Subsidy reform plan strengthens Iran economy: EIU

Iran Materials 12 May 2011 11:28 (UTC +04:00)

Economist Intelligence Unit (EIU) in its April report praised Iran's subsidy reform plan for its substantial positive outcomes for the country, such as boosting industry and manufacturing, lifting oil exports, falling domestic fuel consumption and reducing government's expenditures.

The Economist Intelligence Unit is part of the Economist Group and is one of the world's leading resources for economic and business research, forecasting and analysis. It is particularly well known for its monthly country reports, five-year country economic forecasts, country risk service reports and industry reports.

"The chance of increased government support for industry and manufacturing is on the rise, reflecting not only the increasing difficulties many companies will face as electricity, water and gas rates increase, but also the growing importance of self-reliance as sanctions continue to deepen", the report added.

EIU predicted that oil export revenue should also be lifted by the ending of the fuel subsidy, as domestic fuel consumption has begun to fall in response to higher prices.

Overall, EIU believed that the gross fiscal account of Iran will continue to record a surplus throughout the forecast period (2011-15), but, with oil production declining, it will fall to 0.7% of GDP in fiscal year 2015/16 (March 21st-March 20th).

In regard to inflationary pressures of subsidies reduction, EIU forecasted that the inflation rate would fall. "Having slowed markedly in 2009 on the back of weaker global commodity prices, inflation rose to an average of 10.1% in 2010. The removal of subsidies has led to a sharp increase in fuel, electricity and flour prices; however, the impact will probably be minimized by the fact that the availability of such heavily subsidized items was probably restricted in any case", the report added.

Nevertheless, we still expect a sharp increase in consumer price growth this year, to over 20%. With the phased removal of subsidies planned to occur over almost the entirety of the forecast period, we expect inflation to average 16% in 2012-14, but to fall back in 2015 following the completion of the subsidy reduction program, the report further said.