Phasing out gasoline subsidies in Iran: strengthened targeted social assistance

By: Ingrid Krüger

Iran was the first country in the Gulf Region to discover oil in 1908. Iran now holds the world’s third-largest proven oil reserves. The oil revenues have made it possible for the Iranian state to expand its activities, leading to the question of how the Iranian state is making the people benefit from its large oil revenues. The government’s subsidization of gasoline is an example of short sightedness characteristic of oil revenue spending in Iran. The gasoline subsidies might appear beneficial to the Iranian people at the time being, but come at great cost.

Iran’s low refining capacity makes it dependent on gasoline imports to keep up with domestic demand. Gasoline subsidies imply lost revenues at the present moment and will also be detrimental to the future, as seen from the suffocating air pollution in Tehran. In an IMF Country Report from August last year, an increase of gasoline prices in Iran to their import border price is recommended. However, when rationing was introduced and gasoline prices increased in Iran in June 2007, it led to angry protests. As a carpenter in Tehran put it; ‘there is no reason why we should pay the same price as people outside Iran do, we have all this oil beneath our feet’. Last year, the government decided to increase the rationed amount and to allow gasoline sales above it at a higher price.

t’s hard to set ‘the right price’. Any increase in the gasoline price must be carefully thought through, in order to avoid going one step forward and two steps back. The purchasing power of Iranians must be taken into consideration. It is not the absolute increase in the gasoline price that is important. The importance of the relative increase was shown in Yemen in July 2005 when local diesel prices were more than doubled, leading to public protests and leaving dozens dead after violence broke out in the streets. It is crucial that the price increase does not take the Iranian people by surprise.

The IMF Country Report stresses that a price reform must be ‘accompanied by strengthened targeted social assistance and, possibly, some form of cash transfers from oil revenues to households’. Will the Iranians themselves be informed about how fast and by how much the gasoline prices will be increased each time? How will the state use its strengthened finances to target social assistance better in the future?

 

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