[R-G] Iran: Direct, Untargeted Subsidies vs. Cash Transfers to the Poor

Yoshie Furuhashi critical.montages at gmail.com
Mon Jul 7 23:59:59 MDT 2008

Ahmadi-Nejad aims to focus subsidies on poor

By Najmeh Bozorgmehr in Tehran

Published: June 25 2008 03:00 | Last updated: June 25 2008 03:00

Mahmoud Ahmadi-Nejad has announced plans to revise Iran's costly
subsidies scheme and redirect it to the poorest segments of society.

The attempt to curb the spending on subsidies, which account for a
third of gross domestic product, is, in theory, a move that should be
welcomed by economists but it represents a significant political
gamble for Iran's president.

Given the government's record in implementing new decisions, analysts
in Tehran said Mr AhmadiNejad's decision could prove deeply unpopular
and affect his chances of re-election next year.

In a televised address on Monday, Mr Ahmadi-Nejad lamented that the
state forgoes as much as $97bn (€62bn, £49bn) a year because of its
energy subsidies and vowed a new targeted plan would start in October.
Under the current system, 70 per cent of the subsidies go to people
who have a level of income that should mean they can afford to pay for

The government also heavily subsidises electricity, water, public
transport and basic commodities.

"This change has been one of the dreams of our economists and this
government is determined to do it even if we in the government get
hurt," Mr Ahmadi-Nejad said. "It is worth it."

Development economists and donor agencies including the World Bank
have long argued that direct, untargeted subsidies for food and fuel
are wasteful, encouraging overconsumption and often disproportionately
benefiting the wealthier in society. Most economists recommended
cushioning the impact of higher food and energy costs by cash
transfers to poorer households rather than artificially suppressing
the price of agricultural and fuel products.

But Iranians expect their oil-rich state to spend generously on their
daily needs and they sometimes revolt against any revision of
subsidies which they suspect might be a first step to eliminating the

About a dozen petrol stations were set on fire last June when the
government rationed petrol to curb over-consumption. But the rationing
has continued and the government recently stopped providing subsidised
petrol for luxury cars, priced at 11 cents a litre, making the rich
pay four times more.

"Changing the subsidies system is the most risky step the government
is taking because it is a too complicated procedure which may have
social consequences," said Mohsen Safayi-Farahani, a deputy minister
of economy under the former reformist government.

Details of the plan are still sketchy. The government has only
revealed that Iranians who would like to receive subsidies in cash
must apply next month and they will receive the subsidy into their
bank accounts.

Many analysts say the government has no other option but to try to
reduce the cost of subsidies. Excessive consumption of energy has led
to uncontrollable increases in the annual cost.

Mr Ahmadi-Nejad acknow-ledged that unbalanced -economic development,
in-efficient taxation, two-digit inflation and unemployment were
long-standing problems for the country.

In a departure from his usual language, which often blames economic
problems on "mafias" backed by his reformist and conservative
opponents, the president called for help from all political groups.

"This plan belongs to all of us and I ask you not to drag this into
[political] confrontations. Help [the government] to cure this acute
disease," he said.

Ahmadinejad to focus subsidies on Iran's poor
Wed Jun 25, 2008 1:34pm BST

By Edmund Blair

TEHRAN (Reuters) - Iran's president plans to adjust an unwieldy
subsidy system so that it helps the poor more directly despite initial
inflation risks, in a reform opponents said was an overdue response to
criticism of his policies.

President Mahmoud Ahmadinejad has in the past opposed reforms
requiring liberalising prices of goods like gasoline and some
foodstuffs for fear of driving rampant price rises still higher, the
analysts say. Change may also risk social unrest.

But reforms announced in a TV interview and carried by newspapers on
Wednesday indicate the president, facing growing grumbles from
opponents and the public, may want to rebuff at least some of his
critics before the 2009 presidential election.

"Mr Ahmadinejad is not able to continue the current situation. He has
to do something because the fourth year of Mr Ahmadinejad's
presidential term is starting and actually he did nothing for the
economy," said Saeed Laylaz, a business consultant and frequent critic
of the president's policies.

He said he welcomed the reforms Ahmadinejad announced.

Ahmadinejad has not said if he will run again but is widely expected
to. Analysts say much will depend on keeping the support of Supreme
Leader Ayatollah Ali Khamenei, Iran's top authority who has gently
urged the government to deal with economic problems while still
voicing backing for the president.

Ahmadinejad came to power in 2005 pledging to share out Iran's oil
wealth more fairly. Despite presiding over record crude earnings,
economists say the wealth gap has widened due to profligate spending
that has stoked inflation, mostly harming the poor, and via subsidies
that often mainly benefit the rich.

The president, whose government has in the past sought to tackle
inflation by telling businesses to lower prices, accepted subsidies
needed changing.

"Currently, subsidies are not useful and have the reverse effect (of
what was intended)," he said in comments carried by the official
newspaper Iran, adding that 70 percent of subsidy spending ended up
with the country's richest 30 percent.

"With such subsidies, industry cannot compete with the world as it
should," the president said, adding that energy subsidies cost Iran
900 trillion rials (about 50 billion pounds) a year.


Gasoline subsidies are an example where the rich benefit most because
they tend to have bigger, gas-guzzling vehicles, while the poor may
not even be able to afford a small car.

Changes are already being made via rationing introduced last year that
restricts how much subsidised fuel drivers can buy, with any extra
being sold at a higher price. The government originally opposed
selling any fuel more expensively.

When rationing was introduced, however, several fuel stations were
torched, showing how sensitive reforms can be.

Ahmadinejad indicated changes in subsidies would involve means testing
with Iranians filling a form to establish their position but did not
say precisely how payments would be made.

The economic daily Donya-ye Eqtesad, citing the president, said the
first payments would be made in the second half of the Iranian year.
Iran's calendar begins in March.

Economists have long argued for a shake up of Iran's system of broad
subsidies but say it is a political hot potato because it will
initially add to inflation, currently running at more than 25 percent,
even if it comes with longer term benefits.

"Taking away subsidies is not an easy matter. The government seems to
be doing it, but already we are seeing short-term inflationary
effects," said one economist, speaking before the president's more
sweeping reform was announced.

In the longer term, cutting subsidies would reduce budget spending and
therefore ease inflationary pressure, the economist said.

In his interview, the president also said his economic plan would
involve changes to the tax system to improve collection and reform of
customs. He did not give a timetable.

Economists say one of the main problems fuelling inflation has been
the government's spending of bonanza revenues from sky-high oil

Although designed to help the poor by boosting spending in villages
and provinces in particular, economists say the government has not
used interest rates and other tools to soak up the extra liquidity.
The president, for example, has been criticised for pushing to keep
interest rates below inflation.

(Additional reporting by Zahra Hosseinian; Editing by Dominic Evans)

In the rice basket and bazaars of Iran, they feel the pain
By Zahra Hosseinian
Wednesday, June 25, 2008

CHALUS, Iran: From the lush paddies of northern Iran to the dusty
grain bazaars of Tehran, the pain and paradoxes of rising food and
fuel prices are starkly on display.

Rice prices have more than doubled in Iran since March, but farmers
working from sunrise to sunset in the rice-growing northern region
around Chalus, a city on the Caspian Sea, say little of that money
goes into their pockets.

"Traders bought our rice very cheap. They have put it in storage and
now capital investors are selling it for a high price," Baqer Kefayati
said at his farm in Dasht-e Nesha. "We did not make a profit, but
traders did."

Capital investors are wealthy traders who buy rice wholesale from
farmers. Dealers buy rice in small amounts from capital investors and
sell it to shops. They act as brokers and tend not to make large sums
of money.

Some brokers blame the government, saying its tardiness this year in
importing rice, a staple in Iran, helped fuel the price increase by
creating a vacuum that could be exploited.

Iran, one of the world's biggest producers of oil, is at once a
beneficiary of the oil boom, in which prices have risen to nearly $140
a barrel, and a victim. High oil prices are one factor behind rising
inflation that is punishing the country's poor.

Economists blame profligate spending of windfall oil revenues by the
government of President Mahmoud Ahmadinejad for stoking inflation,
which rose to 25.3 percent in the year to May. Higher food prices have
also contributed.

Iranian newspapers in May said the popular smoked rice had jumped to
50,000 rials, or about $5.40, a kilogram, or 2.2 pounds, from 19,000
rials. The price of another variety of rice rose to 45,000 from 18,000
rials. Some other types have tripled in price, shopkeepers say.

The prices remained at almost the same levels in June.

The price pain has political consequences, even in tightly controlled
Iran. In southern Tehran and some other cities, lower-income Iranians
protested inflation and higher prices, newspapers reported.

Ahmadinejad came to power in 2005 promising to spread Iran's oil
wealth to the people. He faces re-election in 2009.

"Ahmadinejad promised to bring the oil money to our tables, but
instead he is taking away the rice from our table," said Masoumeh
Nayyeri, a mother of five and a cleaner in Tehran.

"Rice and bread were the only things we could afford. How will I feed
my children now? Life becomes harder every day."

Asian rice prices almost trebled to their highest level ever this year
as export restrictions fueled insecurity about food supplies. Prices
have since come off those highs amid signs of larger harvests and of
export curbs being lifted.

As a rice importer, Iran has been hit hard, especially as very cold
winter weather followed by drought affected harvests of domestic rice,
further raising prices for consumers.

This month, the commerce minister was quoted in the English language
Iran News as saying that Iran needed to import 1.7 million tons of
rice in the year that ends in March 2009 to supplement forecast
domestic production of 1.5 million tons.

Consumption is estimated at 3.2 million tons. For the past few years,
Iran has been trying to become self-sufficient, but because of various
issues, including the drought, the state has not been able to achieve
its goal.

Iran has delayed buying rice on world markets - for example, from the
traditional supplier Thailand - because of high prices, but to ease
public concern about shortages, Iranian state TV announced in May that
at least 100,000 tons had been bought from Pakistan. Prices eased, but
they still remain high.

Just as speculators on world markets have been blamed for inflating
the oil rally and adding to volatility, so the capital investors in
Iran have been accused of manipulating the retail market.

Iranian officials have said some traders tried to capitalize on the
drought and the reduced availability of imported rice to make a
profit. Local media reports said several traders in different cities
had been arrested for stockpiling rice.

"Traders hid their rice as soon as they heard there was less rain this
year and that global prices were rising. There was plenty of rice in
the market, but traders used the opportunity," said Ali Asghar Tezval,
66, a dealer in a grain bazaar in southern Tehran.

Tezval, a dealer for more than 50 years, buys rice from capital
investors in the north and sells it to shop owners in other cities.

"For us, high prices make no difference. We buy rice at higher prices
from major traders and we sell it to shops at a higher price too,"
Tezval said.

The traders' role angers farmers and their workers in the northern
provinces of Gilan, Golestan and Mazandaran, where most of the rice
farming takes place.

"The price of rice has really gone up, but who benefits from it?
Certainly not us, working for more than 12 hours a day," said
Banafsheh Yousefi, laboring in a field near the Caspian Sea, her
sleeves rolled up and her black plastic boots deep in water.

"We had less rain this year, but it is traders who have pushed prices
up," the 33-year-old mother of two said.

Siavosh Shirinvash, a rice dealer who works near Rasht in the north,
says the lack of imported grain pushed up prices by allowing traders
to exploit supply fears.

"Some investors bought the rice a few months ago," he said. "They
store the rice and wait until there are circumstances like now,
including the lack of rain and the rise in global prices, to raise the

Tezval agrees that the government's delay in importing rice
contributed to the price increases.

"The government did what it could, but it would have helped if they
imported the grain sooner," he said. "The government should have the
pulse of the market in its hands."

Date :  Monday, July 7, 2008

Ahmadinejad confers with experts on economic reform plan
Tehran Times Political Desk

TEHRAN - President Mahmud Ahmadinejad held talks with over 100 senior
Iranian economists on the government's economic reform plan on
Saturday evening.

Last month Ahmadinejad revealed the long-awaited proposal on economic
reform which calls for eliminating energy and bread subsidies,
delivering funds directly to low-income families, and reforming the
customs, tax, and insurance systems.

The president said the process of making fundamental reforms to the
economy requires nationwide cooperation and urged the economists to
stand in solidarity with the administration in the implementation of
the reform plan.

The Ahmadinejad administration's economic policy has pushed inflation
close to 26 percent by injecting large sums of cash into the economy
to fund local infrastructure projects.

The economists advised the administration to "spend subsidies in a
proper way, slow down the implementation of infrastructure projects,
employ highly efficient economic advisors, merge parallel
organizations, amend contradictory regulations, tackle financial
corruption, and strengthen the private sector" to revitalize the
country's ailing economy.

The president said economics professors and academics will certainly
play a leading role in putting the reform plan into operation.

He denied allegations that his economic policy is "unscientific and
impractical", saying, "I am committed to the key concepts of

"The government is not taking a short-term view on the reform plan"
and is seeking to formulate a comprehensive economic reform plan, the
president said in response to a suggestion that the administration
should implement only a part of the large project.

Ahmadinejad, who is expected to seek reelection next year, also
asserted that the plan does not serve any political purpose and is
only meant to reform the country's ailing economy.

Economic talks positive in principle

Economics professor Farshad Momeni said on Sunday that the meeting
between the president and senior economists was positive in principle.

However, "the information which was given to the economists was
undeveloped and had just gone a bit beyond the usual generalizations,"
he told the Mehr News Agency.

"The meeting was arranged to inform the economists about the
government's reform plan. After the president's address, the
economists raised some points in the short time that was given to
them," Momeni stated.

In response to the economists' warnings that granting cash subsidies
would seriously harm the economy, Ahmadinejad vowed not to make hasty
decisions on the matter, he added.

Although the proposal has serious deficiencies, it also has the
potential to prevent a national economic disaster, he noted.

Momeni said the economists criticized "the government's imprudent
actions under the privatization plan and in the distribution of
justice shares."

Justice shares are shares in state-run companies that are being
privatized that are reserved especially for low-income and
underprivileged citizens.

The president acknowledged the fact that privatization before the
private sector is strengthened can never promote economic competition
but he did not give any assurances that he would revise the current
wrong strategies, he stated.

"The economists also said that the government's economic policy must
be based on theoretical principles in order to avoid controversy and
contradiction… They also expressed serious concerns over the current
non-technical approach to the banking system, which could create
serious problems for Iran's economy," Momeni added.

Iran: Energy price reforms central to economic plan
Posted: 2008/07/07
From: MNN
The most important pivot of the economic reforms plan is to amend the
price of energy sources in the country, an economic expert told IRNA

Expressing this, Jamshid Pajouyan added that based on a wrong
decision, the price of energy has been kept stable for a decade.

During the period, economic experts have always warned about the issue
so as to prevent huge losses incurred by country's economy.

Fortunately, the ninth government has reached the conclusion that
previous strategy is no longer effective and therefore they offered a
plan to lift subsidies on energy, which will surely benefit national

However, he said, declaring a proper policy does not imply its
success; rather the way of implementation is also significant.

Pajouyan also maintained that energy saving should also be considered
in industries.

Referring to the implementation of Article 44 of Constitution, he also
said that privatization should not be limited to distributing justice
shares; rather management of economic entrepreneurs should be ceded to
the private sector.

Labor and social security laws should also undergo amendments in
tandem with fulfillment of Article 44, he noted.

"It's essential to create economic and social conditions for making
energy subsidies target-oriented," he said.

Identifying low-income strata of the society will help determine
welfare needs in the future, he said. --IRNA

Iran to launch "international" fuel pricing in 2011
Fri Jun 13, 2008 4:20pm BST

TEHRAN (Reuters) - Iran, which has some of the cheapest fuel in the
world, will begin selling gasoline at "international" prices in 2011,
state radio said Friday.

Iran is the world's fourth-largest oil producer but lacks enough
refining capacity to meet domestic gasoline needs, forcing it to
import large quantities which it then sells at heavily subsidised
prices, burdening the budget.

In order to curb consumption it introduced rationing in June last
year, allowing motorists to buy a maximum 100 litres per month at the
price of 1,000 rials (around 11 U.S. cents) per litre.

The scheme was later amended to increase the subsidised quota to 120
litres per month and also to allow the sale of higher-priced gasoline
for motorists who needed more, at four times the subsidised price.

The radio report cited Acting Interior Minister Mehdi Hashemi as
saying the move to start selling gasoline at international rates in
three years' time was based on a parliament decision, without giving

Energy officials have previously said "international" prices meant
selling unsubsidised gasoline, not that the cost would reach the same
levels as in the West.

"The consumption of gasoline in the country is not as yet moderate and
it is hoped it will attain moderation through the implementation of
plans that go into effect stage by stage," Hashemi told state radio.

The government spends more than $100 billion (500 million pounds) per
year on energy subsidies, covering also electricity and natural gas,
officials say.

But Hashemi also said more public transport was needed to help curb
gasoline consumption.

(Reporting by Hashem Kalantari; Editing by William Hardy)

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