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Iran, as a country between globalization and isolation, tradition and modernity, has been of paramount importance on the international stage. Televisions, newspapers, magazines, columnists, journalists, reporters, almost all the media have been trying to understand, monitor and interpret the events since the Islamic Revolution of 1979. Recently, this increasing attention has focused on almost the same issues, such as the Iran’s nuclear program, UN sanctions, diplomatic efforts, President Mahmoud Ahmadinejad as a highly controversial figure in Iran. However, Iran’s economic performance with its cautious approach to globalization has respectively attracted less international media attention. In this performance, the long-lasting subsidies granted by the Government of Iran to energy, food, and some services play an important role in terms of their effects on the country’s budget, monetary policy, development plans, and social welfare.
Iran’s economic performance has been dominated primarily by its energy reserves. With a population of 73.6 million, GDP (PPP) of $828 billion, real GDP growth of 1.6%, trade volume of $154 billion, oil and gas exports of $66.2 billion ( 75.6% of its total exports), Iran was the world’s 18th largest economy in 2009.
Iran, as a member of OPEC, has the third proven oil reserves and the second natural gas reserves in the world. It is also the second largest OPEC oil producer and the world’s fourth largest exporter of crude oil. For all its enormous potential, Iran, according to the World Energy Outlook of the International Energy Agency (IEA), spent $66 billion in 2009 on fossil fuel subsidies, ranking it first in the world. This subsidy has been a huge burden on the shoulders of the economy that creates inefficiencies in the energy sector. In total, the subsidies, including those for food and various services, are estimated to cost Iran up to $100 billion a year. Considering Iran’s GDP, which was $331 billion at current prices in 2009, one could imagine that the magnitude of saved subsidies would go as high as 30% of GDP, which has a significant impact on Iran’s GDP. Iran.
The history of subsidies in Iran dates back to the 1970s, when high inflation rates and price volatility, particularly for fossil fuel products, prompted the government to establish a Consumer Support Fund with a view to control prices and distribute subsidies. This was replaced by the Organization for the Protection of Consumers and Producers in 1977. The government believed that subsidies were the best way to distribute the national wealth. During the 1979 Islamic Revolution, the government had to increase subsidies due to declining oil production, continued high inflation, and the growing black market. In fact, while Iran was among the most energy efficient countries in the 1980s, it is now one of the most wasteful. However, with respect to subsidies for food and medicines, the picture was reversed. These have played an important role in increasing child nutrition and reducing child mortality. During the first and second presidencies of Mohammad Khatami, between 1997 and 2005, although the government was entrusted with preparing the necessary reform of subsidies through Economic Development Plans, the attempts were unsuccessful due to the economic, social and political risk of the consequences. derived from sudden price increases.
The problem in Iran, even acknowledged by President Ahmadinejad, is the imbalance between high and low income people because they enjoy public subsidies. Although the richest 20% of Iranians pay only a tenth of total income tax, they benefit from 70% of public subsidies. The poor who use less energy get very few subsidies compared to the rich. The reasons for lifting subsidies are to manage consumption, promote productivity, create justice, eradicate the social gap and increase national production. Energy consumption in the country is extraordinarily higher than international standards.
Finally, in December 2008, the Government submitted to Parliament the “Targeted Subsidies Law” to gradually cut subsidies on fuel, electricity and certain goods over five years. By this date, the so-called “Major Economic Surgery” has begun in Iran. Under the Law, the government pays cash subsidies to compensate low-income families against the adverse effects of possible inflation. In summary, the plan is to move from subsidy policy to market-based energy pricing in five years with assistance to low-income groups. The government intends to distribute 50% of the tax savings resulting from subsidy cuts through direct cash or non-cash compensation.
Ultimately, it took a year for Parliament to pass this Act, and in December 2009, it was adopted by Parliament and then approved by the Guardian Council. Thus, since the beginning of 2010, the Government has been working on the implementation strategy of this Law. At the end of December 18, 2010, the Law entered into force. As established by the Law, the Government has to adjust the internal prices of gasoline , gasoline, liquid oil at the end of the V Economic Development Plan (2010-2015) so that the price of these products is not less than 90% of international prices. (FoB Persian Gulf). For electricity, all subsidies will be lifted until the end of the 5th Plan and the price must be 100% consistent with the final price produced. The Law, in addition to energy products, also covers water, wheat, rice, edible oil, sugar, milk, postal services, air services, rail services, flowers, and bread.
In fact, in Iran, the 30-year habit of living with artificially low prices has made it more difficult for governments to implement a substantial reform program so far. Thanks to extensive 15-year debates, this time a consensus has been reached on the need for this reform in public opinion. It is widely recognized that this Reform program will bring, among others, the following results:
– Additional income will be made available for investments in infrastructure.
– Producers should prioritize energy efficiency in their production processes.
– Cash transfers lead people to be more effective in allocating their resources.
– Demand for fossil fuels will decrease due to high prices, so domestic prices will adjust to world prices and smuggling of these products out of Iran will be discouraged.
– The drop in demand will leave more energy resources for export.
– Iran’s domestic auto industry, which produces 1.5 million cars per year, will need to modernize with the aim of increasing energy efficiency and become more competitive in the export market.
– Demand reduction will also make people more resistant to UN sanctions. The government has also accelerated the implementation of the reform program due to the UN sanctions against refined petroleum products with a view to reducing their domestic demand.
But concerns have been emanating from transparency and the adequacy of measures to avoid or mitigate the program’s negative repercussions for low- and middle-income people. Therefore, the speed of raising the subsidies and the methodology to compensate the different population groups are general concerns to which the following elements could also be added:
– There are doubts about the level and frequency of annual price adjustments.
– The definition of eligibility for compensation and the amount and duration of those payments are ambiguous. This could again cause inequality in the distribution of income.
– The program will most likely trigger inflation depending on the speed with which prices rise.
– Strategies to minimize inflation are not enough.
– Uncertainties in spending saved income.
Pursuant to the provisions of the Act, an independent organization was established to manage cash transfers that must be approved by Parliament. This organization already started its works a long time ago and collected statistics from households to verify their income from cash transfers, registered their bank accounts. According to the aforementioned law, 50% of the additional income obtained from the reduction of subsidies will be used for cash payments, housing investments, medical services, social security, employment increase. In addition, 30% of the revenue will be allocated to companies to invest in energy efficiency technologies, improvement of public transport and support for agricultural and industrial projects.
Now, everyone is watching the first results of the implementation and trying to estimate its immediate impacts on the economy. As provided by the Law, the Government has sent thousands of inspectors to check prices to avoid sudden increases by producers and people have begun to withdraw cash transfers. While the first impression shows that there is no unusual reaction from people, the change has been calmly absorbed and business is running as usual, it is reported that some producers have started to slow down the introduction of products to the market due to expected price increase. Obviously, it is too soon to reach a conclusion about this great economic transformation.
Last but not least, Iran is on the verge of performing one of the “Major Economic Surgery” in its long history. Most people are concerned about the harsh outcomes of the implementation process, possible protests, mismanagement of additional revenue, corruption, and adverse social consequences. However, with more transparency and good cooperation between the Government and the Parliament, some concerns could be eliminated. Obviously, the political, social and economic risks are enormous for the people of Iran, especially under the threat of sanctions as a result of stubborn and uncompromising foreign policies. Although the goal is to end the maintenance of energy prices at a tenth of their world levels and stop massive energy waste, inflation, sanctions, corruption and their most likely severe social impacts could be the inevitable future. from Iran.