Iran, as a country between globalization and isolation, tradition and modernity, has had a capital importance on the international stage. TVs, newspapers, magazines, columnists, journalists, reporters, almost every medium has been trying to understand, monitor and interpret the events since the Islamic Revolution of 1979. Recently, this growing attention has focused on almost the same issues, such as the Iran’s nuclear program, UN sanctions, diplomatic efforts, President Mahmoud Ahmadinejad as a very controversial figure of Iran. However, Iran’s economic performance with its cautious approach to globalization has respectively attracted less international media attention. In this performance, the lasting subsidies granted by the Government of Iran to energy, food and some services have an important role in terms of their effects on the budget, monetary policy, development plans and the social welfare of the country.
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 18th largest economy in the world 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 OPEC’s second largest oil producer and the fourth largest exporter of crude oil in the world. With all its enormous potential, Iran, according to the World Energy Outlook of the International Energy Agency (IEA), spent 66,000 million dollars in 2009 in subsidies to fossil fuels, which places it in first place in the world. This subsidy has been a huge burden on the shoulders of the economy creating inefficiencies in the energy sector. In total, the subsidies, including those for food and various services, are estimated to cost Iran as much as $100 billion a year. Considering Iran’s GDP, which was $331 billion at current prices in 2009, one could imagine that the magnitude of subsidies saved would be 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 in 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 Islamic Revolution of 1979, the government had to increase subsidies due to declining oil production, continued high inflation, and a 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 regard to food and drug subsidies, the picture was reversed. These have played an important role in increasing child nutrition and reducing infant mortality. During the first and second presidencies of Mohammad Khatami, between 1997 and 2005, although the government was instructed to prepare the necessary reform of subsidies through Economic Development Plans, the attempts were unsuccessful due to the economic, social and political risk of the consequences. arising from sudden price increases.
The problem in Iran, even acknowledged by President Ahmadinejad, is the imbalance between high and low income people due to their enjoying public subsidies. Although the richest 20% of Iranians pay only a tenth of the 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 Act, the government pays cash subsidies to compensate low-income families against the adverse effects of possible inflation. In short, 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 passed 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 Fifth 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 produced price. The Law, in addition to energy products, also covers water, wheat, rice, edible oil, sugar, milk, postal services, air services, railway services, flowers and bread.
Indeed, 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 until now. Thanks to extensive debates of 15 years, 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 available for investments in infrastructure.
– Producers must prioritize energy efficiency in their production processes.
– Cash transfers lead people to be more effective in allocating their resources.
– The demand for fossil fuels will decrease due to high prices, so domestic prices will be adjusted to world prices and smuggling of these products out of Iran will be discouraged.
– The fall in demand will leave more energy resources for export.
– Iran’s domestic auto industry, which produces 1.5 million cars a year, will need to modernize with the aim of increasing energy efficiency and become more competitive in the export market.
– Reducing demand 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 lowering their domestic demand.
But concerns have been emanating from transparency and the adequacy of measures to avoid or mitigate negative repercussions of the program for low- and middle-income people. Therefore, the speed at which the subsidies are lifted 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 injustice in the distribution of income.
– The program will most likely trigger inflation depending on how fast prices rise.
– Strategies to minimize inflation are not enough.
– Uncertainties in spending saved income.
In accordance with the provisions of the Law, an independent organization was established to manage cash transfers that must be approved by Parliament. This organization has already started its work 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, investments in housing, medical services, social security, increased employment. In addition, 30% of the proceeds will be allocated to companies to invest in energy efficient technologies, improving public transportation, and supporting agricultural and industrial projects.
Now, the whole world is waiting for the first results of the implementation and trying to make estimates about its immediate impacts on the economy. As provided by law, the government has sent thousands of inspectors to check prices to prevent sudden increases by producers, and people have started withdrawing cash transfers. While first impressions show that there is no unusual reaction from people, the change has been calmly absorbed and business is going on 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 early 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 Surgeries” in its long history. Most people are concerned about the harsh results of the implementation process, potential protests, mismanagement of additional revenue, corruption, and adverse social consequences. However, with more transparency and good cooperation between the Government and Parliament, some concerns could be removed. Obviously, the political, social and economic risks are enormous for the people of Iran, especially under the threat of sanctions as a result of obstinate and uncompromising foreign policies. Although the goal is to end holding energy prices at a tenth of their global levels and stop massive energy waste, inflation, sanctions, corruption and their more likely severe social impacts could be the inevitable future. from Iran.