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Iranian Economic Reform Plan

Iranian Economic Reform Plan

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The Iranian targeted subsidy plan also known as the subsidy reform plan was passed by the Iranian Parliament on January 5, 2010. The government has described the subsidy plan as the "biggest surgery" to the nation's economy
Economy of Iran
The economy of Iran is the eighteenth largest in the world by purchasing power parity and according to Iranian officials' claims is going to become the 12th largest by 2015. The economy of Iran is a mixed and transition economy with a large public sector and some 50% of the economy centrally planned...

 in half a century and "one of the most important undertakings in Iran's recent economic history". The goal of the subsidy reform plan is to replace subsidies on food and energy
Energy in Iran
Energy resources in Iran consist of the third largest oil reserves and the second largest natural gas reserves in the world. Iran is in a constant battle to use its energy resources more effectively in the face of subsidization and the need for technological advances in energy exploration and...

 (80% of total) with targeted social assistance, in accordance with Five Year Economic Development Plan and move towards free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

 prices in a 5-year period. The subsidy reform plan is the most important part of a broader Iranian economic reform plan.

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

The subsidy system has been inherited from the Iran-Iraq war
Iran-Iraq War
The Iran–Iraq War was an armed conflict between the armed forces of Iraq and Iran, lasting from September 1980 to August 1988, making it the longest conventional war of the twentieth century...

 era but was never abolished. Iran is one of the largest gasoline consumers in the world, ranking second behind the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 in consumption per car. The government subsidy reform has been years in the making for various reasons
History of the Islamic Republic of Iran
One of the most dramatic changes in government in Iran's history was seen with the 1979 Iranian Revolution where Shah Mohammad Reza Pahlavi was overthrown and replaced by Ayatollah Ruhollah Khomeini...

. Iran's Supreme Leader
Supreme Leader of Iran
The Supreme Leader of Iran is the highest ranking political and religious authority in the Islamic Republic of Iran. The post was established by the constitution in accordance with the concept of Guardianship of the Islamic Jurists...

 has backed the government's latest subsidy reform plan.

Objectives


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". Concrete consequences of the economic reform plan are that Iran will be less vulnerable to UN sanctions
Sanctions against Iran
This article outlines economic, trade, scientific and military sanctions against Iran, which have been imposed by the U.S. government, or under U.S. pressure by the international community through the United Nations Security Council...

 because it will reduce fuel imports. The reform plan will also save money for the Iranian people because it will end a multi-billion dollar-a-year contraband (17% percent of fuel production in Iran is smuggled abroad daily). 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.

Implementation of the plan will reduce waste and consumerism
Consumerism
Consumerism is a social and economic order that is based on the systematic creation and fostering of a desire to purchase goods and services in ever greater amounts. The term is often associated with criticisms of consumption starting with Thorstein Veblen...

. In fact, according to official data, the higher income strata of the population has enjoyed the same subsidies as the poor until now. On the other side, subsidies reduction will reduce air pollution by reducing car traffic in Tehran. Finally, the subsidy plan will increase social justice
Social justice
Social justice generally refers to the idea of creating a society or institution that is based on the principles of equality and solidarity, that understands and values human rights, and that recognizes the dignity of every human being. The term and modern concept of "social justice" was coined by...

 through targeted social assistance. According to official data, the richest decile of households benefits 12 times more from gasoline subsidies than the poorest decile. Overall, implementation of the plan will increase productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...

, efficiency
Energy conversion efficiency
Energy conversion efficiency is the ratio between the useful output of an energy conversion machine and the input, in energy terms. The useful output may be electric power, mechanical work, or heat.-Overview:...

, competitiveness of Iran's economy
Global Competitiveness Report
The Global Competitiveness Report is a yearly report published by the World Economic Forum. The first report was released in 1979. The 2011–2012 report covers 142 major and emerging economies....

, economic growth, oil exports
Petroleum industry in Iran
In 2004 Iran produced 5.1 percent of the world’s total crude oil , which generated revenues of US$25 billion to US$30 billion and was the country’s primary source of foreign currency. At 2006 levels of production, oil proceeds represented about 18.7 percent of gross domestic product . However, the...

 and per capita income
Per capita income
Per capita income or income per person is a measure of mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate and dividing it by the total population...

.

Government budget


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, the Iranian Parliament approved a $347 billion budget. In the same budget, the allocation from subsidies and the oil price were set at $20 billion and $65 per barrel, respectively. President Ahmadinejad has proposed holding a referendum on this subject. As a compromise, the Iranian Parliament has granted Ahmadinejad's government the freedom to disperse the yearly subsidies in a shorter period of time (6–9 months). According to the Vice President for Parliamentary Affairs, Iran's subsidy reforms would save 20 percent of the country's budget.
IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 Projections/Scenarios
as at 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 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

Overview of 2011-12 budget and comparison with 2010-2011 budget.
Item 2011-12 2010-11 % Change
General Budget, of which 170 129 31.8%
Development Expenditure 35 31.7 10.4%
General Expenditures & Other Items 135 97.3 38.7%
Budget for State-Owned Banks and Enterprises 355 252.5 40.6%
Total* 508 368.4 37.9%
Resources from Subsidies Phase Out 54 20 171.7%

* Totals may not add up due to rounding and deduction of double-counted items
Note: all numbers are in billion dollars.

Implementation


For implementation of the bill an entity shall be established as a duly authorized governmental company under the name "Targeting Subsidies Organization".
The amount saved by the government, 30% of its annual budget based on a $65 dollar oil price according to President Ahmadinejad, will be distributed as follows: 50% towards the poorest strata of Iranian society; 20% at the government's disposal (to compensate for increased costs or as safety net
Safety net
A safety net is in most cases a net to protect people from injury after falling by limiting the distance they fall. It may also be a device to arrest falling or flying objects for the safety of people beyond the net....

); and the remaining 30% will be directed towards improving the efficiency of the utility, fuel and energy production infrastructure, public transportation
Transport in Iran
Transport in Iran is inexpensive because of the government's subsidization of the price of gasoline. The downside is economic inefficiency because of highly wasteful consumption patterns, contraband with neighboring countries and air pollution...

 development, industry and farming
Agriculture in Iran
Roughly one-third of Iran's total surface area is suited for farmland, but because of poor soil and lack of adequate water distribution in many areas, most of it is not under cultivation....

.

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
Iranian calendar
The Iranian calendars or sometimes called Persian calendars are a succession of calendars invented or used for over two millennia in Greater Iran...

 on Sept. 23, 2010. At that time, the 2007 Gas rationing plan will come to an end. 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. The government then revised its plan and indicated it would distribute cash payments to 90% of the general population starting on December 18, 2010.

Income data



The administration has said earlier that it will be able to allocate different payment amounts to different people. 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. The administration has categorized the people into three income brackets; namely lower, middle, and higher for the implementation of the subsidy reform plan. 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.

Cash payments


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.
This represents 2.5 billion dollars a month in the state budget. President Mahmoud Ahmadinejad says implementation of the targeted subsidy system will eradicate unemployment and poverty in Iran within three years. 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.

Price adjustments


Iran was the largest provider of fuel subsidies in the world by 2009. Many Iranian experts agree that these unsustainable subsidies encourage waste among goods, including in the production sector, ranging from gasoline
Gasoline
Gasoline , or petrol , is a toxic, translucent, petroleum-derived liquid that is primarily used as a fuel in internal combustion engines. It consists mostly of organic compounds obtained by the fractional distillation of petroleum, enhanced with a variety of additives. Some gasolines also contain...

 to bread that must be stopped and the only way to do that is to redirect subsidies. 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.
Commodity
(or service)
Old Price
(as of 12/17/2010)
New Price/Increase
(as of 12/18/2010)
Initial decrease in consumption
(as of 01/01/2011)
Target price
(by 2015)
Gasoline 10 cents/liter; 40 cents/liter (beyond 60 liters/month) 40 cents/liter; 70 cents/liter (beyond the quota, except for public service cars which receive a higher quota) 5-20% (from 64 million to 53 million liters/day) Prices for oil derivatives not less than 90% of the prices in the Persian Gulf market (f.o.b
Free On Board
FOB is an initialism which pertains to the shipping of goods. Depending on specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party pays for which shipment and loading costs, and/or where responsibility for the goods is transferred...

)
Diesel $0.06/gallon $0.6/gallon ($1.4/gallon on the open market) 20% (from 54 to 41 million liters/day)
Natural gas 1-1.3 cents/m3 for households and 0.5 cents/m3 for power plants  >500% price increase; on average 7 cents/m3 for households and industry
Industry of Iran
According to a report by the Economist, Iran has been ranked 39th for producing $23 billion of industrial products in 2008. From 2008 to 2009 Iran has leaped to 28th place from 69th place in annual industrial production growth rate. A recent report by the World Fact Book ranks Iran 3rd among...

 and 8 cents/m3 for power plants
6% (for cooking gas) 75% of the average export price for the general population; 65% of the average export price for petrochemical companies for 10 years.
CNG
Compressed natural gas
Compressed natural gas is a fossil fuel substitute for gasoline , diesel, or propane/LPG. Although its combustion does produce greenhouse gases, it is a more environmentally clean alternative to those fuels, and it is much safer than other fuels in the event of a spill...

 
4 cents/m3 30 cents/m3
Electricity 1.6 cents/KWh <300% 11% at production cost (8 cents/KWh as of 2010; 10 cents in 2015)
Water 9 cents/m3 25-37 cents/m3; 300-400% increase (2,500 rials
Iranian rial
The rial is the currency of Iran. It is subdivided into 100 dinar but, because of the very low current value of the rial, no fraction of the rial is used in accounting....

/m3 for household usage; 4,128 rials/m3 for industrial usage)
5% at production cost (~10,000 rials/m3 for household usage)
Bread (loaf of brick oven bread) 5-20 cents; Wheat: 1 cent/kg 200% (40 cents); Wheat: 28-30 cents/kg. Price of bread increased again to 45 cents in April 2011.
Taxi & inter-city buses 10-18% (city buses, domestic flights and the metro, are not allowed to raise prices at all)
Air+rail transport >30% (not yet implemented)


Since 2010, it has been reported that consumption of four petroleum products – diesel fuel, gasoline
Gasoline
Gasoline , or petrol , is a toxic, translucent, petroleum-derived liquid that is primarily used as a fuel in internal combustion engines. It consists mostly of organic compounds obtained by the fractional distillation of petroleum, enhanced with a variety of additives. Some gasolines also contain...

, fuel oil
Fuel oil
Fuel oil is a fraction obtained from petroleum distillation, either as a distillate or a residue. Broadly speaking, fuel oil is any liquid petroleum product that is burned in a furnace or boiler for the generation of heat or used in an engine for the generation of power, except oils having a flash...

, and kerosene
Kerosene
Kerosene, sometimes spelled kerosine in scientific and industrial usage, also known as paraffin or paraffin oil in the United Kingdom, Hong Kong, Ireland and South Africa, is a combustible hydrocarbon liquid. The name is derived from Greek keros...

 – has dropped an average of 38%.

Other determinants


According to the plan, the type of consumption (i.e. whether agricultural, industrial and civil) will also be considered when setting energy prices. The subsidy plan will be implemented in proportion with geographical regions
Geography of Iran
Iran is located in southwest Asia and borders the Gulf of Oman, Persian Gulf, and Caspian Sea.Its mountains have helped to shape both the political and the economic history of the country for several centuries. The mountains enclose several broad basins, or plateaus, on which major agricultural and...

 because warm regions consume more electricity during summer while cold regions consume more gas during winter. Finally, the time of consumption (i.e. during peak and off-peak hours) and the consumption demand
Energy in Iran
Energy resources in Iran consist of the third largest oil reserves and the second largest natural gas reserves in the world. Iran is in a constant battle to use its energy resources more effectively in the face of subsidization and the need for technological advances in energy exploration and...

 (i.e. whether it is low or high) will be taken into consideration.

Inflation



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. Iran wants to save up to $100 billion on subsidies within three years.

Critics say that if the government goes for the top of this range inflation could rise up to 40% through the economy. The International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

, however, has predicted a more moderate rise in inflation of just 32 percent. As of January 2010, the official inflation rate stands at 15 percent. The cost of living in Iran, according to the Majlis Research Center
Strategic Majlis Research Center
Majlis Research Center is the research arm of the Iranian parliament . This Center has access to the classified information of Foreign Ministry, Intelligence Ministry and Defense Ministry of Iran.- External links :*...

, could rise by up to 60 percent.
Ahmadinejad's administration contends that the negative side effects will be transient and that the projections are based on out-of-date models.

Effect on economic sectors


The reforms target one of the major sources of inefficiency and price distortions in the Iranian economy
Economy of Iran
The economy of Iran is the eighteenth largest in the world by purchasing power parity and according to Iranian officials' claims is going to become the 12th largest by 2015. The economy of Iran is a mixed and transition economy with a large public sector and some 50% of the economy centrally planned...

, and will likely lead to major restructuring in almost all economic sectors. The banking sector in Iran is viewed as a potential hedge
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...

 against the removal of subsidies, as the plan is not expected to have any direct impact on banks. Experts believe that
following the launch of the subsidies reform plan, the electricity industry will undergo significant changes and will become more appealing to private investors.

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. Taxi, delivery and truck driver
Truck driver
A truck driver , is a person who earns a living as the driver of a truck, usually a semi truck, box truck, or dump truck.Truck drivers provide an essential service to...

s have also been adversely affected by the recent gas price increase. Experts believe that the removal of subsidies is likely to have an adverse impact on the profitability of the automotive sector for at least the next 2–3 years.
One major element of pressure on producers is the unchanged exchange regime of the Central Bank of Iran, which puts imported products at an advantage by failing to compensate for the relative increase in production costs of domestic producers.

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". 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
Disposable income
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income...

. According to some western reports, cash payments have been denied to some opponents of the regime during the distribution phase. It has also been reported that while the subsidy reform plan needs further adaptation and fine-tuning
Fine-tuning
In theoretical physics, fine-tuning refers to circumstances when the parameters of a model must be adjusted very precisely in order to agree with observations. Theories requiring fine-tuning are regarded as problematic in the absence of a known mechanism to explain why the parameters happen to...

, citizens must separate the questions of public policy
Public policy
Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs. In general, the foundation is the pertinent national and...

 from the issues of government legitimacy. On the other side, the IMF has hailed Iran's economic reform and asked Iran's expertise to be transferred to other countries. The Economist Intelligence Unit
Economist Intelligence Unit
The Economist Intelligence Unit is part of the Economist Group.It is a research and advisory company providing country, industry and management analysis worldwide and incorporates the former Business International Corporation, a U.S. company acquired by the parent organization in 1986...

 has also praised Iran's subsidies reform plan for its positive effect on the economy in 2011.

See also


  • Economy of Iran
    Economy of Iran
    The economy of Iran is the eighteenth largest in the world by purchasing power parity and according to Iranian officials' claims is going to become the 12th largest by 2015. The economy of Iran is a mixed and transition economy with a large public sector and some 50% of the economy centrally planned...

  • Economic history of Iran
    Economic history of Iran
    -Pahlavi Era :Reza Shah Pahlavi improved the country’s overall infrastructure, implemented educational reform, campaigned against foreign influence, reformed the legal system, and introduced modern industries...

  • Social Security Organization (Iran)
    Social Security Organization (Iran)
    Social Security Organization is a social insurer organization in Iran which provides coverage of wage-earners and salaried workers as well as voluntary coverage of self-employed persons...

  • 2007 Gas Rationing Plan in Iran
    2007 Gas Rationing Plan in Iran
    2007 Gasoline Rationing Plan in Iran was launched by president Mahmoud Ahmadinejad's cabinet to reduce that country's fuel consumption. Although Iran is one of the world's largest producers of petroleum, rapid increases in demand and limited refining capacity has forced the country to import about...

  • Energy in Iran
    Energy in Iran
    Energy resources in Iran consist of the third largest oil reserves and the second largest natural gas reserves in the world. Iran is in a constant battle to use its energy resources more effectively in the face of subsidization and the need for technological advances in energy exploration and...

  • Privatization in Iran
    Privatization in Iran
    According to the Fourth Five-Year Economic Development Plan , the Privatization Organization of Iran affiliated to the Ministry of Economic Affairs and Finance is in charge of setting prices and ceding shares to the general public and on the Tehran Stock Exchange...

  • Transition economy
    Transition economy
    A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a free market. Transition economies undergo economic liberalization, where market forces set prices rather than a central planning organization and trade barriers are removed,...

  • International rankings of Iran
  • Iran and WTO
    Iran and WTO
    Iran officially submitted an application to join the World Trade Organization on 19 July 1996. From July 1996 to May 2001, Iran’s application had not been considered, mainly as a result of US objections and the US veto power in the WTO Council. From May 2001 Iran’s application for WTO membership...

  • Middle East economic integration
    Middle East economic integration
    Middle East economic integration has been envisioned, proposed or implemented by various parties in recent history.The stated rationale is that peace, stability and prosperity in the Middle East can only be sustained over the long-run through intra-regional economic cooperation.Governance,...

  • Tehran Stock Exchange
    Tehran Stock Exchange
    The Tehran Stock Exchange is Iran's largest stock exchange, which first opened in 1967. The TSE is based in Tehran. As of July 2010, 337 companies with a market capitalization of US$72 billion were listed on TSE...

  • Chinese economic reform
    Chinese economic reform
    The Chinese economic reform refers to the program of economic reforms called "Socialism with Chinese characteristics" in the People's Republic of China that were started in December 1978 by reformists within the Communist Party of China led by Deng Xiaoping.China had one of the world's largest...

  • Japanese post-war economic miracle
    Japanese post-war economic miracle
    The Japanese post-war economic miracle is the name given to the historical phenomenon of Japan's record period of economic growth following World War II, spurred mainly by Japanese economic policy, in particular through the Ministry of International Trade and Industry...

  • Trente Glorieuses
    Trente Glorieuses
    Les Trente Glorieuses refers to the thirty years from 1945-1975 following the end of the Second World War in France. The name was first used by the French demographer Jean Fourastié...

  • Wirtschaftswunder
    Wirtschaftswunder
    The term describes the rapid reconstruction and development of the economies of West Germany and Austria after World War II . The expression was used by The Times in 1950...


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