Iran tries to reduce subsidies again

NY Times:

Faced with falling oil prices and a weakening economy, President Mahmoud Ahmadinejad presented a plan to Parliament on Tuesday that would scrap energy subsidies, a significant change in a major oil-producing country where gasoline is sold for 36 cents a gallon.

Economists warn that the move could spur inflation and raise unemployment. But Mr. Ahmadinejad urged Parliament to vote for the bill because of the need to curb costly energy consumption, which the subsidies have encouraged.

The president previously insisted that the global economic downturn and the decline in oil prices would not harm Iran’s economy. But as oil prices have fallen to less than $40 a barrel from $147 in recent months, the pressures on the government have become unavoidable. It currently pays $100 billion a year in direct and indirect subsidies for goods, according to government figures.

“Falling oil prices encourage us to promptly implement the bill,” Mr. Ahmadinejad told Parliament. “It is time we made a decision.”

The falling international oil prices provided a good opportunity for Iran to act now to end subsidies that have been in place for years, he said. The resulting inflation, he argued, would be temporary.

Opposition to the plan is expected to be intense. But Parliament agreed to study the package and is expected to put it up for a vote within a month. Parliament has 290 members, and more than half of them would have to vote for the bill for it to pass.

Electricity is now sold at just 6 cents per 10 kilowatt-hours. The plan would abolish all government subsidies for things like heating gas, gasoline, electricity and water within the next three years and allow prices to reach international levels.

While the plan seems likely to be unpopular, Mr. Ahmadinejad’s critics say he is trying to offset its impact and appeal to voters ahead of the June 2009 presidential election by also promising to give much of the money that is now paid in subsidies directly to the poor in the form of a monthly allowance.

Iran needs to get rid of these subsidies that encourage consumption and distort the market place. The government has not done so before now because it needed them to buy quite from the people who hate the rule of the religious bigots. Doing it while oil prices are down makes the blow a little less harsh than it would have been when prices were three or four times as high this summer. It will still be a shock for the economy.


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