Iran's populist government is backing away from a plan to phase out subsidies on energy and other basic commodities, analysts say. Instead, it is overpaying cash compensation to the poorer members of Iranian society to maintain political support.
Official estimates admit that for decades Iran spent $100bn a year on subsidising basic commodities -- although the support was widely viewed as unsustainable and distorting supply and demand signals.
In December last year, Mahmoud Ahmadi-Nejad, the president, embarked on a parliament-approved plan under which subsidies on energy products and foodstuffs were to be phased out gradually over a five-year period.
The plan was backed by all Iranian political groups as well as the International Monetary Fund and was viewed as a much-needed reform to the country's state-dominated economy.
However, economic analysts believe the government's populist approach has ended up inflicting a heavier burden on the economy and say that the government is moving away from the initial goal of making prices more realistic.
Under the plan, half of the government's savings from the cuts in subsidies were to be redistributed to those who registered to receive financial assistance, regardless of means. Now every man, woman and child can receive IR445,000 ($42.30) a month.
The remainder of the savings were to go to the industrial, agricultural and services sectors as well as state-owned organisations to help them cope with higher costs.
But analysts say the only section of the scheme which has been implemented is the cash payment to people.
Now, about 70m out of Iran's 75m-strong population is in receipt, which is generally considered to cost more than the old subsidies.
"People now receive cash two times more than their consumption which means our goal of managing consumption of energy products is not being achieved," Jamshid Ansari, a reform-minded parliamentarian, tells the Financial Times.
The cash payments have so far been benefiting up to 30m mainly rural poor.
They and their counterparts in the cities are even net winners because the per capita consumption of their populous families is low.
"The government is buying political support through an uneconomic and illogical way of extra subsidies payments despite the budget deficit this policy has been creating," says an analyst, who asked not to be named.
Akbar, a janitor in an affluent neighbourhood in northern Tehran, says he has not yet spent his family's payments which are almost equal to half of his monthly salary. "We have saved it so far," he says.
However, the middle class who are estimated to be also about 30m in number usually live in apartments equipped with gas and electricity for heating and cooling systems. They may own at least one car and do not have many children.
Officially, the price of gas has risen fivefold, electricity and water by three times, flour by 40 times and petrol between four and seven times.
Thursday, April 28, 2011
"Overpaying the Poor"
I submit what the empire likes the least about the Islamic Republic of Iran is not its nuclear program but its being prone to "overpaying [sic] . . . the poorer members of Iranian society." Cf. Najmeh Bozorgmehr, "Iran's Handouts Prove Costly" (Financial Times, 28 April 2011):