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The protests in Iran and the role of the International Monetary Fund

05 January 2018
Several media have identified declining living standards as the root cause of the protests, including the impact of new budget measures that are supposed to go into effect in March. However, few media reports have pointed out that the IMF has urged the country to adopt and implement some of the most unpopular measures.
By Peter Bakvis
 
The International Trade Union Confederation (ITUC) issued on Thursday, January 4, a communiqué on the widespread protests in Iran, underscoring the “spiralling inflation and the continued decline in real incomes” in the country.
 
Several media have similarly identified declining living standards as the root cause of the protests, including the impact of new budget measures that are supposed to go into effect in March. For example, a New York Times article on 3 January stated: “The initial catalyst for the anger appears to have been the leak by President Rouhani last month of a proposed government budget [that] proposed to end cash subsidies for millions of citizens, increase fuel prices and privatize public schools.”
 
However, few media reports have pointed out that the International Monetary Fund (IMF) has urged the country to adopt and implement some of the most unpopular measures. The Fund did so most recently on 18 December after its mission completed an annual Article IV consultation with Iranian authorities. (It should be noted that Iran has not borrowed from the IMF since the early 1960s, but the government appears to have made efforts to regularize its relations with the Fund and comply more closely with its advice since the 2015 nuclear agreement.)
 
The unpopular measures that will affect most Iranians’ living standards include the end of a universal cash transfer programme introduced in 2011 to compensate for the elimination of cheap (subsidized) fuel. An IMF analysis last February stated that the universal cash transfer scheme had caused a significant drop in income inequality, lowering the Gini coefficient by 2¾ points. However, because the transfer has not been increased to keep up with inflation it has lost half of its value since 2011.
 
Despite the decline in real terms, the IMF paper proposed that the cash transfer programme should no longer be universal but rather made selective by “targeting transfers more specifically at the poor” so as “to create fiscal space”, i.e. reduce the government deficit. It estimates that in the first year, targeting would result in savings equivalent to 0.7 per cent of GDP.
 
In last year’s Article IV consultation staff report for Iran, released in April, the IMF also endorsed targeted rather than universal cash transfers because of the need free up funds to clear public sector arrears and finance bank recapitalization, among other needs. However, it admitted that “administrative difficulties” would make it difficult to identify who should continue to receive the benefit and who should not. Experience in other countries has shown that the proxy means tests used in other countries to target this kind of assistance typically exclude 50 per cent or more of those who should be eligible by virtue of their income level. 
 
Last year’s Article IV report also called for increased tax revenue, notably though the value added tax, a source of revenue that typically has a regressive impact, i.e. the less one earns, the more one pays as a proportion of one’s income. The report observes that “the VAT rate remains low despite its increase from 3 to 9 per cent” and is critical of the fact that in Iran “direct taxes [namely personal and corporate income taxes] still account for almost half of total tax revenues”.
 
The IMF’s latest Article IV mission to Iran, completed in mid-December barely two weeks before the protest began, expressed enthusiastic support for elimination of the universal cash transfer: “The IMF welcomes the reform of the universal cash transfer system to target income support to the poor in the proposed 2018/19 budget…. The reform of the universal cash transfer scheme to target the poor secures much needed fiscal space.”
 
The IMF’s communiqué follows up on earlier IMF recommendations and supports further measures to create even more fiscal space, notably by removing exemptions to the VAT. The communiqué also calls for a yet-to-be-defined pension reform, again with the objective of reducing public expenditures.
 
It is safe to assume that no one among those participating in the recent mass protests in Iran was consulted by the IMF’s mission before it endorsed the 2018/19 budget and issued recommendations for the country’s economic and social policies.
 
Peter Bakvis is the director of the Washington office of the International Trade Union Confederation (ITUC)

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