Iran’s subsidy reforms have been among the most significant, but also most controversial socioeconomic initiatives in recent years. Now that Iran is preparing for the post-Ahmadinejad era, it is appropriate to examine how the planned continuation of this program will be affected by the emergence of a new administration in the second half of 2013.
The subsidy reform plan
Iran introduced the first phase of its subsidy reform plan in December 2010 as a necessary campaign to ease the government's financial burden and to achieve a better distribution of wealth. In a diversion from its different original plan, the government adjusted fuel prices to bring in $40 billion in new revenue from price corrections (i.e., partial “shock therapy” as President Mahmoud Ahmadinejad had argued originally). The original redistribution plan was revised as follows: 80% directly to recipients (about 63 million citizens), 20% to affected industries (only partly realized) and nothing for the Treasury. The government’s handling of the financial aspects of the reforms was so bad that it officially asked higher-income segments of the population to “voluntarily” forgo receiving cash handouts.
Experts disagree on the actual impact of the plan on Iranians' purchasing power. Some argue that the plan partially improved the purchasing power of the lowest-income classes (the bottom 30%), but undermined everyone else. Others contend that the material and non-material costs imposed through these reforms have been too high, undermining the economic well-being of all social and income classes in the country.
Iran is experiencing its highest level of inflation since the mid-1990s. The latest statistics suggest that inflation in the 12 months ending in March 2013 reached 40%, confirming the worst fears of independent economists. Furthermore, the actual additional purchasing power generated by the cash handouts has diminished drastically over the past two years.
As a consequence, from a socioeconomic perspective, the subsidy reforms have been a disaster, with the urban middle class being the biggest loser. There have been a reported 500,000 to 700,000 jobs lost in the agricultural sector due to cash handouts and rising energy prices. Iranian industry is also suffering, and a large number of industrial units are going bankrupt in the absence of the planned government subsidies to the sector. The inflationary impact and the socioeconomic uncertainties have been so strong that the Iranian parliament has postponed the introduction of the second phase of the reforms (i.e., a new wave of price hikes).
Nonetheless, there are two upsides that need to be taken into account when analyzing the commitment of a future administration to the reforms: First, the accumulated energy saving is expected to reach some 100 million cubic meters a day (equivalent to $12 billion in annual export revenue), and second, Iranian companies, while under pressure in the short run, will have to become more competitive internationally.
In any case, managing the negative consequences of the subsidy reforms will be a major challenge for the next administration as the consequent economic imbalancewill continue for two to three years, producing many negative hiccups, including high inflation and unemployment.
Leading candidates’ views on subsidy reforms
There is no doubt that the subsidy reforms, especially the amount of cash handouts as well as fuel prices, will become a key topic in the emerging presidential election campaign. At the same time, candidates will be compelled to promise improvement to the overall situation, especially if they want to attract votes. Once the dust of the campaign settles, however, there will be time for more realistic analysis of the scenarios that might emerge. To forecast in which direction Iran will move with regard to subsidy reform, one needs to understand the views of the key presidential candidates. They will either directly (as the future president or a potential minister) or indirectly (as a member of a key decision-making organ) influence the overall direction on subsidies. The views below were compiled based on interviews and speeches by the candidates:
- Ali-Akbar Velayati (member of the 2+1 Coalition) believes that the subsidy reforms are necessary for the country’s economic development, but criticizes the government’s lack of attention to the original law. He states that the original plan—i.e., 50% of revenue to the public, 30% to industry and 20% to the Treasury—will have to be implemented.
- Mohammad-Baquer Qalibaf (member of the 2+1 Coalition) has been a vocal critic of the government in challenging the legal framework for the subsidy reforms. He has said on the record that there is no room for “trial and error” and that the subsidy reforms will have to be implemented based on expert studies and approaches.
- Gholamali Haddad-Adel (member of the 2+1 Coalition) considers the subsidy reforms “one of the most important economic events in the country,” but believes that the non-payment of grants to industry (30% of revenue) has led to major problems among industrial outlets. He has also talked about the need to significantly increase the amount of cash handouts.
- Manuchahr Mottaki (member of the 3+2 Coalition) argues that more attention needs to be paid to the “culture of domestic production,” hence the need to revise the original plans and to allocate more resources to local industry so that jobs can be secured.
- Mostafa Pourmohammadi (member of the 3+2 Coalition) believes that cash handouts should only be paid to the lowest-income classes and at a level at which they can actually affect purchasing power.
- Yahya Ale-Eshagh (member of the 3+2 Coalition) is committed to revision of the planned subsidy reforms to contain the negative consequences. He argues that realizing the revenues that will be distributed is the most significant challenge in the process.
- Mohammadreza Bahonar (member of the 3+2 Coalition) praises the government for initiating reforms, but believes that the second phase should only be implemented after thorough analysis of the actual consequences of phase one.
- Hassan Rouhani (centrist candidate) has stated clearly that the subsidy reforms will have to be continued, but has offered a more nuanced approach, primarily involving consideration of non-cash subsidies to the lower-income classes.
- Mohammadreza Aref (reformist candidate) is opposed to the principal of shock therapy (which was Ahmadinejad’s original idea) and believes that the reforms will have to be continued at a slower pace once a thorough analysis has taken place.
- Mohsen Rezai (conservative candidate) is committed to continuing the plan, but only under a scenario in which the overall purchasing power of lower-income citizens is raised to the levels prior to the introduction of the reforms. This would require a much higher cash handout.
- Kamran Bagheri Lankarani (principlist candidate) would continue the reforms by focusing more on lower-income groups and trying to contain the inflationary impact.
The views above indicate that the subsidy reforms will continue in any postelection constellation of government, but the key variable will be the choices concerning cash or non-cash handouts, distribution of revenues among citizens, industry and Treasury as well as the overall pace of reforms. It should be noted that the Ahmadinejad government is already trying to increase fuel prices prior to the election, so the new government might immediately face the socioeconomic consequences of the second phase. Therefore, a decision on how society and industry will be compensated for inflationary pressures will be on the agenda very soon.
Bijan Khajehpour is a managing partner at Atieh International, the Vienna-based international arm of the Atieh Group of Companies, a group of strategic consulting firms based in Tehran, Iran.