Q&A-What does subsidy bill mean for Iran?

09 Nov 2009 15:38:32 GMT
Source: Reuters




TEHRAN, Nov 9 (Reuters) - The political stakes are high for the plan of Iran's President Mahmoud Ahmadinejad to cut food and energy subsidies.

Locked in dispute with Western powers over Iran's nuclear programme, the populist president has faced an unprecedented wave of protests by supporters of moderate defeated candidates claiming June's presidential election was forged.

The liberal reforms could stoke popular dissent, coming at a time of spending cutbacks because of the fall in world oil prices over the past year. Or they could put the economy and government in better shape to withstand more sanctions in the nuclear dispute. Iran is one of the world's top five oil producers.

Here are key facts in the subsidy debate:

WHAT IS THE HISTORICAL BACKGROUND TO THE PLAN?

Overhauling Iran's generous subsidy system has been under discussion for years, but stiff popular and political resistance has repeatedly stalled attempts at reform.

Gasoline rationing was introduced in 2007 as the first step towards reforming the system. Though it provoked riots in Tehran, the plan went ahead.

The current bill, which takes the plan forward, was presented to parliament in early 2009, before the presidential elections in June that provoked protests by supporters of defeated opposition candidates who claimed vote fraud won Ahmadinejad the poll.

The bill was approved in October but Ahmadinejad fought off an attempt to impose close scrutiny over what his government does with the money. Parliament obliged the government to count the subsidy savings as part of the official budget that requires the assembly's approval but on Saturday pulled back from a threat to demand special accounts are set up directing the money into specific areas of the economy approved by parliament.

Now the reforms must win the approval of hardline watchdog body the Guardian Council before coming into effect.

HOW BIG ARE SUBSIDIES?

Subsidies covering gasoline and other refined products, natural gas, electricity, water and basic foodstuffs cost Iran at least $90 billion a year and equal around 30 percent of GDP. But state help in energy products accounts for the majority of the state subsidy system. Subsidies cover oil, petrol, natural gas, electricity, water, flour, transport, and telephone services.

WHAT WILL THE BILL DO?

The idea is to move towards free market prices in the five-year period to 2015. According to Business & Economy Digest, published by Access Consultancy Group:

* Gasoline and refined products will be priced at 90 percent of Middle East benchmark prices on a free-on-board (FOB) basis. Prices will be revised if there is a fluctuation of more than 25 percent.

* Natural gas for households will be priced a minimum 75 percent of the average export price.

* Price of gas for industries, refining and petrochemicals will be a maximum 65 percent of the average gas export basket.

* Electricity and water will be at free market prices in 2014.

* The government could earn $10-20 billion in 2010/11 through price increases it will be able to introduce.

WHAT HAPPENS TO THE SAVINGS?

Analysts say around 50 percent is for redistribution among the people, 30 percent will be made available to industries in the form of loans, and 20 percent to create a social safety net.

Media have said the government intends to open bank accounts for 36 million people, about half its population, to give them cash to compensate for higher food and energy prices.

WHAT OTHER AIMS BEHIND IT?

By removing the heavy budget burden, Iran could be less vulnerable to any new U.N. sanctions on imports over Tehran's disputed nuclear energy programme, which Washington says is a front for building weapons. Tehran denies this.

Iran could be vulnerable to sanctions on energy imports since it imports around a third of its gasoline consumption needs due to lack of refining capacity. Iran imports around 100,000 to 120,000 barrels per day (bpd) of gasoline. Demand is growing at 6 percent per year as 700,000 new cars hit the roads each year. Reducing consumption will lighten any blow.

Iran also imports rice, with annual consumption of about 3 million tonnes exceeding domestic production by about 750,000 tonnes. The country imported 5.9 million tonnes of wheat in the 2008-09 year after it was hit by a severe drought, but an agriculture official suggested in May it may produce enough of the grain this year to meet domestic needs.

With oil prices down to about $80 a barrel, many development and infrastructure projects have been delayed in the past year. The subsidy reform could help the government in this regard.

U.N. sanctions have stopped Western companies investing in Iran and even slowed the flow of cash from Asian firms less concerned by Western opprobrium.(Disgrace arising from exceedingly shameful conduct; ignominy.)

Critics say the need for savings is ironic, arguing that Iran's total debts balance around $40 billion was mainly incurred through overzealous spending during Ahmadinejad's first term.

WHAT OTHER EFFECTS COULD THE CUTS HAVE?

It could be inflationary and lead to a repeat of the street disturbances of 2007. Some analysts say inflation could rise by as much as 40 percent, with prices already high. Ahmadinejad says redirection of the subsidies to the poor will help close the gap between the rich and the poor segments of the country. But many fear it will make the poor poorer.

Hardline lawmaker Ahmad Tavakkoli said on Saturday: "The bill will have a negative impact on inflation. It will eliminate the middle class and will increase the number of poor people in the country."

Opposition leader Mirhossein Mousavi said the plan could be beneficial if implemented well, hinting at corruption and incompetence in bloated state structures -- something his campaign dwelt on in the disputed election.

"If this does not happen then people, if pressured further, will confront the government," he said, according to website Kaleme on Monday.

(Compiled by Parisa Hafezi, Reza Derakhshi, Andrew Hammond; editing by Samia Nakhoul)