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Sun, Sep 26, 2004
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Subsidy System Unsustainable
Removing, reducing or restructuring energy subsidies is helpful for the economy. Potential social costs in terms of employment in the conventional energy industry or reduced access to energy could be addressed by redirecting the money spent on subsidies to income support, health, environment, education or national development programs.
Of course, subsidies can have certain positive results, particularly where they are aimed at encouraging more sustainable energy production and use. Temporary support for renewable energy and energy-efficient technologies to overcome market barriers, and measures to improve poor or rural households' access to modern, commercial forms of energy, for instance, could be positive measures in support of sustainable development.
But instead of creating conditions to encourage a transition to greater energy efficiency or lower energy use, governments tend to aggravate problems by subsidizing energy production and consumption. Moreover, these subsidies often favor the more polluting energy sources and benefit the rich.
Governments in both developing and developed countries intervene heavily in their energy sectors in many ways: from direct grants to mandatory regulations; from training assistance to price controls and guaranteed markets. These interventions can be divided into subsidies to producers and consumers.
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An urban family in Iran on average consumes close to 3,000 kw/h of electricity per annum.
Unreasonable
The price of energy in the Iranian market is one-tenth of the price paid in the Persian Gulf region. Contrary to many other countries, Iranians not only do not pay taxes on energy, but also are given energy subsidies.
Such subsidies mainly benefit the higher income groups of the society, and at the same time lead to waste and squandering of the nation's natural resources.
The government offers energy by-products at prices far below international standard rates in order to restrain inflation.
Between March 2000 and 2001, the government paid more than $11.90 billion in energy subsidies. According to analysts, the country has endured between $11-13 billion of energy subsidies in the past years.
The situation is deteriorating because cheap fuel and energy prices have caused all state efforts to alter energy consumption patterns to fail.
The energy consumption growth rate (national and per capita) is unreasonably high when compared to other countries.
Iranians use more energy than they should, which is inconsistent with national economic growth and also when compared with other countries.
Many analysts argue given that fuel consumption is growing rapidly and also considering that Iran is a major importer of certain energy products such as gasoline, energy subsidies just don't make sense.
Some experts believe that natural gas should replace oil as a source of fuel and energy, not only due to its abundance in the country (3 times as much as oil resources) but also because of it being inexpensive compared to oil.
Another justification is that since transfer and transport of gas cost more than oil, it is more economical to use the gas in the local market and save more oil for exports.
Policies as to energy and fuel pricing have not been reasonable, lacking scientific basis, requiring them to undergo serious revaluation to prevent further damages to the economy.
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Iran is a major importer of certain energy products such as gasoline.
Pretexts
The government still tries to justify the heavily subsidized energy system under the pretext of promoting social justice and creating comparative advantages in various industries.
It says the main logic behind the subsidy system is alleviating living costs on Iranian families who receive between 800-900 rials in the form of fuel subsidies on a monthly average. Naturally, affluent families get the lion's share of the cash because they consume more energy.
An urban family in Iran on average consumes near 3,000 cubic meters of gas and close to 3,000 kw/h of electricity per annum, whereas a rural family's main source of fuel is kerosene, the consumption of which does not exceed 1,200-1,400 liters per month or equal to one cubic meter of gas.
Rural residents consume between 120-140kw/h of electricity per month, amounting to 1,600-1,900 kw/h annually.
Statistical evidence shows that the rich are the ones who devour state money set aside as subsidies.
For example, almost 80 percent of city residents do not own a private car and use the public transport fleet for their daily commutes, making them unqualified for state aid (in the form of subsidies).
What the present subsidy system has bestowed on the people can be summarized in two short sentences: allowing the rich to become richer while imposing a heavy burden on the less privileged. The prevailing condition stands in sharp contradiction with state's declared policies of promoting social justice and welfare.
For a cash-strapped government extra expenses can only cause its budget to shrink, striking further blows to the process of economic development.
In addition to paying for subsidies, the government also has to pay for supplying and upgrading the equipment and machinery employed in the energy sector such as in power plants, refineries, pipelines, distribution networks, etc.
The time has come for the government to make its decisions and policies based on ground economic realities and try to meet most basic needs of the masses such as food, healthcare, housing, etc.
Even while residents of the posh northern districts of the capital are leading a rich life and cruising in luxurious cars, children in downtown Tehran suffer from malnutrition and lack of hygiene.
Many of them rely on a meager 120,000 rials in aid provided by the Imam Khomeini Relief Committee just to survive.
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Temporary support for renewable energy and energy-efficient technologies to overcome market barriers could be a positive measure towards sustainable development.
Crossing Point
Based on an economic theory, any price deviation from the final value of a commodity is damaging to the social status of nations. The optimum point (where the welfare condition is supposedly at its best) is where the two indices actually meet.
The price deviation occurs when the taxing system does not function as it should or when the private sector is allowed to monopolize the economy. These factors are often blamed for undermining social welfare, economic productivity and sending to waste national resources.
Such price deviations cause huge wastage of national resources and undermine economic efficiency. Low production levels and technological backwardness are among direct outcomes of inadequate consumption patterns.
Using the experiences of other countries that have succeeded in implementing a workable subsidy system in favor of the economy could be of great help.
Take the German case as an example.
In a bid to reduce its reliance on the Organization of Petroleum Exporting Countries (OPEC) as its main energy supplier and due to political and security reasons, the German government has managed to minimize its energy imports by directing the money formerly spent on fuel subsidies to the coal sector.
The objective is to make coal the alternative source of energy in Germany in the long run.
The subsidy system in Iran has proved to be a heavy burden on the government and the economy.
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Poor Banking
The recent conference on 'Islamic banking' provided a suitable platform to examine the problems of the banking system.
Justice and efficiency are fundamental to Islamic banking. This is while many financial and banking experts of the country believe that the main problem with the banking system is that it is governmental in nature and not because it abides by an Islamic mode of operation. These experts maintain that if justice and efficiency are not implemented properly it is not because of the Islamic methods but rather the state's control over the banking system.
Many people believe that the foreign banking system is corrupt. But, the point is that the interest rate in many foreign countries has actually approached zero while the Iranian banks, which operate on the basis of Islamic principles, offer very high profit rates. Meanwhile, the national banks charge high profit for offering banking facilities to prospective clients. This situation could seriously challenge the economic well being of the citizens of the republic. Thus as long as the anomalies in the banking system are not rectified, the state of economy will not improve significantly either.
Some experts believe that the prevailing banking system is actually interest-free and not Islamic. These experts essentially differentiate between interest-free banking and Islamic banking. Moreover, some experts maintain that banking and participation are two entirely different issues and the monetary market could be organized through a partnership system.
At any rate it is obvious that in absence of a competitive atmosphere in the banking system, we are witness to an increasing rift between the profit offered on deposits and the profit charged on banking facilities. The only remedial measure is to revise the banking system. This is something that more or less all experts agree on.
It seems that most financial and banking experts believe that the root cause of the problems in the banking sector stems from government control and that the Islamic system of banking itself does not need to be rectified.
The Islamic banking operations have been approved by the officialdom and above all by the leader. One problem is that Article 44 of the Constitution does not allow privatization of banks. This article stipulates that the government controls all banking affairs unless the country suffers losses from this mode of operation. The crux of the matter is that state-run banks do not have the kind of efficiency, which the public seeks. Currently, private banks operate more successfully than state-run banks. People are in fact keen that private rather than government banks handle their banking requirements. In order to overcome this dilemma, we need to establish more private banks.
A comparison between our banking system and the conventional international banking system reveals that our banking modus operandi is inadequate. The low efficiency level is rooted in government control of the banking system. In other words, if we are to reach an acceptable level of efficiency, we need to pursue the drive for privatization more seriously and also eliminate unnecessary laws and regulations. By changing the banking system from within, its efficiency can be improved.
It must be understood that the Islamic system of banking is ideal for us, but the government should not dominate banking operations. The rule is that whenever the government imposes its will on all forms of economic activity, efficiency goes down. The banking system is no exception to this general rule. Therefore, the role of government in banking operations needs to be revised.

Paying Tax Legal Duty
Collecting taxes is among the problems of the government. Every year, some citizens and companies evade taxes thus creating a budgetary deficit for the government. However, in the current Iranian year (started March 20, 2004), the Ministry of Finance has managed to increase tax collection by over 35 percent by launching an extensive publicity campaign.
The media-oriented campaign launched by the ministry during the first four months of the current year, has helped garner some 113 percent more tax declaration forms from the public. From the beginning of this year till now, some 1,830,000-tax declaration forms have been distributed among the public. It should be mentioned that in the past few decades, taxes were evaded by not filling out declaration forms, but indeed the situation has undergone a change this year.
Head of the Taxation Affairs Organization Gholam Reza Heydari has said the government was hopeful that this year over 90 percent of the direct taxes projected in the budget law would be collected. He added, "When real and legal persons realize that if they declare the tax payments themselves, they would be paying less taxes. Thus they will develop an interest in using tax declaration forms as the mode of paying taxes."
The point is that the people are obliged to pay direct taxes for their assets and their income. However, the fact that tax officials set tough regulations in recent years led many people to evade paying taxes or at least seek ways to pay less.
Meanwhile, our people typically think that payment of taxes is not crucial. This is while in advanced countries such as the US people understand that payment of taxes contributes to their welfare in the long run because they get to use many state and federal facilities. Although the taxation system in a country like the US is different from ours, we could emulate that system at least by promulgating the culture that 'paying taxes is the duty of a good and law-abiding citizen'.
It cannot and should not be denied that the Americans for example are keen on paying taxes in a timely manner because they are blessed with many facilities and their tax money is used for ensuring public welfare. However, in our country people still do not know how their tax money is used for their well-being. In other words, people do not trust the government over proper use of the tax money for ensuring the well-being of the citizens. The Taxation Affairs Organization should work on promoting the right culture and convincing the people that their tax money will be used for their own good. If the people come to terms with this reality, then they will not try to evade taxes. Of course, tax evasion is also a common phenomenon in advanced countries. But the point is that these countries have the legal wherewithal to prevent excessive tax evasion.
All in all, TAO needs to intensify its sound initiative of launching the publicity campaign through the Islamic Republic of Iran Broadcasting (IRIB) and thus encourage the citizens to pay taxes as a legal duty towards the government. In return, the government should provide the people with the necessary assurances that their tax money is used for constructive purposes. This way perhaps our people would learn that paying taxes in a timely manner is in their own interest.
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