Iranian Subsidy Policy

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Since 1980, after the 1979 Islamic revolution, Iran has subsidized petroleum products, basic foodstuffs, medical goods and utilities, first to manage hardships during the eight-year war with Iraq, and then to prevent political and economic challenges since. Three presidents since the 1990s have attempted to cut back subsidies that, as of 2010, cost Iran an estimated $70-100 billion annually,[1] with energy subsidies alone equaling around 40 percent of the government's 2006 budget, or $40 billion, and even more during 2008’s oil price peak.[2] Reforming Iran's subsidy policy has long been a contentious political issue domestically.[3]

Subsidy Reform

Road to reform

As in most oil-exporting countries, domestic energy prices have historically been set administratively in Iran. When oil prices were relatively stable and low before 2002, domestic energy prices were set at a level just high enough to cover production costs. This worked well for a time, but when international prices began rising after 2002, low domestic energy costs became increasingly disparate from the market value of oil. Further, Iran's high inflation rates and subsequent exchange rate depreciations led to the continued erosion of domestic energy prices in comparison to their international benchmarks. Cheap energy led to a rapid increase in energy demand and consumption, reducing the amount of Iran's oil and gas available for export. Combined with the fact that domestic energy prices were set at barely cost recovery levels, Iranian energy companies became increasingly starved of funds. By 2007, with Iran's capacity to increase its oil production and halt a decline in exports in doubt, the need for reform became increasingly clear.[4]

The subsidies program was plagued by two fundamental flaws, according to the US Institute of Peace: first, cheap prices fostered wasteful behavior; second, the subsidies did not benefit all Iranians equally, with the richest 30 percent of the population reaping the benefits of 70 percent of the government's government subsidies.[1]

Targeted Subsidy Reform Act of 2010

In 2008, international oil prices hovered around $2 per liter (including shipping), while domestic prices in Iran were just $0.10. Iranian officials emphasised the need to reduce waste and rationalise consumption, and by the end of that year Parliament began debate on the Targeted Subsidy Reform Act, which would compensate households in exchange for energy price increases. The Reform Act, approved in January 2010, was to coincide with Iran's Fifth Five Year Development Plan for the years 2010-2015[4] and bring prices of staples close to regional market levels;[2] the reform was to raise approximately 200 billion rials (about $20 billion) over that period. The Reform Act stipulated that households,[4] especially the poorest strata of the population,[2] would receive at least 50 percent of the increase in revenues derived from the reform, while 30 percent were to be used to assist Iranian companies restructure to adjust to the new, higher energy costs. The remaining twenty percent of the additional revenues would go to the government to cover its own higher energy bill.[4]

The actual percentage of the energy price increase was politically sensitive and had to take many factors into account, including the interests of those segments of the population (some 62 million people, or 80% of the total) who were to receive compensation, as well as the interests of the corporate, banking and government sectors.[4]

On December 18 2010, Iranian President Mahmoud Ahmedinejad announced that reforms would go into effect the following day December 19. To offset the negative impact of higher energy prices, government officials pledged to impose price controls on most products in the days immediately following the reform, and Iranian companies were pressured to reduce some consumer and industrial goods prices. Additionally, some energy prices were reduced and additional quotas or grants at low prices were allocated to the most vulnerable groups, such as truckers.[4]

Results of 2010 Reform Act

The implementation of reform quadrupled the price of gas and increased the price of diesel ninefold almost overnight. At the same time, the price of electricity was set to triple, the cost of water to quadruple, and the price of flour to rise 12-fold. In his announcement, Ahmadinejad promised that the compensation scheme of $40 per person per month would benefit 60 percent of Iran’s population, and that he hoped to wean Iranians off subsidies completely by the end of his term in 2013.[3]

The success or failure of the subsidy reforms has been hotly debated. Djavad Salehi-Isfahani of the Brookings Institution has called the government's decision to make two months worth of compensation payments prior to the implementation of reform a "clever" move.[3] According to the International Monetary Fund the Iranian government's pragmatic approach in dealing with the hardships caused by the energy price increases led to a successful implementation of the reform, and created a unique opportunity for Iran to reform its economy and accelerate economic growth.[4]

Iranian activist Dr. Fariborz Rais Dana, meanwhile, argued that the compensation handed out by the government would tilt the markets and eventually "evaporate under inflationary pressure", and that the elimination of subsidies would "create more unemployment, more poverty, and more misery."[5] Similarly, the Middle East Research and Information Project cited the possibility of inflation spiraling out of control.[2]

As Jahangir Amuzegar wrote in the Middle East Economic Survey in mid-2011, evaluating the record of subsidy reform is very difficult due to a lack of transparency within the Iranian government; information regarding basic results of the scheme remains shrouded in secrecy, censorship and contradictory official figures. In the absence of official figures, many anecdotal accounts have served to provide a window into the preliminary results of subsidy reform. In April 2011, the Deputy Minister of Petroleum revealed that 30% of the country’s gas consumers had failed to pay their gas bills, and several other parliamentary deputies reported higher unemployment in their districts due to higher gas and electric rates. According to Amuzegar there were sporadic reports of workers’ strikes due to missed wages.[6] As of January 2012, the full impact of Iran's subsidy reforms remained unclear.

External links

Targeted Subsidy Reform Act of 2010 full text (in English): www.icana.ir/News/Parliament/2010/1/52183/0/Default.aspx

References

  1. 1.0 1.1 "The Subsidies Conundrum" US Institute of Peace, Retrieved 26 January 2012.
  2. 2.0 2.1 2.2 2.3 "The Politics of Subsidy Reform in Iran" Middle East Research and Information Project, Retrieved 26 January 2012.
  3. 3.0 3.1 3.2 "Ahmadinejad cuts Iranian subsidies, quadrupling the price of gas" Christian Science Monitor, 20 December 2010.
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 "Iran–The Chronicles of the Subsidy Reform" IMF Working Paper, July 2011.
  5. "Subsidy Cuts Begin, Basic Commodity Prices Skyrocket" Tehran Bureau, 19 December 2010.
  6. "Iran’s Subsidy Reform: A Progress Report" Middle East Economic Survey, 19 June 2011.