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Why Iran's Ahmadinejad is pushing to cut popular government subsidies

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The Islamic Republic spends between $90 billion to $100 billion per year on subsidies. Of that, $35 billion to $45 billion goes to fuel subsidies, which include gasoline, heating oil, kerosene, liquefied petroleum gas or LPG, and fuel oil, according to interviews with government officials.

Parliamentarians already approved a subsidy cut of $20 billion in January. Under the deal, a new government entity will be given the $20 billion to disperse as they see fit – outside the purview of the national budget, and thus with little to no parliamentary oversight.

But Ahmadinejad has been battling MPs for more comprehensive legislation to cut subsidies by double that amount. The aim is to ensure that his administration will have enough cash on hand to raise payments to his predominantly low-income constituency in the case that utility and fuel prices rise more than government projections, according to domestic analysts.

Though the parliament isn't likely in the near-term to double the subsidy cut to $40 billion, it has granted Ahmadinejad's government the freedom to disperse the $20 billion worth of yearly subsidies over a six- or nine-month period, allowing larger individual cash payments that are on par with those that would have been made with a larger subsidy cut. His administration will also be able to allocate different payment amounts to different people.

Calls for subsidy cuts as early as 1992

Domestic economists and lawmakers have privately called for subsidy cuts since at least 1992. They advocated spending part of the savings on cash handouts, which would leave the government with extra funds and enable Iranians to pay fair market prices for energy – allowing Iran to invest more in its aging oil infrastructure.

But many economists claim the lack of transparency about how the government will ultimately disburse the cash payments could cause massive hikes in inflation.

“Everybody agrees we need to get rid of our subsidies because it puts too much unhealthy pressure on the government. But nobody knows how the groupings are going to be determined and who will actually get the payments,” says the Tehran-based analyst. “[The methodology] with which Ahmadinejad actually goes about doing it could have a fundamentally catastrophic impact on the economy.”

Economists predict the president will seek an addendum to the subsidy bill allowing his government to start implementing the subsidy plan during the second half of the Iranian new year, which began on March 21.

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