Rouhani Hits Welfare Roadblock in Readying Iran Economy for Deal

President Hassan Rouhani could be two weeks from persuading world powers to begin releasing Iran’s economy from the shackles of sanctions. Convincing Iranians that they must shoulder part of the burden of recovery may take longer.

While ending the dispute over Iran’s nuclear program around the June 30 deadline would send investor interest soaring, it may not bring an immediate influx of cash. The U.S. and European nations favor a delay before sanctions on oil and financial flows are entirely lifted.

To fund the interim, Rouhani is trying to scale back a safety net of monthly family support payments, which isn’t proving popular.

“The government is in a bind because unless they can lower the cash handout amount, they’ll have to cut the infrastructure budget by 65 percent,” said Mehrdad Emadi, an Iranian economist with London’s BetaMatrix Research & Consultancy. “That means two out of three projects have to be canceled. That’s not good for job creation plans.”

The $16 per month payments were introduced by Rouhani’s predecessor, Mahmoud Ahmadinejad, in 2012 to replace a runaway program of subsidies on food and fuel, as his confrontation with the international community deepened.

Spreading Wealth

The plan was intended to spread Iran’s oil wealth more equally, by shifting from subsidies on energy and food to cash handouts. While it won praise from the International Monetary Fund, critics say it stoked inflation and helped propel a slide in the rial. While the payments were supposed to be directed toward the poorest Iranians, as many as 75 million of the country’s 78 million people were eligible.

Since coming to power a year later, Rouhani has sought to trim the handouts, which cost $15 billion last year, as he has overseen a breakthrough in relations with major powers.

Using appeals by influential clerics and sports stars, he asked better-off Iranians to voluntarily forgo the cash. Last year only 2.4 million, out of a target of 6 million, opted out. In March, the government renewed its push and eliminated 200,000 wealthier Iranians from the list. This month, Rouhani said the program faced a funding shortfall of $3.5 billion unless further reductions were made.

“They can’t afford to pay cash handouts as before,” said Ali Dadpay, an associate professor of economics at Clayton State University in Morrow, Georgia, who studies Iran. “It was a badly designed plan and Rouhani has to make tough decisions at a time of low oil prices.”

‘Populist Actions’

Moving too fast risks fueling social discontent and alienating voters ahead of parliamentary elections next year and a presidential ballot in 2017. While analysts expect Iran to boost its oil exports by 400,000 barrels a day in the months following a nuclear accord, it will take longer for ordinary Iranians to feel better off.

“Tackling the populist actions of the previous government is a costly endeavor from a social point of view,” said Mousa Ghaninejad, an economist and adviser to Iran’s chamber of commerce. “The government doesn’t want the population to think the previous government helped them and this one is cutting aid.”

Iran’s economy has for years been undermined by mismanagement, corruption and politically motivated spending, said Bijan Khajehpour, managing partner of Atieh International, a Vienna-based management consulting firm.

Tighter Sanctions

From 2006, the U.S., European Union and United Nations imposed ever tighter sanctions as concern grew that Iran was pursuing atomic weapons, something it denies.

The economy grew 3 percent in 2014 after two years of contraction, while the rial has been stabilized and inflation slowed to about 15 percent from 40 percent. In May, the government raised fuel prices by 40 percent and scrapped an eight-year-old rationing program for private motorists.

Growth needs to be near 10 percent to lower youth unemployment, which hovers around 24 percent, Khajehpour said this month in a presentation at Woodrow Wilson Center in Washington. The World Bank says Iran must create 8.5 million jobs over the next two years.

The government has revealed plans to build major road and rail projects and two new nuclear power stations. Yet it needs $100 billion to overhaul its gas industry alone, according to Azizollah Ramazani, a senior official at National Iranian Gas Co. Upgrading aging oil field needs a similar investment.

Wasted Money

Some commentators are concerned that if Rouhani fails to push through tough decisions now, the impetus may fade once money returns to Iran after a nuclear deal. Under the terms of April’s outline deal, sanctions will be phased out as Iranian compliance is confirmed by international monitors.

“I’m afraid with the lifting of sanctions there’ll be lots of money flooding the economy and that money will be wasted,” said Hossein Askari, professor of International Business at George Washington University. “Reforms will not be a priority and in two to three years the problems will come due.”

Rouhani needs to cut 20 million Iranians from the cash payment program, BetaMatrix’s Emadi said. That may be too radical a move.

“The social situation is such that it’s not possible to proceed with a greater speed than this toward liberalization of the economy,” said Saeed Laylaz, an Iranian economist whose views are close to those of the government.