Ahmadinejad to focus subsidies on Iran's poor

TEHRAN (Reuters) - Iran's president plans to adjust an unwieldy subsidy system so that it helps the poor more directly despite initial inflation risks, in a reform opponents said was an overdue response to criticism of his policies.

President Mahmoud Ahmadinejad has in the past opposed reforms requiring liberalizing prices of goods like gasoline and some foodstuffs for fear of driving rampant price rises still higher, the analysts say. Change may also risk social unrest.

But reforms announced in a TV interview and carried by newspapers on Wednesday indicate the president, facing growing grumbles from opponents and the public, may want to rebuff at least some of his critics before the 2009 presidential election.

"Mr Ahmadinejad is not able to continue the current situation. He has to do something because the fourth year of Mr Ahmadinejad's presidential term is starting and actually he did nothing for the economy," said Saeed Laylaz, a business consultant and frequent critic of the president's policies.

He said he welcomed the reforms Ahmadinejad announced.

Ahmadinejad has not said if he will run again but is widely expected to. Analysts say much will depend on keeping the support of Supreme Leader Ayatollah Ali Khamenei, Iran's top authority who has gently urged the government to deal with economic problems while still voicing backing for the president.

Ahmadinejad came to power in 2005 pledging to share out Iran's oil wealth more fairly. Despite presiding over record crude earnings, economists say the wealth gap has widened due to profligate spending that has stoked inflation, mostly harming the poor, and via subsidies that often mainly benefit the rich.

The president, whose government has in the past sought to tackle inflation by telling businesses to lower prices, accepted subsidies needed changing.

"Currently, subsidies are not useful and have the reverse effect (of what was intended)," he said in comments carried by the official newspaper Iran, adding that 70 percent of subsidy spending ended up with the country's richest 30 percent.

"With such subsidies, industry cannot compete with the world as it should," the president said, adding that energy subsidies cost Iran 900 trillion rials (about $98 billion) a year.

POLITICAL HOT POTATO

Gasoline subsidies are an example where the rich benefit most because they tend to have bigger, gas-guzzling vehicles, while the poor may not even be able to afford a small car.

Changes are already being made via rationing introduced last year that restricts how much subsidized fuel drivers can buy, with any extra being sold at a higher price. The government originally opposed selling any fuel more expensively.

When rationing was introduced, however, several fuel stations were torched, showing how sensitive reforms can be.

Ahmadinejad indicated changes in subsidies would involve means testing with Iranians filling a form to establish their position but did not say precisely how payments would be made.

The economic daily Donya-ye Eqtesad, citing the president, said the first payments would be made in the second half of the Iranian year. Iran's calendar begins in March.

Economists have long argued for a shake up of Iran's system of broad subsidies but say it is a political hot potato because it will initially add to inflation, currently running at more than 25 percent, even if it comes with longer term benefits.

"Taking away subsidies is not an easy matter. The government seems to be doing it, but already we are seeing short-term inflationary effects," said one economist, speaking before the president's more sweeping reform was announced.

In the longer term, cutting subsidies would reduce budget spending and therefore ease inflationary pressure, the economist said.

In his interview, the president also said his economic plan would involve changes to the tax system to improve collection and reform of customs. He did not give a timetable.

Economists say one of the main problems fuelling inflation has been the government's spending of bonanza revenues from sky-high oil prices.

Although designed to help the poor by boosting spending in villages and provinces in particular, economists say the government has not used interest rates and other tools to soak up the extra liquidity. The president, for example, has been criticized for pushing to keep interest rates below inflation.

(Additional reporting by Zahra Hosseinian; Editing by Dominic Evans)