Iran, as a country between globalization and isolation, tradition and modernity has been of capital importance in the international arena. Televisions, newspapers, magazines, columnists, journalists, reporters, almost every media outlet has been trying to understand, monitor and interpret developments since the 1979 Islamic Revolution. Recently, this growing attention has focused on almost the same issues as the show. Iran’s nuclear, UN sanctions, diplomatic efforts, President Mahmoud Ahmadinejad as a highly controversial figure of Iran. However, Iran’s economic performance with its cautious approach to globalization has attracted, respectively, less international media attention. In this performance, the long-term subsidies granted by the Government of Iran to energy, food and some services play an important role in terms of their effects on the budget, monetary policy, development plans and social welfare of the country. country.
Iran’s economic performance has been dominated primarily by its energy reserves. With its population of 73.6 million, $ 828 billion of GDP (PPP), 1.6% of real GDP growth, $ 154 billion of trade volume, $ 66.2 billion of oil and gas exports ( 75.6% of its total exports), Iran was the country’s 18th largest economy. world in 2009.
Iran, as a member of OPEC, has the world’s third largest proven oil reserves and the second largest natural gas reserves. It is also OPEC’s second-largest oil producer and the world’s fourth-largest oil exporter. With all its enormous potential, Iran, according to the International Energy Agency’s (IEA) World Energy Outlook, spent $ 66 billion in 2009 on fossil fuel subsidies, ranking it first in the world. This subsidy has been a huge burden on the economy creating inefficiencies in the energy sector. In all, it is estimated that subsidies, including those for food and various services, are believed 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 reach 30% of GDP, which has a significant impact on Iran’s GDP.
The history of subsidies in Iran dates back to the 1970s, when high rates of inflation and price instability, 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 the growth of the black market. In fact, while Iran was among the most energy efficient countries in the 1980s, it is now one of the wasteful. However, when it came to food and drug subsidies, the picture was reversed. These have played an important role in increasing infant nutrition and reducing infant mortality. During Mohammad Khatami’s first and second presidency, between 1997 and 2005, although the government was tasked with preparing the necessary subsidy reform through economic development plans, the attempts were unsuccessful due to economic and social risk. and political consequences of sudden price increases.
The problem in Iran, even recognized by President Ahmadinejad, is the imbalance between high-income and low-income people because they enjoy public subsidies. Although the richest 20% of Iranians pay only one-tenth of the total income tax, they benefit from 70% of public subsidies. The poor who use less energy receive very few subsidies compared to the rich. The reasons for lifting the subsidies are to manage consumption, promote productivity, generate 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 introduced the “Subsidy Targeting Act” to Parliament to gradually cut subsidies for fuels, electricity and certain goods over five years. By this date, the so-called “Major Economic Surgery” has begun in Iran. According to the Law, the government pays cash subsidies to compensate low-income families for 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 lower 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 Parliament a year 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 must adjust the internal prices of gasoline, gasoline and liquid oil before 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, bread.
Indeed, in Iran, the 30-year habit of living with artificially low prices made it more difficult for governments to implement a substantial reform program so far. Thanks to extensive discussions 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 make people more effective in allocating their resources.
– Demand for fossil fuels will decline due to high prices, so domestic prices will adjust 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 have to be modernized with the aim of increasing energy efficiency and will be more competitive in the export market.
– Demand reduction will also make people more resilient 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 its domestic demand.
But concerns have arisen from the transparency and adequacy of measures to avoid or mitigate the negative impacts of the program for both low- and middle-income people. Therefore, the speed with which subsidies are removed and the methodology to compensate different population groups are general concerns that 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 most likely triggers inflation depending on the rate of rise in prices.
– Strategies to minimize inflation are not enough.
– Uncertainties in spending saved income.
In accordance with the provisions of the law, an independent organization was created to manage cash transfers which must be approved by Parliament. This organization has already started its work a long time ago and collected statistics from households in order 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 go to companies to invest in energy efficiency technologies, improve public transport and support agricultural and industrial projects.
Now, everyone is looking at the first results of the implementation and trying to make estimates about its immediate impacts on the economy. As provided by the Law, the Government has sent thousands of inspectors to check prices in order to avoid any sudden increase on the part of producers and people have started withdrawing cash transfers. While the first impression shows that there is no unusual reaction on the part of the people, the change has been absorbed calmly and the business continues on its usual course, some producers are reported to have started to slow down the introduction of products to the market due to expected price increase. Obviously, it is too early to come to a conclusion for this great economic transformation.
Last but not least, Iran is on the brink of performing one of the “major economic surgeries” in its long history. Most people are concerned about the harsh results 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 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 keeping energy prices at one-tenth of their global levels and to halt massive energy waste, inflation, sanctions, corruption, and their severe social impacts could most likely be the inevitable future of Iran.