News ID: 170018
Published: 0651 GMT October 08, 2016

Subsidy reform plan problematic

Subsidy reform plan problematic

The government of former president Mahmoud Ahmadinejad (2005-13) initiated one of the most controversial socioeconomic plans in Iran. His administration implemented a subsidy reform plan which was met with fierce criticism from economic pundits. The first phase of the project came into force in December 2010.

The plan was deemed necessary to ease the government's financial burden and to help achieve a better distribution of wealth.

Based on the plan, the government raised the prices of energy carriers and consumer goods. However, it granted monthly allowances to people from all walks of life irrespective of their financial needs to cushion the blow of rising prices. Each individual was entitled to about $15 per month.

Even though the cash subsidies were intended for only 10 percent of the populace, they were granted to almost the entire population.

Recently, the Research Center of the Parliament released a report on the impacts of the plan.

The report said the 'redirection of subsidies' has imposed huge economic and social burdens on the country.

The report further said that the rise in fuel prices has not curtailed consumption. It noted that the former government had neglected the optimization of production, distribution and consumption in the energy industry.

Lawmakers are now studying approaches to abolish the subsidy reform plan within three years and replace it with a new plan named 'energy management'.

The new plan aims to rectify flaws in the energy sector and set new fuel prices. Economizing on energy consumption and balancing energy distribution are also among its targets.

The incumbent government is still reeling from the fallout of the subsidy reform plan. A large number of people are receiving stipends although millions of those who are not among needy people have been removed from the list of cash recipients.

The poor implementation of subsidy reform plan pushed inflation up. The inflationary impact of the plan was so strong that the Iranian Parliament had to suspend the second phase.

Cash subsidies also led to huge job losses while adversely impacting the production sector. This is because in rural regions, for instance, the handouts discouraged residents from working. The huge money also brought about a rise in liquidity which was attracted by arbitrage opportunities rather than being channeled to the production sector.

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