Targeted subsidies plan in Iran

On 27 Azar 1389, Iranian President Mahmoud Ahmadinejad announced the beginning of the enforcement of targeted subsidies law officially at Iranian state television.

This law was planned to enforce long time ago, but not performed due to many reasons.

Subsidy is a form of financial assistance that is paid to a business or economic sector. It is usually granted to producers or distributers within an industry by government in order to prevent stagnation of the industry or price increases as well as job creation.

Really, subsidies could be a form of protectionism or trade restrictions with the enforcement of import policies and to help various sectors of Agriculture and Technology.

The enforcement of subsidies in Iran began in Safavids period and continued in the Qajar era within the framework of supporting agriculture and its development. But, direct involvement in the supply and demand area began during the second Pahlavi. During World War II, the first rationing system was established in Iran with subsidies. Before the Islamic revolution, a Fund to support consumers was established in 1353 which actually revealed the direct involvement of government in the economy.

Further, the pricing policy was executed extensively after the Islamic revolution (since 1360) by the Producers and Consumers Support Organization due to economic pressures caused by war and sanctions. But, after Iran-Iraq war, subsidies received by public was replaced with the policy of economic price adjustment and the payment of subsidies was became more targeted.

However, the continuation of this process and allocating subsidies to the poor long-term goals caused irreparable damages to the statue of Iran’s economy.

Targeting of subsidies is the largest plan of Iran’s economic and the most important part of government’s current economic development plan that will change the process of paying subsidies.

This plan (targeted subsidies law) was an inevitable necessity in the Iran’s economic, because continuing a previous trend had to result in imbalance between supply and demand.

One of the purposes of targeted subsidies plan has been increased economic efficiency based on allocating subsidies to producers rather than consumers which has been advised by World Bank aimed to improve Iran’s economic. Other purposes of this plan include preventing the excessive rise of fuel consumption, meeting the poor’s needs (because the most of subsidies allocates to affluent families), eliminating the class gap and economic corrupts on subsidies in Iran.

According to targeted subsidies law, government has to revise the prices of energy carriers including gasoline, kerosene, liquid gas and other derivations of oil, gas as well as water. Further, government is obligated to target the subsidies of items including wheat, rice, oil, milk, sugar and bread as well as post-air-rail services.

Surely, there are hindrances that will block this large economic plan. But, the whole plan and its proper implementation could result in Iran’s development. In this way, the viewpoints of international organizations as external watchers will be important.

Six months after the removal of energy subsidies, IMF congratulated Iran due to its success in combating inequality. This organization stressed that production suffers harmful effects in the short-time, but it will be natural and in the mid-term, this plan will improve the Iran’s landscape significantly.

Further, a World Bank’s report has examined the economic status of Iran. This report says that: “Iranian government has implemented a major amendment plan for country’s subsidy system. Productivity in Iranian economy will increase significantly if this plan be successful. Iranian government has taken a cash subsidy system and consequently has increased the prices of water, electricity, bread, gasoline and gas. Early estimates show that this plan has decreased the poverty and regional income inequalities.”

Secretary General of the World Energy Council, Van Hulst, has praised the implementation of targeted subsidies law in Iran. He said that: “Despite many problems, Iran has succeeded to implement this great plan very well”. Referring to the unique role of Iran in the world gas market, he added that: “Today, all eyes in the world gas market have turned to Iran.”

Targeted subsidies plan is considered as the largest economic plan in Iran’s history which could cause Iran to become a developed country. Of course, this depends on many factors including its proper implementation and considering a suitable mechanism aimed to achieve its goals.

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