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Iran gets out the eraser to fight inflation

President Mahmoud Ahmadinejad says his government is planning to cut zeros from its currency in an apparent effort to fight Iran's double-digit inflation.
/ Source: The Associated Press

President Mahmoud Ahmadinejad said Wednesday his government is planning to lop off zeros from its currency in an apparent fight against Iran's double-digit inflation.

Ahmadinejad's government is preparing to enact a law in April that would sharply slash energy and food subsidies. The move could provoke more unrest in a country already struggling under international sanctions, high inflation and a government crackdown on the opposition.

"It is planned to remove zeros off currency and make the rial value real," Iran's government website quoted Ahmadinejad as saying. "The value of rial, under the law, is calculated on the basis of the price of gold. For some reason, the rial has been devaluated and we have to return its value to the one existing in the law."

The Iranian rial is now traded at 10,000 rials to one U.S. dollar. That compares to 70 rials against the dollar in 1979, the year an Islamic revolution toppled the pro-Western Shah Mohammad Reza Pahlavi.

The governor of Iran's Central Bank, Mahmoud Bahmani, last month said three or four zeros will be removed from the currency, depending on the results of the government's subsidy cuts.

The law to slash fuel and food subsidies was formally approved by Iran's constitutional watchdog Guardian Council last week. The law would gradually cut energy subsidies, bringing heavily discounted fuel prices closer in line with international prices.

Officials say the step is needed to recoup some of the roughly $100 billion spent yearly on subsidies by OPEC's second largest oil exporter. Subsidies currently consume about 30 percent of the government budget at a time when high spending and last year's collapse of oil prices have hammered Iran's economy.

The aim is to channel the funds directly at the poorer segments of the population and building projects.

Of the estimated $100 billion savings, the government promises to spend half on cash payments to families it considers vulnerable. That money would be give to families over a five-year period.

Another $30 billion would be earmarked for industries and economic infrastructure projects, and the remaining $20 billion will be put in the government's treasury for future plans and projects.

Critics say that providing that much money to the government will spread corruption amid concerns that some of the cash will be spent to undermine political opponents instead of improving the economy.

Ahmadinejad said Iranians should not fear the subsidy cuts.

"There is nothing to be worried about ... Living conditions will get better if subsidies are paid (in cash) to the people," he said.

Ahmadinejad said 70 percent of Iran's 70 million population will get initial cash payments. The rest of the nation will get it at some point in the future, he said.

Experts have warned that a monthly cash payment of up to $20 per person won't be enough to balance the 60 percent inflation rate Iranians will face in April.

Iran's economic woes have been one of Ahmadinejad's biggest challenges.