Subsidies strangles Iranian economy like cancer: expert

Azerbaijan, Baku, September 16 / Trend , T.Konyayeva /

Liquidating subsidies for the energy sector of Iran will lead to an increase in domestic energy prices that will affect the cost of goods and services in the country, will lead to a decline in demand, inflation and a significant slowdown in the economy if the government does not take any protective measures, Kamran Dadkhah, Associate Professor at Northeastern University, said.

"Of necessity such an increase in energy prices will increase the price of all goods and services in the economy because energy is an input to all production activities, Dadkhah told Trend via e-mail. If government doesn't take any counter measures the demand for these products will fall and the economy will experience a serious recession."

A year ago, Iranian President Mahmoud Ahmadinejad presented to Parliament a plan to liquidate subsidies for the energy sector and pay social benefits in amount of $50-70 per capita, which reached almost 70 million people. Parliament considered that president's initiative could lead to inflation, and dismissed it. Nevertheless, in his speeches in the Parliament, the Minister of Economy Shamsaddin Husseini mentioned the importance of eliminating subsidies for the energy sector, which currently reach $50 billion per year. Ahmadinejad hopes to reduce government expenditures through elimination of subsidies.

"On the other hand, if the government tries to prop up the demand by paying out subsidies or increasing demand for all products, there will be a bigger budget deficit. As a result money supply and liquidity will increase and there will be a rapid rise in inflation rate, which according to various assessments, reaches 21-26 percent," Dadkhah said.

However, the American expert on Iran considers that the basic idea of scrapping price subsidies and paying direct assistance to those below poverty line or those in serious need is a sound one. According to him, since energy prices have come down from their height in July 2008 this is a right time to withdraw the subsidies as the difference between domestic and international prices are less than what they were a year ago.

However, the important issue is how such a policy is implemented, Dadkhah said.

"To carry out such a policy the government needs a well thought out five year plan," the expert said.

The adequacy of payments depends on how fast the government would bring the energy prices in line with international prices, the expert said.

"The amount of social benefits to a family of four would be between 16 and 23 thousand tumans a month. It may be adequate for the first year and if the increase in prices is gradual," Professor said. But the amount would hardly cover the additional cost of the families if the energy prices are rapidly brought to align with international prices.

Energy consumption in Iran for the past 10 years has almost doubled. According to data provided by BP, in 1998 the daily oil consumption in Iran was 1.194 million barrels, while in 2008 this figure rose almost 45 percent to 1.730 million barrels per day.
Simultaneously, gas consumption in 2008 reached 117.6 billion cubic meters (per year) compared with 51.8 billion cubic meters in 1998.

Under relatively low world oil prices, liquidating subsidies and providing direct social assistance to the population will lead to higher prices for electricity, gas and water, which automatically will increase the prices of goods in the country, formerly artificially supported at the expense of subsidies for low energy prices in Iran .

"The present price subsidies are strangling the Iranian economy like a cancer. Unfortunately, from what we have seen from Mr. Ahmadinejad and his administration, there is little hope that there will be any plan let alone a well thought out one," Dadkhah said.

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