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Diana T Fritz  12/06/2006 06:06:15 PM  From  DB/Inbox:  Search Results

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UNCLAS        DUBAI 00271

SIPDIS
CXABU:
    ACTION: POL
    INFO:   AMB RSO DCM P/M MEPI ECON

DISSEMINATION: POL
CHARGE: PROG

VZCZCADO928
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ZNR UUUUU ZZH
P 181334Z JAN 05
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0985
INFO RUEHAD/AMEMBASSY ABU DHABI PRIORITY 0497
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUCAACC/CINCCENT MACDILL AFB FL
RUEAHLC/DHS WASHDC
RUEHDE/AMCONSUL DUBAI PRIORITY 3745
RUCNIRA/IRAN COLLECTIVE
RHEHNSC/NSC WASHDC
RUEHUNV/USMISSION UNVIE VIENNA PRIORITY 0037

UNCLAS SECTION 01 OF 03 DUBAI 000271 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL IR ECON
SUBJECT: IRAN'S MAJLIS VOTES TO FREEZE KEY PRICES 
 
¶1. (U) Sensitive But Unclassified - Protect Accordingly 
 
¶2. (SBU) SUMMARY: On January 11 the Iranian Majlis passed a bill 
fixing the price of gasoline and other key goods and services at 
September 2004 levels for the upcoming Iranian year 1384 (i.e. 
March 21, 2005 - March 20, 2006).  The bill's proponents say 
that fixing will decrease inflation and force the government to 
economize.  Opponents label the bill as a political gambit to 
keep key consumer prices low before the June 2005 Presidential 
election, a perception which seems to be prevalent among 
political observers.  The Guardian Council is expected to 
approve the bill.  END SUMMARY. 
 
¶3. (U) On January 11 the Iranian Majlis passed a bill fixing the 
price of key goods and services for the upcoming Iranian year 
1384 (March 21, 2005-March 20, 2006) at September 2004 levels. 
The bill was titled "Substituting Article Three of the Fourth 
Development Plan (FYDP)," and was more popularly known as the 
"Stabilizing Goods and Services Bill" (NOTE: Iran's Third FYDP 
ends March 20, 2005, with the Fourth FYDP starting on March 21, 
2005).  The Guardian Council is expected to approve the bill. 
 
¶4. (U) This bill revised Article Three of the Fourth FYDP such 
that the sales price of gasoline, diesel, kerosene, furnace oil 
and other oil products, as well as gas, electricity, water and 
drainage service charges, phone call and postal rates in the 
Iranian year starting March 21, 2005 will remain at Shahrivar 
month 1383 (i.e. August-September 2004) levels.  The bill also 
stipulates that for the subsequent years of the Fourth FYDP, 
prices will be set on the basis of plans presented to the Majlis 
by the government each September, with any suggested price 
increases for each item having to be justified on socio-economic 
grounds. 
 
¶5. (U) The bill also mandates that by the end of the second year 
of the Fourth FYDP (March 20, 2007) the government is obliged to 
take sufficient steps, to include economizing in fuel product 
usage and increasing public transportation capacity, such that 
all of Iran's domestic needs for fuel products are met by the 
output of Iran's refineries.  The bill also authorizes state-run 
gas and electricity companies to fine non-industrial entities 
exceeding the consumption level authorized by the Majlis each 
year. 
 
ADMINISTRATION ATTACKS PLAN... 
------------------------------ 
 
¶6. (U) This bill, put forward by the dominant conservative 
faction within the Majlis, had become a source of much political 
controversy in the recent weeks.  Administration reformists 
involved in the drafting of the Fourth FYDP, to include Economy 
and Finance Minister Safdar Hoseyni and Management and Planning 
Organization (MPO) head Hamid Reza Baradaran-e Shoraka, came out 
strongly against its passage.  MPO head Baradaran-e Shoraka told 
press that the bill's passage would worsen the existing 
projected budget deficit. He added that price stabilization in 
the coming year would obstruct many planned government programs, 
and that, if the Majlis bill were approved, "the government will 
have no alternative but to take money from the foreign exchange 
reserve."  President Khatami's Parliamentary Deputy 
Hojjatoleslam Majid Ansari told press that the bill was contrary 
to the macro-policies of the Supreme Leader as articulated in 
the Fourth FYDP, which include creating jobs and optimizing fuel 
consumption. 
 
¶7. (U) Government spokesman Abdollah Ramazanzadeh told ISNA that 
the bill had been drafted "based on political objectives."  In 
his December 27, 2004 weekly press conference, Ramazanzadeh 
spoke out harshly against the (then) draft bill, saying that 
with the decreased government income, the government would no 
longer be able to achieve the following goals: 
 
- providing funds for the Social Security system for the poor; 
 
- increasing the resistance of urban and rural buildings and 
residences to earthquakes; 
 
- expanding and increasing the efficiency of urban and 
inter-city public transportation, producing duel-fuel 
automobiles and expanding the supply of compressed natural gas 
at subsidized prices; 
 
- decreasing the number of incident-prone road locations and 
equipping a network of emergency pre-hospital and hospital 
medical care; 
 
- implementing plans to optimize fuel-use technology in 
factories while decreasing air pollution. 
¶8. (U) Ramazanzadeh predicted that the decreased income to 
government companies would decrease the flow of taxes and 
profits to the government, and push some of these companies into 
the red.  He also claimed that the decrease in government income 
would increase the budget deficit, which would in turn increase 
liquidity, exacerbate inflation and necessitate increased 
withdrawals from the Oil Stabilization Fund. 
 
GAS PRICES TOO LOW 
------------------ 
¶9. (U) Majlis representative Hassan Afarideh, a staunch opponent 
of the bill, told press before the bill's passage that by 
keeping gasoline prices artificially low, this bill would have 
major adverse consequences (the current price is approximately 
10 cents/liter, or 40 cents a gallon).  He said that Iran was 
currently using 63 million liters of gasoline daily, with a ten 
percent annual growth in recent years.  If Iran's gasoline 
consumption continues to grow at the present rate, Iran's daily 
consumption would be 310 million liters in Iranian year 1400 
(March 21, 2021-March 20, 2022).  To be produced domestically, 
this amount would require 6 million barrels of crude oil per day 
(bpd) for refining, and 40 refineries, the construction of which 
would cost approximately 80 billion dollars.  He said that Iran, 
with a population of approximately 70 million, was using the 
same amount of gasoline annually as was India, with a population 
of over one billion.  Afarideh said that low gasoline prices 
encourage consumption and decrease economic incentives for 
getting rid of fuel-inefficient vehicles and bringing to market 
fuel-efficient vehicles.  He urged that instead of fixing Iran's 
gasoline prices at an artificially low level, the price be 
raised to the FOB Persian Gulf price. 
 
ON THE OTHER HAND... 
-------------------- 
 
¶10. (U) The Majlis Research Center, headed by Tehran 
representative (and possible Presidential candidate) Ahmad 
Tavakoli, was the original drafter of the Price Stabilization 
bill.  Tavakoli, known for his pro-statist, anti-free market 
economic views, has also been one of the bill's main proponents 
in the Majlis.  Contrary to Administration positions, he 
trumpeted the bill as a major tool in reining in runaway 
government expenses and controlling inflation.  He told press 
that had the Fourth FYDP been implemented without changing 
Article 3, it would have caused a severe budget deficit and 
"rampant inflation that would have dealt a heavy blow to the 
productive private sector and to exporters."  He boasted to 
press that the price stabilization bill would prevent 
"back-breaking pressure" on Iran's people and on its private 
sector producers and manufacturers, and would also prevent both 
an increase of government presence in the economy and a budget 
deficit. 
 
¶11. (U) In response to reporters' questions as to whether this 
bill would decrease government income, Tavakoli explained that 
the government budget had two parts: the government's general 
budget and the budget for government companies, banks and 
subordinate institutions.  When Government companies producing 
goods are not allowed to raise prices, it doesn't affect the 
government's income but rather only decreases the government's 
general expenses, as the government itself is a consumer of some 
of these goods.  He claimed that decreased government expenses 
from buying many goods at last year's rates would partially 
offset decreased revenue.  He also claimed that government 
companies could compensate for lost revenues by economizing in 
current expenses (critics have pointed out however that 
economizing is hard when, for example, existing Iranian labor 
laws prevent government workers from being dismissed). 
 
¶12. (U) When accused of politicking, Majlis Speaker Gholamali 
Haddad-Adel replied that since the bill benefited the people, 
the Majlis should not avoid approving it solely because its 
passage would be to the political benefit of its supporters.  He 
told Iranian press before the bill's passage that the annual 
government price increase for these targeted goods and services 
had created many problems for the people, especially fixed-wage 
earners and the poor.  He claimed that the government should 
think of 'other ways' to overcome economic problems, besides 
raising prices.  He told press that this bill's passage was just 
one step in the Majlis's ongoing efforts to combat "financial 
indiscipline." 
 
¶13. (SBU) COMMENT:  Based on anecdotal information gleaned by 
Poloff, the popular perception among political analysts is that 
the Majlis's motivation in passing the bill passage was in fact 
exclusively political, to bolster the conservatives' popularity 
before the June 2005 Presidential election.  The consensus of 
Iran's economists as reflected in Iranian print media seems to 
be that the bill's overall effect will be deleterious, 
increasing the government's budget deficit and crippling 
government efforts to decrease gasoline usage by bringing its 
price in line with regional prices. 
 
¶14. (SBU) COMMENT CONT'D: The passage of this bill, like the 
Majlis cancellation of the "Tav" and "Turkcell" contracts, the 
possible cancellation of the Renault L-90 automobile contract, 
and other similar measures being considered by the Majlis, is 
another indication that this Majlis's agenda is being set by its 
so-called 'neo-conservatives,' i.e. the younger, radicalized 
conservatives aligned with the IRGC and the "Isargaran" 
political party, as opposed to the traditional conservative 
faction aligned with the Islamic Coalition Association 
('Motalafeh') and the Militant Clergy Association ('Ruhaniat'), 
who were predominant in the Fourth and Fifth Majlis (1992-96, 
1996-2000).  This group is pursuing a policy of decreasing the 
influence of foreign companies on the Iranian economy and 
increasing state intervention, reversing the general trend of 
the Khatami years.