The subsidy system in Iran is set for a major overhaul as its burden has rendered the national economy vulnerable. Currently a huge volume of the government budget is distributed equally among all the people, both the haves and have-nots, in the form of a wide range of subsidies. The pattern has continued but failed to satisfy the low-income strata.
Due to the heavy subsidies government plans for improving the quality of life
have not produced the desired results while large amounts have been wasted in the process. Now the government has taken a firm decision to rewrite the prohibitive subsidy regime.
The future direction will be based on two components, namely consumption subsidies and subsidies for production of goods and services. Consequently, unnecessary subsidies like the payments to detergent producers are being eliminated only to be channeled for more important purposes such as dairy products that have a direct bearing on the health of the masses.
In the new government initiative to be announced by President Mahmoud Ahmadinejad next week, the bulk of the nonessential subsidies will be removed to help check corruption, which is also a result of difference in prices of subsidized and non-subsidized goods.
One proposal making the rounds in recent years calls on the government to end the existing subsidy system and either pay cash to the needy or lower education and health costs through efficient management of the funds allocated as subsidies.
The government is determined to cooperate with the parliament to reform the payment of subsidies to manufactures and economic institutions so that the financial assistance ensures checks on prices of goods and services.
It is also expected that instead of lowering bank lending rates to support production and create jobs, costs of economic sectors will be reduced with the ensuing liquidity channeled into production sectors to boost growth.
Reports indicate that the government is revising the three-decade-old subsidy policy with special focus on decreasing production costs/overheads and pave the way for an effective presence of Iranian enterprises in international markets.
It is an open secret that the present subsidy system, among other things, has also encouraged smuggling of goods across our borders with several countries. Basic goods (fuel, flour, medicineÉ) distributed at low prices with huge costs to the national treasury are routinely smuggled to the neighboring countries.
Last year the government rationed the sale of fuel to motorists and minimized to the extent possible smuggling of petrol. Experts maintain that if the government succeeds in overhauling the subsidy system, the disturbing trends in smuggling that has seemingly become an industry will become a thing of the past.
If the government can shift subsidies from consumption to production and extend financial support only to the most needy, it will have put an end to years of deficit spending. Under the new schemes state revenues will improve, smuggling will no longer be an attractive enterprise, and the overall economic climate will move on the right track.
Needless to say, the national economy will become dynamic and be better able to compete with other countries when macro economic structures are reformed, and legal, executive and administrative hurdles are removed to make space for a vibrant private sector. The present subsidy system can no more be defended. Alterations or modifications could make a bad situation worse.
No matter how the government wants to reform the economy with its “major surgery“, it will certainly encounter new challenges, objections and criticism.
The bottom line is that for the Iranian economy to interact with the global economy meaningful change is the only game in town. This is something that both the government and Majlis agree on. Let us hope cooperation between the government and the legislature on this key platform will be strong, pragmatic and profound.