Will Rouhani complete the reform of subsidies?
In principle, the answer to this question should be yes. Rouhani’s administration professes to be pro-market and is eager to shift resources from wasteful consumption to economic growth. What better way to remove energy subsidies and use the proceeds to fund the cash-starved development budget?
That is in principle; in practice there are two problems. First, the subsidy reform law within which the Rouhani government must operate is the legacy program of the Ahmadinejad administration, which it has endlessly criticized and is loath to emulate. So they have condemned the subsidy reform program without carefully examining its pros and cons. In particular, they fail to understand the serious adverse consequences of subsidy reform on the lives of the poor, and the need to protect them, for example, by offering them cash transfers as compensation.
Which brings me to the second problem. Rouhani’s economic team has condemned the cash transfer program using such unfortunate language as “fostering beggars.” They must infuriate millions who depend on the transfers to make ends meet at a time that prices for energy and bread are rising and they unable to replace the lost purchasing power with higher wages. The strong negative view of cash transfers in the current government is likely to prevent it from fully implementing a reform which is good for the economy, the government’s own budget and the environment.
Since coming to power, Rouhani has raised bread and energy prices (by roughly 50%) without increasing the amount of cash transfers (now worth less $15 per person per month). The highest price increase has been for gasoline, from about 4800 rials for the average liter (counting liters sold at 4,000 and 7,000 rials) to 10,000 rials per liter (about 30 US cents), still half the US price and one fifth of the average price in Europe.
Oddly, in the last installment of the adjustment, in May 2015, it was the lower price that was raised (from 7,000 to 19,000 rials per liter) while the higher marginal price remained unchanged. In the name of price unification, richer consumers were allowed to continue to get gasoline at half the price in Iraq and Afghanistan and one-sixth in Turkey, while the smaller users were asked to pay more. I cannot understand the urgency to unify the price of gasoline when the smart card introduced by Ahmadinejad (a clue?) enabled sensible price discrimination favoring smaller (and most likely poorer) consumers.
In this week’s Persian weekly Tejarat Farda (issue #145) Mohammad Mostafavi-Dehzooei and I argue (link in Persian) that removing all the remaining subsidies without increasing the amount of cash transfers is highly impractical. We also argue that with proper targeting of cash transfers to the poor the amount of compensation needed to prevent poverty from increasing is reasonably small leaving some money for government revenues. It is true that cash transfers were too generous at the start of the subsidy reform program in 2011. This was a costly mistake that bankrupted the Ahmadinejad government, fueled inflation, and undermined the whole program (as I have argued before). But now the transfers are worth only one-third of what they were before and therefore no longer too generous.
The main remaining problem with the cash transfer program is that it is paid evenly to the rich and the poor. That Iranian parliament has mandated the government to stop paying the rich (easier said than done). The government claims to have already dropped 2 million undeserving individuals from its roster. This is good news but as the government goes down the very murky distribution of wealth the number of deserving people who are dropped by mistake will rise exponentially. Surely not a wise thing for the government to be doing in the the month before the crucial parliamentary elections this February. In the end, lack of proper targeting of cash transfers is a poor argument for continuing to distribute energy subsidies in a highly unequal way.
Given the stagnant economy and large gaps in Iran’s social protection, I believe that raising energy prices further should be coupled with increase in cash transfers. To seriously consider doing so, policy makers must first stop calling cash transfers beggar fostering. To pay people a small share of their hydrocarbon wealth in cash instead of cheap energy (or bread) so they can decide how to spend it is a reasonable proposition no matter how unreasonable was the person who thought of it first.