Economy, Domestic Economy

Back to the Subsidy Conundrum

Back to the Subsidy ConundrumBack to the Subsidy Conundrum

The government will continue its cash handout scheme, which already provides almost every Iranian citizen with a monthly pay of 455,000 rials ($17 based on official rate), throughout the next Iranian year (starting March 21, 2015) Mohammad Baqer Nobakht, the vice president for planning and strategic supervision, stated this week.  Even the implementation of the third phase of the Subsidy Reform Plan will not change that.

The subsidy reform plan, introduced as “the biggest surgery on the economy” by former president Mahmoud Ahmadinejad, aimed to gradually remove subsides for energy carriers in a bid to make sizeable savings. A share of the earned sum was to be paid in the form of cash handouts to Iranian citizens while the rest was allocated to the manufacturing sector.

However, the plan itself and the way it was implemented failed to meet the expectations of both the government and the public in the years that followed.

Critics say the controversial scheme, which came into effect in September 2010 by the previous government, must come to a halt. The Rouhani administration however has said it has no choice but to carry on with the colossal payments. They believe the households have experienced, since the implementation of the plan, nothing but hyperinflation, which they blame partly on the injection of cash into the society.

When President Hassan Rouhani took office in June 2013, Iran’s economy was suffering from hyperinflation and recession as a result of macroeconomic mismanagement as well as western sanctions imposed against Iran over its nuclear energy program.  Unemployment was another challenge Rouhani had to face. He also needed to manage the incomplete subsidy plan.

Rouhani decided to make changes in the way the plan was being implemented. So, before he started implementing the second phase of the plan in April 2014, he asked the well-to-do to refrain from receiving their share in favor of the low-income households. The Rouhani administration was hoping to overcome the tough economic conditions by injecting the saved money into productive projects. But things did not turn out the way he expected. During the days the government had specified for people to register for cash handouts, more than 90 percent of the population announced they were in need. So, the second phase of the subsidy plan began with little change in the number of handout receivers.

The failure to identify the wealthy raised criticism, with a number of lawmakers lashing out at the president for allegedly wasting the budget, as they argued that the cash handouts would not reach the needy people.

After the implementation of the second phase of the Subsidy Reform Plan and in an effort to overcome the aforementioned problem, Rouhani called on several state organizations, including the labor ministry as a key entity, to form a database to help the government identify top earners.

Recently, the economy minister, Ali Tayebnia, announced that nearly 10 million rich people have been identified and that the government will gradually remove them from the list of handout recipients. Some critics welcomed the announcement and called it a step forward.

However, the government’s recent decision to continue handing out cash to every Iranian citizen has dashed all hopes. If implemented as announced, the third phase will be a big mistake as most economists believe the decision has been more politically motivated than economically.