Since he was elected in August, Rouhani has pleased many Iranians
by reaching an interim agreement with the United States and the
European Union on his country's nuclear program, and pursuing a deal
that would end economic sanctions against Iran.
He has promised more social freedoms and repaired some of the
economic damage of the sanctions; the rial currency has stabilized
and sky-high inflation has started to come down.
But this could be threatened if Rouhani's government mishandles
planned cuts in the massive state subsidies which keep domestic
prices of gasoline and other fuels far below global levels.
The cuts are a key part of Rouhani's efforts to reform the economy
after years of erratic management under his predecessor, Mahmoud
Ahmadinejad. But they will be painful for many Iranians and
therefore eat into Rouhani's political capital, which he needs to
overcome domestic resistance to a nuclear deal.
"People voted for Rouhani in the hope that he would decrease their
living costs, not increase them," said Karim Sadjadpour, an Iran
expert at the Carnegie Endowment for International Peace in the
A senior Western diplomat in Tehran said the announcement of Rouhani's plan to cut subsidies had already caused concern across
Iranian society, from government employees to businessmen and even
some clerics. Some people have begun stockpiling food.
"Cutting subsidies will put more pressure on those who voted for
Rouhani. It will have a negative impact on the already-high
inflation and price of goods," the diplomat said.
"It will be a litmus test of Rouhani's political strength and also
his popularity since his election."
Iranian motorists now pay only around 7,000 rials for gasoline,
equivalent to $0.28 a liter at the central bank's official exchange
rate, or $1.27 a gallon.
Rouhani's cash-strapped government wants to slash the subsidies to
free up money for investment in Iran's dilapidated infrastructure,
reduce government borrowing from banks so they can lend to the
private sector, and encourage energy efficiency.
Ahmadinejad first cut fuel subsidies in 2010 but this sent inflation
soaring, and parliament blocked the second stage of his reform in
2012, complaining that the first stage had tripled prices of
electricity and cooking gas.
In the afterglow of his election, Rouhani commands much greater
support in parliament, which in February he was able to persuade to
back subsidy reform in principle.
But the response of the public, which has struggled through a
recession triggered by the sanctions, may not be as calm, since the
benefits of subsidy reform may take months or years to emerge while
the pain will be felt immediately.
"I have economic problems already. I try to go home late at night to
avoid seeing my children, because as a father I cannot even meet
their very basic demands," said teacher Ahmad Hashemi.
"If the government increases the fuel price, everything will become
more expensive. Don't they see that?" the father of three said from
the northern city of Sari.
The official inflation rate rose above 40 percent under Ahmadinejad;
Rouhani has said bringing it down is a priority, and the rate has
dropped below 35 percent as his administration has introduced more
conservative monetary and fiscal policies. Temporarily at least,
subsidy reform could undo that progress.
"We are buying cooking oil and rice because as soon as they start to
cut fuel subsidies, the prices will go higher," said government
employee Ali Alami in the holy Shi'ite city of Qom.
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Over 15 percent of the country's workforce is unemployed and many
jobs pay a pittance.
"I like Mr. Rouhani and I believe in him. But that is not the issue.
I cannot practically and financially support my family with my 8.8
million rials (about $350) monthly," said retired government
employee Asghar Abdolhoseini in Isfahan.
Serious unrest in response to fuel price hikes looks unlikely,
partly because of the power of the security forces.
discontent could weaken Rouhani in his struggle with hardline
politicians who opposed his election, and who may want to block any
These politicians include some members of parliament, commanders in
the Revolutionary Guards and conservative clerics. The support of
supreme leader Ayatollah Ali Khamenei has so far shielded Rouhani
from their opposition, but that could change if the subsidy reforms
arouse public anger.
Because of the risks, Rouhani's administration has been cagey about
the extent and timing of the fuel price hikes.
Iranian media reports, based on vague and sometimes contradictory
statements by government officials, have suggested the price of
gasoline will double to 14,000 rials a liter.
The Tehran-e Emrouz daily predicted last month that the average
price hike for gasoline, diesel and other fuels might be around 87
percent, saving the government $9.9 billion annually.
Iran does not release comprehensive numbers for its state budgets,
so calculating the impact of that saving is difficult. But Rouhani's
budget for the fiscal year that began on March 21 envisages spending
on government operations — excluding items such as the activities of
state enterprises — of $77.1 billion.
Media reports suggest the fuel price hikes could occur in June or
July, though the government might wait until after late July, when
it hopes to reach a nuclear deal with the West.
Implementing the hikes would be easier if sanctions were being eased
as part of a nuclear agreement, which would trigger fresh private
sector investment in the country.
Some reports suggest the government may initially choose to soften
the impact on the poor by keeping the smart cards which allow
lower-income Iranians to buy a ration of 60 liters of subsidized
gasoline each month at just $0.16 per liter.
Some believe Rouhani's subsidy reforms have already begun by
stealth; prices of electricity and other utilities have risen in
some areas over recent months.
"He has no other option," said Saeed Ghazian, a private economist in
Tehran. "This much-needed economic surgery will be painful, but it
will save the patient's life."
(Additional reporting by Mehrdad Balali in Dubai;
editing by Andrew Torchia and Giles Elgood)
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