$20bn black hole in Ahmadinejad budget

Parliament says the Iranian president's plan to generate cash by cutting energy subsidies is likely to fall short, leading to inflation worries.

TEHRAN // One week after parliament and the Guardian Council approved a controversial bill to begin cutting energy subsidies, the president is seen as hoping to squeeze more resources out of it than the bill originally allowed.

The conflict has raised concern among parliamentarians and ordinary Iranians as legislators prepare to debate next year's budget. Iran has been paying about US$100 billion (Dh367bn) yearly to subsidise energy, water, some foodstuffs and such services as postal and aviation. The subsidy reform bill sees cutting the subsidies by $20bn a year for five years. Mahmoud Ahmadinejad's proposed budget predicts resources acquired from cutting the energy subsidies will amount to about $40bn, double the amount permitted by parliament in the first year of the reform plan.

This puts Mr Ahmadinejad in direct conflict with parliament. Indeed, his budgetary wish is seen by some as a sign of disdain for the parliamentary legislation. The president had to wait until last week to submit his budget to parliament - two and a half months after a parliamentary deadline for receipt of the budget had passed - because of the time it took in resolving the impasse over the subsidy reform law.

When passing the law last month, parliament introduced a number of amendments to the government bill. Changes included requiring the government to cut subsidies gradually over five years. The government had desired a free hand in conducting the reform. To meet Mr Ahmadinejad's desired $40bn in resources means prices might rise higher and faster than expected. By way of example, one legislator, Jafar Ghaderi, quoted by the Tehran Emrouz newspaper, said the government would need to quadruple the price of petrol to 4,000 rials (Dh1.48) per litre in the next fiscal year.

"I am sorry that by persisting on Mr Ahmadinejad's views, the government is ignoring [parliament's] legislation and is setting the parliament against itself" by asking it to ignore its own legislation when putting the budget bill to vote, Ahmad Tavakkoli, a legislator and head of parliament's research centre, which offers advice to legislators, said according to Fars News Agency. "Parliament's insistence that the reform plan be carried out over a five-year period is meant to prevent grinding growth of inflation," Mr Tavakkoli said.

Other legislators have repeatedly warned that cutting energy subsidies could cause the rate of inflation to shoot up to as high as 60 per cent within a year. When offering his budget bill to parliament on January 24, however, Mr Ahmadinejad told legislators that inflation would drop to five per cent within two and a half years of implementation of the subsidy reform. The annual rate of inflation stands at 18.5 per cent now.

According to the law, to make up for the rise in the price of utilities and other commodities, the government is required to compensate all families in cash or by other unspecified means. Mr Ahmadinejad has on many occasions promised the public that scrapping subsidies and paying cash compensation to families will help lower-income families, who consume less of such subsidised commodities as energy and thus benefit less from government subsidies, to improve their living standards.

How much each Iranian family will receive in compensation will depend on the number of family members and its income status. Parliament did not include a compensation formula in the law and left the decision of how much to pay and who to pay to the government. "One government official says the compensation will be paid to 70 per cent of people and another says it will be paid to all," one legislator, Ali Hosseini, was quoted by the Donyaye Eghtesad newspaper as complaining to parliament on Sunday.

Two weeks ago, Mohammad Madad, the head of Iran's statistics centre, appeared on state television to say income declarations made in the summer of 2008 show there are 10 definable family income groups in the country. Of these, seven lower-income groups of families, comprising 47.6 million individuals, would receive priority a cash compensation. Mr Madad, however, was later contradicted by other officials, including the economy minster, Shameddin Hosseini, who said everyone could benefit from the cash compensation.

Such contradictory statements have spread concern among many people, who fear they will not be compensated in cash when prices shoot up. To try to clear up the confusion, a committee formed by the government to carry out the subsidy reforms issued an official statement on Monday that said all "applicants" were to be eligible for compensation. Still, the statement did not specify whether the compensation would be in cash or other means.

"I can't understand why we were required to fill in all those income declaration forms if everyone is going to get compensation. My income is not even remotely comparable to the people in the top three income groups I have been grouped with, and who I thought were not going to receive compensation," Sahar Aghaie, 35, a teacher, said. "Now there is something different and the government says everyone will receive compensation. I'm still confused."