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Subsidies in Iran

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According to the government, $100 billion is spend on subsidies each year.

The Iranian targeted subsidy plan was passed by the Iranian Parliament on January 5, 2010.[1] The subsidy plan is one of the most important undertakings in Iran's recent economic history.[2] The goal of the subsidy reform plan is replace subsidies on food and energy (80% of total) with targeted social assistance, in accordance with Five Year Economic Development Plan and move towards free market prices in a 5-year period.[3] The subsidy reform plan is part of a broader Iranian economic reform plan.

According to the government, approximately $100 billion is spent on subsidizing energy prices ($45 billion for the prices of fuel alone) and many consumable goods each year including bread, sugar, rice, cooking oil and medicine.[4][5] Although some experts believe direct subsidies are about $30 billion.[6]

The subsidy system has been inherited from the Iran-Iraq war era but was never abolished. Iran is one of the largest gasoline consumers in the world, ranking second behind the United States in consumption per car.[7] The government subsidy reform has been years in the making for various reasons.[8][9][10] Iran's Supreme Leader has backed the government's subsidy reform plan.[11]

Objectives

See also: Energy in Iran and Fuel smuggling in Iran
Subsidizing fuel prices has been the primary factor accounting for a 500 percent rise in Iran's domestic energy consumption over the past three decades, while the size of the population has doubled over the same period.[12]

The stated goal of the subsidy reform is "to rejuvenate Iran's economy, increase productivity, give it a new footing and bring it out of the slump it has been in for so long".[13] Concrete consequences of the economic reform plan will be:

  1. make Iran less vulnerable towards new UN sanctions because of its nuclear program by reducing fuel imports;
  2. concurrently, save money for the Iranian people by ending a multi-billion dollar-a-year contraband as 17% of daily fuel production in Iran is smuggled abroad.[14][15] Due to subsidies, Iran had long had one of the cheapest gas prices in the world, 10 cents per liter or 40 cents per gallon;[14]
  3. reduce waste and consumerism among the higher income strata that has enjoyed the same subsidies as the poor until now;[16]
  4. reduce air pollution by reducing car traffic in Tehran;[16]
  5. increase social justice through targeted social assistance, since the richest decile of households benefits 12 times more from gasoline subsidies than the poorest decile;[17]
  6. as a result, increase productivity, efficiency, competitiveness of Iran's economy, economic growth, oil exports and per capita income.[18][16][19]

Government budget

See also: Public finance and fiscal policy in Iran
Iran's oil and gas projected revenues by the IMF. Iranian officials estimate that Iran's annual oil and gas revenues could reach as much as $250 billion by 2015.[20]

According to the 2010 draft budget, the government is planning to generate $40 billion by 2011 from the reduction or removal of subsidies - as opposed to the $20 billion authorized by the law during the first year. On March 8, 2010, Iranian Parliament finally approved a $347-billion budget, based on a $20 billion allocation from subsidies cuts and $65 oil price.[21][22] President Ahmadinejad has proposed holding a referendum on this subject.[23][24]

As a compromise, the Iranian Parliament has granted Ahmadinejad's government the freedom to disperse the $20 billion worth of yearly subsidies over a six- or nine-month period, allowing larger individual cash payments that are on par with those that would have been made with a larger subsidy cut.[4]

IMF Projections/Scenarios[16]
2008/09 2014/15
Baseline		 2014/15
Energy price reform
Real GDP growth -3.7% 3.5% ~8%
Real GDP growth (non-oil) 2.9% 3.8% ~8%
Crude oil exports 2.4 Mb/d[25] 1.8 Mb/d ~2.5 Mb/d
Current account 7.2% 0.2% ~2.5%
CPI inflation 25.4% 10% ~7% (peaking above 30% in 2011)
Gross official reserves $80 billion $98 billion ~$170 billion

Implementation

See also: Transition economy
Iran's gasoline and gas-oil production and consumption projection (2008-2012)

For implementation of the bill an entity shall be established as a duly authorized governmental company under the name "Targeting Subsidies Organization".[26] The amount saved by the government, 30% of its annual budget based on a $65 dollar oil price[27][28] according to President Ahmadinejad,[14][29] will be distributed as follows:

The plan will commence with energy, fuel and utilities in the first year and consumable goods will start in the second year. The start of the cuts will coincide with the beginning of the second half of the Iranian year on Sept. 23, 2010.[30] At that time, the 2007 Gas rationing plan will come to an end.[31] In September 2010, Iran's Statistics Bureau announced that the implementation will be delayed by one month (until October 2010) because they are still collecting new information regarding financial situation of households to establish accounts for them where they can receive government assistance.[32] Finally, the government started the implementation of the targeted subsidy plan through cash payments to 90% of the general population on December 18, 2010.[28]

Income data

See also: Labor and tax laws in Iran
According to the IMF, until recently a four-member Iranian household received an average of $4,000 a year in subsidies for oil and natural gas, compared with a typical annual income of about $3,600 a year.

The administration has said earlier that it will be able to allocate different payment amounts to different people.[4] To that end, in 2009, forms were distributed asking Iranians to report income, assets and property but the question remains on how the government will verify this information gathered by self-reporting. Many people have chosen not to report or withhold information.[33] The administration has categorized the people into three income brackets; namely lower, middle, and higher for the implementation of the subsidy reform plan.[34] According to the IMF, until recently a four-member Iranian household received an average of $4,000 a year in subsidies for oil and natural gas, compared with a typical annual income of about $3,600 a year.[35]

Cash payments

See also: Banking and Insurance in Iran and "Justice shares" distribution in Iran

The government has indicated it would distribute $40 a month per person to 90% of the general population to ease the economic pain of lost subsidies.[36][37] [38] This represents 2.5 billion dollars a month in the state budget.[39] President Mahmoud Ahmadinejad says implementation of the targeted subsidy system will eradicate unemployment and poverty in Iran within three years.[1] In 2010, Iran's Department of Statistics announced that 10 million Iranians live under the absolute poverty line and 30 million live under the relative poverty line.[40]

Price adjustments

See also: National Iranian Oil Refining and Distribution Company

Many Iranian experts agree that these unsustainable subsidies encourage waste among goods, including in the production sector, ranging from gasoline to bread that must be stopped and the only way to do that is to redirect subsidies. [13] According to the IMF, Iranians can expect the first price hike to lift energy product prices between four and 20 times previous levels, with prices surging even higher eventually.[41]

Commodity
(or service)		 Old Price
(as of 12/17/2010)		 New Price/Increase
(as of 12/18/2010)		 Decrease in consumption
(as of 01/01/2011)[42][43]		 Target price
(by 2015)
Gasoline 10 cents/liter; 40 cents/liter (beyond 50 liters/month)[44] 40 cents/liter; 70 cents/liter (beyond the quota)[44] 20% (from 64 million to 53 million liters/day)[45][46][42][43] Prices for oil derivatives not less than 90% of the prices in the Persian Gulf market (f.o.b)[47]
Diesel $0.06/gallon[43] $0.6/gallon ($1.4/gallon on the open market)[43] 20% (from 54 to 41 million liters/day)[43] —
Natural gas — >500%[48] 6% (for cooking gas)[48] 75% of the average export price for the general population; 65% of the average export price for petrochemical companies for 10 years.[49]
Electricity 1.6 cents/KWh[50] <300%[48] — at production cost (8 cents/KWh as of 2010; 10 cents in 2015)[49][50][51]
Water — 300-400%[48] (2,500 rials/m3 for household usage; 4,128 rials/m3 for industrial usage)[48] 5%[42] at production cost (~10,000 rials/m3 for household usage)[49][52]
Bread (loaf of brick oven bread) 5-20 cents[43] 200%[53] (40 cents) — —
Taxi & inter-city buses — 10-18% (city buses, domestic flights and the metro, are not allowed to raises prices at all)[54] — —
Air+rail transport — >30% (not yet implemented)[55][56] — —

Since 2010, it has been reported that consumption of four petroleum products – diesel fuel, gasoline, fuel oil, and kerosene – has dropped an average of 38%.[45]

Other determinants

According to the plan, the following determinants will also be considered when setting energy prices:[47]

  • the type of consumption whether agricultural, industrial and civil;
  • targeted subsidy plan should be implemented in proportion with geographical regions such as cold and warm areas. Warm regions consume more electricity during summer while cold regions consume more gas during winter;
  • time of consumption such as during peak and off-peak hours;
  • the consumption demand, whether it is low or high. If it is high the prices should be higher.

Inflation

See also: Inflation and monetary policy in Iran
Between 2002 and 2006, the rate of inflation in Iran has been fluctuating between 12 and 16%[57]

The government has been given the responsibility of deciding how much the prices should rise in a year, as long as the subsidy cuts on gasoline and other refined products, natural gas, electricity, water, food (sugar, rice, cooking oil and bread), health and education are between $10 and 20 billion dollars annually. Estimates indicate that the government has to increase existing prices by an average of 2.5 times to achieve the lower target and by 4 times for the maximum target.[49] Iran wants to save up to $100 billion on subsidies within three years.[58][59] Critics say that if the government goes for the top of this range inflation could rise up to 40% through the economy.[33] The International Monetary Fund, however, has predicted a more moderate rise in inflation of just 32 percent.[12] As of January 2010, the official inflation rate stands at 15 percent.[59] The cost of living in Iran, according to the Majlis Research Center, could rise by up to 60 percent.[12] [60] Ahmadinejad's administration contends that the negative side effects will be transient and that the projections are based on out-of-date models.[61]

Effect on economic sectors

See also: Tehran Stock Exchange

The banking sector in Iran is viewed as a potential hedge against the removal of subsidies, as the plan is not expected to have any direct impact on banks.[62] On the other side, the cement industry in Iran is one of the economic sectors that will be hit the hardest in Iran following of the subsidy reform plan, because many Iranian cement factories are energy inefficient.[49] Taxi, delivery and truck drivers have also been adversely affected by the recent gas price increase.[63]

Criticism

According to earlier critics, even if half of $20 billion is passed as part of the compensation to the poorer 50% of the Iranian society, it will amount to $25 dollars per eligible person per month; "no way near enough to make up for such inflation rates".[33][29] On the other side, it was not clear in what form the compensation would be distributed, direct cash or goods. Another concern is the accuracy of government information on family incomes. According to some western reports, cash payments have been denied to some opponents of the regime during the distribution phase.[64] It has been reported that while the subsidy reform plan needs further adaptation and fine-tuning, citizens must separate the questions of public policy from the issues of government legitimacy.[65]

See also

References

  1. ^ a b "Majlis approves Ahmadinejad's subsidy bill". Presstv.com. 2010-01-05. Retrieved 2010-01-30.
  2. ^ PressTV: 'Subsidy reforms halt fuel consumption'. Retrieved December 30, 2010.
  3. ^ "Resources - Economic Indicators". Atieh Bahar. 2008-10-20. Retrieved 2010-01-30.
  4. ^ a b c "Why Iran's Ahmadinejad is pushing to cut popular government subsidies". CSMonitor.com. 2010-04-30. Retrieved 2010-05-05.
  5. ^ Iran daily: Energy Subsidies Reach $84b. Retrieved February 13, 2010.
  6. ^ "Iran may limit cooperation with nuclear watchdog". Los Angeles Times. 2010-12-18. Retrieved 2010-12-23.
  7. ^ United States Energy Information Administration: Environmental Issues in Iran (2000). Retrieved August 16, 2009.
  8. ^ "President: Opposition to subsidy plan is 'politically motivated'". Tehran Times. 2009-12-07. Retrieved 2010-01-30.
  9. ^ "Majlis special committee to study economic reform plan". Tehran Times. 2008-06-24. Retrieved 2010-01-30.
  10. ^ Dr. Amuzegar, Jahangir (2005-10-03). "Iran's Third Development Plan: an Appraisal". Retrieved 2010-07-26.
  11. ^ New York times: Supreme Leader in Iran Supports Bid to Cut Subsidies Retrieved January 6, 2011
  12. ^ a b c RFE/RL/Payvand.com: Sanctions And Iran's Achilles Heel. Retrieved June 11, 2010.
  13. ^ a b c January 09, 2010 (2010-01-09). "Press TV- Iran Today- President Ahmadinejads economy reform plan-01-08-2010- (Part 1)". YouTube. Retrieved 2010-01-30.{{cite web}}: CS1 maint: numeric names: authors list (link)
  14. ^ a b c "'17 percent of daily fuel production smuggled abroad'". Presstv.com. 2009-09-26. Retrieved 2010-01-30.
  15. ^ RAND Corportaion: The Rise of the Pasdaran. Retrieved June 10, 2010.
  16. ^ a b c d IMF: Iran to Cut Oil Subsidies in Energy Reform. Retrieved October 13, 2010.
  17. ^ "Iran - Country Brief". Go.worldbank.org. Retrieved 2010-01-30.
  18. ^ "Targeted Subsidies in Iran". Press TV. Retrieved 2010-01-30.
  19. ^ http://www.imf.org/external/pubs/ft/scr/2010/cr1074.pdf
  20. ^ Mehr News Agency: Iran eyes $250 billion annual revenue in 5 years. Retrieved December 22, 2010.
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  24. ^ Lawmakers assail Ahmadinejad, propose debate. Retrieved March 20, 2010.
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  28. ^ a b Post a Job (2010-12-19). "Iran Cuts Energy Subsidies as Sanctions Take Toll". BusinessWeek. Retrieved 2010-12-23.
  29. ^ a b Yoshie Furuhashi (2010-01-16). "Djavad Salehi-Isfahani, "Iran: A Good Time for Goodbye to Subsidies"". Mrzine.monthlyreview.org. Retrieved 2010-01-30.
  30. ^ "Iranian Subsidy Cuts to Begin in September, Ahmadinejad Says". Businessweek.com. 2010-05-13. Retrieved 2010-05-26.
  31. ^ PressTV: Iran plans to cut subsidized fuel. Retrieved June 7, 2010.
  32. ^ "Iran delays government subsidy reform again". Payvand.com. 2006-11-22. Retrieved 2010-10-08.
  33. ^ a b c January 09, 2010 (2010-01-09). "Presstv". Youtube.com. Retrieved 2010-01-30.{{cite web}}: CS1 maint: numeric names: authors list (link)
  34. ^ Tehran Times: 40 percent of families in lower income bracket. Retrieved February 2, 2010.
  35. ^ "No. 3789 | Front page | Page 1". Irandaily. 2010-09-30. Retrieved 2010-10-08.
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  37. ^ Solomon, Jay (2010-10-23). "Iran to Pare Food, Gas Subsidies". Wall Street Journal: A8. {{cite journal}}: |access-date= requires |url= (help); Unknown parameter |coauthors= ignored (|author= suggested) (help)
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  40. ^ Radio Zamaneh: Ten Million Iranians Under "Absolute Poverty Line" Retrieved May 28, 2010
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  50. ^ a b   (2006-11-22). "Blackouts Threaten Iran". Payvand.com. Retrieved 2010-05-05.{{cite web}}: CS1 maint: extra punctuation (link)
  51. ^ Iran Daily: Electricity Bourse Ready for Inauguration Retrieved January 8, 2011
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  55. ^ "Big jump in air and train ticket prices in Iran". Payvand.com. 2006-11-22. Retrieved 2010-10-08.
  56. ^ Mehr News Agency: Plane, train ticket prices not to increase for nowRetrieved January 9, 2011
  57. ^ "Iran Inflation Rate". index Mondi.
  58. ^ "Iran: Ahmadinejad Submits Ambitious Budget". Payvand.com. 2006-11-22. Retrieved 2010-01-30.
  59. ^ a b Derakhshi, Reza. "Iran MPs reject call for subsidy bill withdrawal - Yahoo! News". News.yahoo.com. Retrieved 2010-01-30. [dead link‍]
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  61. ^ "FRONTLINE: Tehran Bureau: Iran's Subsidies Conundrum". PBS. Retrieved 2010-12-23.
  62. ^ Turquoise Partners: "Iran Investment Monthly" - October 2010. Retrieved October 30, 2010.
  63. ^ "Iran | Economy | Sanctions". Globalpost.com. Retrieved 2011-01-06.
  64. ^ Tait, Robert. "Economists Say Iran Subsidy Plan A Weapon Of Political Control." Radio Liberty, 20 December 2010.
  65. ^ Nader Habibi: Reaction to Iranian Government's Subsidy Reform Program. Retrieved January 6, 2010.
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