below global levels.

The cuts are a key part of Rouhani's efforts to reform the economy after years of erratic management under his predecessor, Mahmoud Ahmadinejad. But they will be painful for many Iranians and therefore eat into Rouhani's political capital, which he needs to overcome domestic resistance to a nuclear deal.

"People voted for Rouhani in the hope that he would decrease their living costs, not increase them," said Karim Sadjadpour, an Iran expert at the Carnegie Endowment for International Peace in the United States.

A senior western diplomat in Tehran said the announcement of Rouhani's plan to cut subsidies had already caused concern across Iranian society, from government employees to businessmen and even some clerics. Some people have begun stockpiling food.

"Cutting subsidies will put more pressure on those who voted for Rouhani. It will have a negative impact on the already-high inflation and price of goods," the diplomat said.

"It will be a litmus test of Rouhani's political strength and also his popularity since his election."

BUDGET

Iranian motorists now pay only around 7,000 rials for gasoline, equivalent to $0.28 a liter at the central bank's official exchange rate, or $1.27 a gallon.

Rouhani's cash-strapped government wants to slash the subsidies to free up money for investment in Iran's dilapidated infrastructure, reduce government borrowing from banks so they can lend to the private sector, and encourage energy efficiency.

Ahmadinejad first cut fuel subsidies in 2010 but this sent inflation soaring, and parliament blocked the second stage of his reform in 2012, complaining that the first stage had tripled prices of electricity and cooking gas.

In the afterglow of his election, Rouhani commands much greater support in parliament, which in February he was able to persuade to back subsidy reform in principle.

But the response of the public, which has struggled through a recession triggered by the sanctions, may not be as calm, since the benefits of subsidy reform may take months or years to emerge while the pain will be felt immediately.

"I have economic problems already. I try to go home late at night to avoid seeing my children, because as a father I cannot even meet their very basic demands," said teacher Ahmad Hashemi.

"If the government increases the fuel price, everything will become more expensive. Don't they see that?" the father of three said from the northern city of Sari.

The official inflation rate rose above 40 percent under Ahmadinejad; Rouhani has said bringing it down is a priority, and the rate has dropped below 35 percent as his administration has introduced more conservative monetary and fiscal policies. Temporarily at least, subsidy reform could undo that progress.

"We are buying cooking oil and rice because as soon as they start to cut fuel subsidies, the prices will go higher," said government employee Ali Alami in the holy Shi'ite city of Qom.

Over 15 percent of the country's workforce is unemployed and many jobs pay a pittance.

"I like Mr. Rouhani and I believe in him. But that is not the issue. I cannot practically and financially support my family with my 8.8 million rials (about $350) monthly," said retired government employee Asghar Abdolhoseini in Isfahan.

Serious unrest in response to fuel price hikes looks unlikely, partly because of the power of the security forces.

But public discontent could weaken Rouhani in his struggle with hardline politicians who opposed his election, and who may want to block any nuclear deal.

These politicians include some members of parliament, commanders in the Revolutionary Guards and conservative clerics. The support of supreme leader Ayatollah Ali Khamenei has so far shielded Rouhani from their opposition, but that could change if the subsidy reforms arouse public anger.

TIMETABLE

Because of the risks, Rouhani's administration has been cagey about the extent and timing of the fuel price hikes.

Iranian media reports, based on vague and sometimes contradictory statements by government officials, have suggested the price of gasoline will double to 14,000 rials a liter.

The Tehran-e Emrouz daily predicted last month that the average price hike for gasoline, diesel and other fuels might be around 87 percent, saving the government $9.9 billion annually.

Iran does not release comprehensive numbers for its state budgets, so calculating the impact of that saving is difficult. But Rouhani's budget for the fiscal year that began on March 21 envisages spending on government operations - excluding items such as the activities of state enterprises - of $77.1 billion.

Media reports suggest the fuel price hikes could occur in June or July, though the government might wait until after late July, when it hopes to reach a nuclear deal with the West.

Implementing the hikes would be easier if sanctions were being eased as part of a nuclear agreement, which would trigger fresh private sector investment in the country.

Some reports suggest the government may initially choose to soften the impact on the poor by keeping the smart cards which allow lower-income Iranians to buy a ration of 60 liters of subsidized gasoline each month at just $0.16 per liter.

Some believe Rouhani's subsidy reforms have already begun by stealth; prices of electricity and other utilities have risen in some areas over recent months.

"He has no other option," said Saeed Ghazian, a private economist in Tehran. "This much-needed economic surgery will be painful, but it will save the patient's life."

(Additional reporting by Mehrdad Balali in Dubai; Editing by Andrew Torchia and Giles Elgood)

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