Hassan Rouhani
Iranian President Hassan Rouhani delivers a message for the Iranian New Year, in Tehran, March 20, 2014.
Office of the Iranian Presidency—AP
March 20, 2014 1:26 PM EDT

In the seven months since Hassan Rouhani took office as President of Iran, his country’s economy has taken a slight turn for the better. Inflation dropped from 43 percent to 33 percent, while an interim agreement with world powers on Iran’s nuclear program produced some relief from sanctions and access to a portion of previously blocked oil revenues.

But those gains–and the vital stability they brought to the country’s troubled economy—may be short-lived. On Friday, timed to the Iranian new year celebration of Nowruz, the government’s 2014 budget takes effect, bringing with it new cuts in subsidies on food, fuel, energy and utilities. The cuts, once phased in over the coming weeks, will sharply ratchet up prices paid by ordinary citizens. The price of fuel is expected to rise by 71 percent. The next electricity bill an Iranian opens will be 24 percent higher. Water is going up 20 percent.

All told, Tehran will stop spending $25 billion it had been spending to hold down the price of essential goods and services. Instead, consumers will be exposed to something closer to real market prices—and Rouhani to the wrath of an Iranian public already strapped for cash.

“People just don’t have enough money to spend,” says Houman Kordestani, sales manager of Iran Tissue Company. He stood in his stall at the Tehran Mosalla New Year Sales Fair, an annual affair offering discounts in advance of the March 21 Nowruz holiday, and so sparsely attended this year that salesmen spent most of their time talking to one another, or staring at their phones. “In the last 19 days I’ve only sold 130 million Rials ($5,200),” says Kordestani. “It won’t even pay for my stall let alone the 4 employees I’ve got here.

“We thought it would be better with the new president.”

Rouhani campaigned on a platform that promised to improve Iran’s long dysfunctional economy by reducing the country’s international isolation. Negotiations aimed at reassuring the West about Iran’s nuclear program, which Washington and others fear could produce atomic weapons, are meant to free Iran from the crippling economic sanctions that still cost Iran $8 billion a month in lost revenue, on top of $60 billion in assets frozen overseas.

The latest round of talks, aimed at a permanent settlement, concluded on an upbeat note in Vienna on Wednesday, with Iranian Foreign Minister Mohammad Javad Zarif saying he saw “signs” of a comprehensive agreement by the July deadline. By then, public pressure for a deal may be increasing in Iran, as consumers stung by the loss of subsidies look for relief from lowered sanctions.

“In the present circumstances of Iran’s economy, my only hope is that the nuclear talks are successful,” says a manufacturer of canned tuna at the fair, speaking anonymously out of fear of political repercussions. The factory owner said he had to fire most of his employees after his production sagged badly after a first round of subsidy cuts, in 2010. Carried out under Rouhani’s predecessor, Mahmoud Ahmedinejad, those subsidy cuts hastened the political demise of the conservative president, who had run as a man of the people.

“Before my customers used to buy tuna by the box,” the factory owner says. “After the first round of subsidy reforms they just buy two or three cans. If the next round of reforms is anything like the last one I’ll have to pack up next year.” His factory has shrunk from 98 workers producing 10 tons daily to a payroll of 25 and 2 tons a day, he says.

Lawmakers have tried to take some of the edge off the cuts. The $25 billion being removed from the budget is a fraction of the $70 billion (some estimates say $100 billion) that Iran’s government spends on subsidies. And expected price increases are intended to be less drastic than four years ago. Also, as in 2010, the impact of the lost subsidies will be softened to some extent by direct cash payments to low-income Iranians. Legislators also are directing money formerly spent on subsidies to go to health care and the country’s relatively small private sector—the Iranian economy is still dominated by the government.

Still, economists fear the cuts will result in the inflationary spike that occurred in the 2010 round, and was aggravated by the loss in value of the Iranian Rial because of sanctions.

“The objectives of the plan are good ones but the method has major flaws,” says Mohammad Khoshchehreh, a professor in Tehran University Faculty of Economics and former lawmaker. “In its present form this plan will increase inflation and liquidity, and force producers in the private sector out of the market.”

The cleric who holds ultimate power in Iran, Supreme Leader Ayatollah Ali Khamenei, has cast the shared hardship as a patriotic enterprise, declaring a “Resistance Economy.” The program’s 24 points include reducing dependence on oil, boosting manufacturing and diversifying imports. “If Islamic Iran follows the policies of resistance economy, not only will it overcome all economic problems, but will also defeat the enemy, who is waging an all-out economic war against our great nation,” reads the communiqué posted Feb. 19 on Khamenei’s official website.

But Khamenei, who was appointed to his office by a panel of clerics 25 years ago, does not have to worry about re-election. Rouhani’s four-year term may have only begun in August, but it may well be decided by the blend of economic and foreign policy challenges that defined his campaign. Iranians, at least, see the topics as one.

“Rouhani has entered the nuclear talks with sincerity and moderation; he is trying to rebuild Iran’s international relations,” says Khoshchehreh, the economist. “However if he is rebuffed again as he was in the 2003 negotiations [which Rouhani led as Khamenei’s chief nuclear negotiator], than Iran’s moderation will be replaced with hard-line positions just as Ahmadinejad replaced the reformist government behind the 2003 talks.”

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