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Merchants in the Tajrish Bazaar in north Tehran re-open their shops after two days of protests. The strike was the first by Iranian bazaaris since the Islamic revolution in 1979.
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After around 18 days of enacting the value added tax (VAT) law in Iran, Ahmadinejad's government had to scrap it after two days of protests by merchants in most Iranian cities. Protests, which reached the level of a general strike, engulfed major cities, such as Tehran, Tabriz, and Isfahan. The strike was the first by Iranian bazaar merchants since the Islamic revolution in 1979.
As a result of the wave of protests, the government announced postponing imposing the law for two months, a statement that was followed by another that declared delaying its enforcement till next year.
President Ahmadinejad sent a message to the treasury minister, asking for a clear plan for the enactment of the law that enables a better implementation and a deeper understanding within two months.
The law, which imposes an added tax of 3 percent on goods and services on merchants, were first discussed during the presidency of Muhammad Khatami. Khatami’s government introduced the proposal to the seventh Shura Council, which was under the Conservatives’ control. The law passed the parliament, and it was approved by the Council of Guardians and the Expediency Council to be enacted on Sep. 22, 2008.
The law proposal was part of a strategy for reducing the government’s dependence on oil exports and increasing tax revenues in the Iranian balance of payments. Such a policy was a cornerstone in the Reformists’ plan for economic reform, which Khatami’s government strived to provide with a legislative cover.
A Significant Precedent
| Iran's economy, which at first seemed unaffected by the international crisis, appears to be on the verge of a grave crisis. |
For the first time in 30 years, bazaar merchants strike in major cities, such as Tehran, Isfahan, Tabriz, Mashhad, and Kermanshah. Interestingly, a wide range of merchants from various industries, such as jewelry making and carpet weaving, took part in the protests. It is important to note that those industries are the major ones in Iranian bazaars, which means that a strike among their workers can paralyze a whole range of other small industries that depend on them.
The continuity of the strike for two days was a clear indication that there is a serious crisis in the internal dynamics of Iranian economy. The Islamic Republic’s economy, which seemed unaffected directly by the international financial crisis because of the economic isolation imposed by the United States and other Western countries, appears to be on the verge of a grave crisis.
The new law forces the merchants indirectly to increase the prices of their goods in order to be able to pay the tax. According to bazaaris, such an increase should range between 10 and 16 percent. And in light of the current inflation rate in Iran, which stands at 29 percent, this would mean a further decrease in the purchase power of Iranian citizens. Such a scenario raises fear among bazaar merchants of a recession that can hit their business interests.
Also, some observers argue that most of the authorized trade methods in the industries of jewelry making and carpet weaving are still traditional; therefore, it is difficult to use modern taxing and accounting systems to monitor them. Consequently, modernizing those industries with the purpose of applying modern taxing and accounting systems has been the subject of many discussions recently.
From the government’s viewpoint, the new law will enable it to fight tax illusion and provide the national treasury with a constant source of income – an argument that does not seem very convincing for bazaar merchants.
The essence of the problem, according to some experts, lies in the lack of communication between the government and the merchants; it does not seem that the new law is fully understood in terms of its implementation and mechanisms, which created much tension among merchants.
There is a widespread belief among bazaaris that the new law will discourage people from buying. Critics of Ahmadinejad’s government argue that the absence of proper communication has increased public panic over the law.
Given the plunge in oil prices, the recent wave of protests probably reflect the tension dominating the Iranian economic arena.
The balance of payments proposed by Ahmadinejad’s government depended heavily on the skyrocketing oil prices. It is important to note that Iran has gained a balance of payments surplus of $80 billion because of the high prices of oil.
However, the continuing drop in oil prices – which is bringing the barrel price down to around $60 – has started to disturb Ahmadinejad’s government, given the growing criticism of its economic performance, and the way it has been using the extra income.
In light of the decline in oil revenues, criticism of the current government is expected to increase with the decrease in the next Iranian balance of payments, which will be the last presented by president Ahmadinejad who will probably leave the seat of presidency soon.
Mixed Reactions
| Panic stems from the fact that protests were carried out by the traditional allies of the religious institution in Iran – the bazaar merchants. |
The protests of bazaaris and craftsmen acquire much significance because they are taking place against the backdrop of an early start of the presidential race, and a shaking economy that was badly hit by the drop in oil prices and economic isolation. Also, the fact that bazaar merchants have always been the supporters of the regime, particularly during hard times, indicates the seriousness of the incident. Therefore, the government was keen to contain the situation, which was reflected in the statements made by key government officials.
“Merchants and craftsmen are the protectors of the Islamic Republic,” stated Ayatollah Hashemi Rafsanjani, head of the Expediency Council, urging executives to work more seriously.
However, some Conservative voices attempted to stigmatize protestors. On Oct. 13, 2008, for instance, Hussein Shari’temdari – editor-in-chief of the Keyhan newspaper – described the strikers as “greedy capitalists who seek bad money.”
“The wave of strikes is fuelled by external players and internal conspirators,” wrote Shari’atmedari in the conservative newspaper, arguing that the strikers are only a minority that do not belong to the mainstream merchants who are characterized by piety.
The controversy over the bazaaris’ and craftsmen’s protests reflect the nature of the Iranian political scene that gets engulfed in panic at the approach of presidential elections. Nevertheless, this time panic stems mainly from the fact that the protests were carried out by the traditional, historical allies of the religious institution in Iran – the bazaar merchants.
Historically, the religious credibility bestowed on the Islamic Republic by the hawza (religious institution) has been supplemented with the economic credibility granted by the bazaar merchants and craftsmen.
The recent developments in Iran that followed the enforcement of the VAT law highlight the overlapping between the internal and external problems faced by the Islamic Republic. Analyzing internal problems outside the international context can result in misreading the situation.
It can be argued that Iran’s international image and the current financial crisis are negatively affecting the internal situation in the Islamic Republic negatively despite the denials issued by the government.
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