Distribution of social money will lead to deformation on Iranian market: U.S. analyst

Azerbaijan, Baku, November 7 / Trend , T. Konyayeva, E. Ostapenko /

Iranian government's plan to reallocate subsidies may tend to give a short term boost to the economy, but in the long run it could be inflationary, said Paul Sullivan, professor of economics at the National Defense University (USA).

"This may tend to give a short term boost to the economy, but in the long run it could be inflationary if production does not keep up with the synthetic demand that the Iranian government is producing from creating bank accounts," Sullivan wrote to Trend in an e-mail. 

A year ago, Iranian President Mahmoud Ahmadinejad presented to Parliament a plan on elimination of subsidies in the energy sector, and instead proposed to allocate $50-70 per capita as the social benefits. With elimination of subsidies, Ahmadinejad hopes to reduce government expenditures. Parliament considered that president's initiative could lead to inflation, and gave up it.

Nevertheless, the economy minister Shamsaddin Husseini repeatedly talked about the importance of the elimination of subsidies for the economic sector, which currently reaches $50 billion.

The Iranian plan to phase out fuel subsidies in return for setting up bank accounts for many Iranians is surely a curious way of "saving" money, said Sullivan.

According to the expert, subsidies have distorted fuel markets in Iran by making petrol cheaper and, hence, giving incentives to Iranians to demand and use more petrol. This has put the budget of Iran under great stress. It has forced Iran to import massive amounts of petrol given that Iran's refinery system has not been able to keep up with the increasing demand in petrol.

This is especially so since the auto industry started to real take off in the 1990s. Petrol subsidies in Iran also act as subsidies to the auto industry in Iran, said Sullivan. - The cheaper the petrol the more demand for cars. This means more people are employed in the auto industry as well.

"Taking off the subsidies will make the petrol more expensive and may slow demand from the production of the Iranian auto industry and, hence, may reduce demand for labor and inputs to the Iranian oil industry, Sullivan believes. - By just giving Iranians money instead of giving them direct subsidies the distortions will be changed".

Iran today became the second largest exporter of oil amongst the OPEC member countries, exporting about 2.4-2.5 million barrels per day.

The budgetary effects could actually end up to be worse given that inflation could eat away at the value of the money transfers to the public, and the public may likely ask for more money or they mat hit the streets in a more noisy fashion, Sullivan said.

The already high inflation in Iran (the highest for the country in the current decade) continues to grow. According to official data, in July it amounted to 21.5 percent, last year - 17.1 percent, and two years earlier - 8.9 percent.

"My sense is that this curious synthetic banking policy is more a response to the demonstrations and tensions in the street rather than any real attempt at rationalizing their petrol and other markets," Sullivan said.

Tensions and disagreement of the people in Iran are connected with the results of presidential elections. Mahmoud Ahmadinejad won the elections which took place on June 12. His main rival Mir Hussein Musavi accused authorities of falsifying the voting results. Protests of people dissatisfied with the election results caused a confrontation between police forces and the opposition. According to official figures, 20 people were killed during the riots.

"I also cannot see this as a long term policy. It makes little sense economically. It may make some sense politically in the short run," Sullivan said.

"It will likely not buy off those who are the most frustrated and angry. That problem will take much more to be done, including changing the way the government treats its people and some in the government remembering that the people of Iran have a revolutionary streak and an independence streak when pushed to their limits," Sullivan concluded. 

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