The Iranian economy, battered from Western sanctions, took a huge dive after the Government heavily changed its fixed pricing of fuel on Friday, under the pretext of “diverting funds” to help the poor. Last week, drivers were allotted up to 250 liters a month at the pump for a controlled price of 10,000 rials per liter. Friday the situation radically changed to an allowance of 60 liters per month at 15,000 rials a liter [12 Euro cents]. Additional liters above the threshold cost 30,000 rials. Gas prices tripled overnight. Millions of working class people across the country went out to protest. Roads were closed. State news agency Irna reported clashes with police when protesters attacked a fuel storage warehouse in Sirjan and tried to set fire to it. Other cities were also affected including the capital, Tehran, Kermanshah, Isfahan, Tabriz, Karadj, Shiraz, Yazd, Boushehr, and Sari.
Here’s some footage from Twitter.
I don’t know what the hell the Iranian authorities were thinking when they made this move. Subsidies shouldn’t be drastically cut, but phased out slowly, while at the same time investing to expand output capacity. Shock therapy will always have pernicious effects. But the major tool the Government operated with was price controls. Price ceilings do not work. Even Maynard Keynes told us that. The Iranian state can go one of two ways, in my opinion. It either adopts military-style rationing measures, or – if it wants a fair market system in which prices are derived from value, not vice-versa – it implements land-value capture.
For the last 18 years, Iran has had a positive current account to GDP ratio, meaning it net saved in foreign currency. After 2018, its consumer price index shot up from below 110 to almost 190. During this year, food inflation spiked to nearly 90 percent, but then came back down swiftly enough to the 30 percent mark. Cost of transportation and utilities shot up as well, and there is no correcting downward trend for these two like for food; the trend remains upwards. The benchmark interest rate in Iran is in the double digits at 18 percent, which means the Government pays more in interest to the private sector. It’s not wise to grow demand while you are supply constrained; not to mention the fact that such a high interest rate is a [needless] drag for both firms and households who have debts to service. Rouhani’s finance guys should be fired. They’ve learned nothing from history, including super-recent history [France, Ecuador, Haiti, Chile].
Doubtless, there are foreign-backed elements within the crowds who are seeking regime change. I wrote about such an operation back in September: Deep State MAGA & MIGA [Make Iran Great Again]. But I didn’t expect it to be carried out on the heel of such a huge Government blunder. The only way to retain political stability now, I think, is for Khamenei to call for new elections [because this Government is obviously too incompetent to remain in power] and seek emergency aid from Russia and China – hasty deliveries of basic commodities like water, food, and pharmaceuticals. For an oil-rich country like Iran, having to rely on oil price fixing to prevent social unrest [like Egypt subsidizing bread or risking revolution] is humiliating. The Iranian Government telling people they have to pay more for less fuel, otherwise it won’t have enough rials [sovereign currency] for the poor is a perfidious lie, and needlessly foments political instability, unrest, and social hardships. Iranian political elites need to take the situation seriously. Stronger states across history have been brought low by such idiotic policies [self-made problems], and not by rival empires or nature’s wrath.