Cash Subsidy Targeted Farther

Business & Markets Desk
Cash Subsidy Targeted Farther
Cash Subsidy Targeted Farther

The government will stop paying cash subsidies to 15 million "rich" people as of the next Iranian year (to start March 20, 2016), unlocking 81 trillion rials ($2.2 billion at market exchange rate) for the poor, the head of Majlis Social Commission said recently.

"The move has been integrated into next year's budget plans," Abdolreza Azizi said.

The target of eliminating 15 million people in the upcoming fiscal year is a huge spike from the 3.5 million cut so far.

This is in line with the President Hassan Rouhani Administration's policy of cleaning up the government's subsidy program and limiting its costs.

In view of the depreciating value of rial, it's one-third the value of cash subsidy (currently $12.6 at market exchange rate) first implemented by former president Mahmoud Ahmadinejad in 2010.

The plan aimed to cut indirect subsidies on fuel and foodstuff, and paid a monthly sum in cash to every family. The government later made not-very-successful attempts to differentiate between high income and low income households.

The Subsidy Reform Plan has been characterized with inefficiency and cost overruns during its five-year run. The government had a 390-trillion-rial ($10.7 billion) budget for direct and indirect subsidies to people and companies for the current fiscal year.

However, it is estimated to actually cost 7.6% more at 420 trillion rials ($11.4 billion) due to overruns of cash subsidies, based on its current trend, according to Donya-e-Eqtesad.

The Rouhani administration spent 280 trillion rials ($7.6 billion) in the first three quarters of the current Iranian year to pay cash subsidies.

For next year, the government will pay 480 trillion rials ($13 billion) in direct and indirect subsidies based on the budget, which indicates a 23% surge compared to this year's budget.

The government is stepping up its efforts to sculpt a welfare system out of the cash subsidy program. However, it is also mixing social acts with its economic policy.

According to the Donya-e-Eqtesad report, the unlocked 81 trillion rials will be paid to people covered by State Welfare Organization and Imam Khomeini Relief Committee—both organizations that help the poor, disabled or ill.

> Short-Listing Process

To eliminate the haves from the cash subsidy list, the government has created a database that reviews 41 criteria. These include ownership deeds of property and cars, commercial licenses, foreign travel history, insurance policies owned and more.

People can challenge rulings against them. They will be referred to a call center which, oddly enough, will explain to them where their cash handout is going.

According to the report, of the 60,000 average monthly complaints, 75% give up their complaint after the explanation.

People that persist can have their case reviewed. If the assets are proven to be actually owned by someone else or a member of the challenging family is going through a shock—e.g. a family member is seriously ill—then cash subsidies will resume.

One in five of these cases get cash handouts again. This brings the elimination processes success rate up to 95%.

Based on the criteria, top government, public, private and bank executives, high-ranking military officers, owners of plants and professionals, including doctors, lawyers and university professors, are ineligible for cash handouts.

Also, those living abroad or owning two cars or one foreign-made car along with those who have loans worth over 800 million rials ($21,700) will be crossed out of the list.

> Failed Attempt

The parliament also voted to scrap plans to raise fuel prices by 10% annually until they reached 90% of the cost of fuel ready on tankers in the Persian Gulf in 2004, during the tenure of former president Mohammad Khatami, citing the need to protect the poor against rising fuel costs.

Ahmadinejad offered a plan to swap subsidies with cash handouts to the poor in 2009. The government was supposed to pay half the money raised from increasing energy prices in cash handouts to the poor, use 30% of the money to support industries and save 20% for its own expenses. It went into effect in Dec. 2010.

Energy prices were hiked an average 400%. Gasoline went from 10 cents to 70 cents per liter though the government went ahead and gave each car a 720-liter ration of 40 cent gasoline. Diesel prices had a steeper increase, but working vehicles got generous rations of cheaper fuel. Heating gas went up 30 times.

As for cash subsidies, every Iranian was paid $45 on a monthly basis. This racked up the costs and no money was used to support industries or fuel fiscal spending. The plan has actually cost more than the previous subsidy system.

The Iranian government made 950 trillion rials ($25.9 billion at current market exchange rate) from the Subsidy Reform Plan while paying 1.35 quadrillion rials ($36.8 billion) from the plan's execution by 2013. The difference was paid through capital expenditure costs and printing out 57 trillion rials.

Ultimately runaway inflation and devaluation of the rial brought down the value of the handouts as fuel price increased. When President Rouhani took office, the second phase of the Subsidy Reform Plan went underway. The government tried to limit the number of recipients but 73 million, 91.2% of the population, applied.

Today, a year after the second phase, gasoline costs 27 cents a liter and diesel costs 13 cents. The government's costs for paying cash handouts will outstrip what it raises by 70 trillion rials ($1.9 billion) this year.