Image: Iranian baker
Vahid Salemi  /  AP
An Iranian baker doing work at his bakery in central Tehran, Iran, on Saturday. Iran's President Mahmoud Ahmadinejad announced the start of a plan to slash energy and food subsidies, part of government efforts to boost the nation's ailing economy.
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updated 12/19/2010 9:40:33 AM ET 2010-12-19T14:40:33

The Iranian government sent squads of riot police to man the major intersections of the capital as sensitive cuts in energy and food subsidies came into effect Sunday.

Eye witnesses reported a heavy police presence in the squares and junctions of Tehran such as Enghelab square and Sadeghieh and Valiasr squares as well as some western neighborhoods of the city, though so far the city has been quiet.

In 2007, angry protesters set dozens of gas stations on fire after the government imposed a new system of gasoline rationing to cut down on access to heavily subsidized fuel.

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Iranian President Mahmoud Ahmadinejad said late Saturday that the cuts in essential subsidies were the "biggest surgery" to the nation's economy in half a century.

After the president announced the cuts late Saturday, long lines of cars were seen at several gas stations in Tehran as Iranians rushed to fill their tanks at subsidized prices before the new ones took effect at midnight.

The cuts come as the Iranian economy is suffering under four rounds of U.N. sanctions as well as those from individual countries over its controversial nuclear program.

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Still, Iran had planned to slash subsidies before the latest sanctions took effect, and Ahmadinejad and his allies have long insisted the country's oil-based economy could no longer afford the largesse.

Tehran says it is paying some $100 billion in subsidies annually, although experts believe the amount is about $30 billion.

Under the new rationing system, each person with a fuel card has to pay 40 cents per liter of gas, up from 10 cents per liter. Fuel beyond a person's quota is now sold at 70 cents per liter, up from 40 cents.

Ahmadinejad also said his government was paying $4 billion in bread subsidies. That, too, is now being gradually phased out.

Economists say the unpopular plan to slash subsidies could stoke inflation already estimated to be over 20 percent. The cuts also are widely seen as placing added burdens on Iranians.

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The government says cutting subsidies, known as the Subsidy Smart Plan, will return part of the money obtained from increased prices to the people through cash payments. It has already paid nearly $15 billion into bank accounts of some 20 million families in the country as compensation ahead of the cuts.

Every family member would now receive $80 for to help them over the next two months, and Ahmadinejad suggested that they could withdraw the money as of Sunday.

The new prices for electricity, water, flour and bread are expected to be announced later on Sunday.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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