Iran Now Vulnerable to Outside Pressure

By Patrick Clawson

On August 2, Tehran distributed a sixth installment of cash payments to 73 million Iranians in lieu of subsidies on fuel, natural gas, electricity, and essential items such as bread. Having done the easy part of its subsidy reform - sending out checks to compensate for price increases - the regime must now do the hard part: raise the money to pay for those checks and find a way to help businesses badly hit by the higher prices. Tehran should be able to meet that challenge as long as its oil income remains high, but if oil prices drop or sanctions impede financial flows, it could face serious problems.

Flooding Households with Checks

In terms of actually distributing the checks to households, the regime has been effective. In recent years, it has supplemented the longstanding and chaotic identification system based on hand-issued birth-certificate booklets with a computerized national ID card, which is better able to control fraud. To be sure, a July 2011 paper by two International Monetary Fund (IMF) staffers and an Iranian official reported that two million of those receiving checks live abroad and should not have been eligible.

The other side of the coin is getting money to the poor, many of whom do not have bank accounts. The regime seems to have been quite successful at getting this constituency "banked," as the phrase goes. Iran's banking system has deepened its reach in recent years, partly through the creation of numerous private banks and the conversion/consolidation of 1,200 credit unions into thirteen banking firms. Even more important, thousands of Postal Bank "offices" (as distinct from full-service banks) have been established in rural areas with enough accounts to cover up to a quarter of the country's 22 million rural residents.

To be sure, if the checks are going to 71 million Iranians as reported (discounting the 2 million recipients abroad), and if the official October 2010 population estimate of 74.7 million was correct, at least 3.7 million people are not getting paid. For instance, Iran's impoverished Afghan immigrants, who number well over a million, are not eligible. In general, though, the poor have gained much from the subsidy reform.

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Currently, the payments, having been raised twice, are 455,000 Iranian rials per person per month, equivalent to $41. Virginia Tech economist Djavad Salehi-Isfahani has estimated that poor Iranians - those in the bottom 10 percent of the income distribution - are receiving seven times more than the extra costs they pay due to the removal of subsidies. That means a net monthly gain of IR1.6 million for a four-person household, more than 35 percent of the minimum wage of IR4.3 million per month (including the various monthly allowances and a year-end bonus). Many rural and informal workers can only dream of getting the minimum wage through regular employment. Not surprisingly, then, the poor have not objected to this reform.

 

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Patrick Clawson is director of research and head of the Iran Security Initiative at The Washington Institute.

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