January 13, 2010

Source:

TEHRAN, Iran–Iran’s constitutional watchdog approved a contentious law that would sharply slash energy and food subsidies — a move that could provoke more unrest in a country struggling under international sanctions, double-digit inflation and a government crackdown on the opposition.

The bill was formally approved by the Guardian Council, state television Web sites reported Wednesday, roughly a week after Iranian lawmakers signed off on the plan proposed by President Mahmoud Ahmadinejad. The Guardian Council is a hardline body that must vet all legislation before it becomes law.

The law would gradually cut energy subsidies, bringing the heavily discounted fuel prices more in line with international prices.

Officials say the step is needed to recoup some of the roughly $90 billion spent yearly on subsidies by OPEC’s second largest oil exporter. Subsidies currently consume about 30% of the government budget at a time when already high spending and the collapse of oil prices last year hammered Iran’s economy.

The aim is to channel the funds directly at the poorer segments of the population, as well as funding infrastructure projects.

Mr. Ahmadinejad said on Wednesday the law is “big step toward implementation of justice,” and added that with its implementation, there will “not be a single unemployed and poor person within three years.”

The conservative-dominated parliament and Mr. Ahmadinejad’s hardline government have been bickering for months over who should control the money earned through increasing fuel prices.

While the government wanted a total free hand on controlling and spending the money, lawmakers countered that it would only result in widespread corruption and waste. In a compromise, lawmakers agreed to set up a government organization charged with administering the program, but the parliament will have oversight of the organization.

Iran’s economic woes have been one of Mr. Ahmadinejad’s biggest challenges. Critics argue he squandered the billions of dollars Iran earned when oil peaked in mid-2008 at $147 per barrel on populist projects that appeased his core supporters, but did little to address inflation that last year hit a high of 30%. While experts say inflation remains above 25%, the government contends that it is around 13.2%.

The economy was also a major issue in the contested June elections in which Mr. Ahmadinejad was declared the winner. The disputed victory sparked months of protests by reformists who maintain he stole the election. The subsequent government crackdown has further blighted Iran’s image even as it struggles with an international community leery of its nuclear program.

A push in 2007 to scrap the fuel subsidy program resulted in widespread outrage, with gasoline stations burned to the ground in protests.

Iranians enjoy some of the cheapest gasoline prices in the world. Under the current rations system, they pay $0.38 per gallon for the first 100 liters. Any gasoline bought beyond that limit costs $1.50 per gallon.

The new law would gradually strip away subsidies to bring the prices closer in line with international market prices. The law could also ostensibly be aimed at helping decrease gasoline consumption in the country.

A bill before the U.S. Senate would authorize President Barack Obama to impose sanctions on Iran, including limiting its imports of gasoline. Iranian officials have downplayed the potential consequences, but the country has to import about 40% of its gasoline needs because it lacks sufficient refining capacity.

Efforts to boost its oil production, which analysts estimate at about 3.75 million barrels per day, have also been stymied by U.S. sanctions that seek to bar companies from investing in Iran’s oil sector. Those sanctions have meant that relatively few companies have been willing to commit capital to projects.

Copyright 2010 Associated Press