Iran’s Subsidy Reform from Promise to Disappointment

In December 2010, Iran implemented an ambitious subsidy reform program for energy and bread. Prices on these products were raised by factors of 2 to 9 and, in compensation, households were given a monthly cash transfer of about $45 per person (about $90 in Purchasing Power Parity dollars). The compensation scheme was essential to the initial success of the program and allowed the largest energy price reforms in history to go through without the social unrest that usually accompanies, and often derails, much smaller fuel price increases in other countries. However, three years later, the program has stalled and energy prices are once again well below their global levels. Two factors explain the failure of the program to continue after its successful implementation. First, in its zest to redistribute income, the government set the level of cash transfers well above new revenues from the price increases, and printed money to pay for the deficit. The resulting inflation eroded public support for the program and caused the parliament to freeze further price adjustments. Second, about a year and a half after the program began, international sanctions targeting Iran’s oil exports and the country’s access to global trade tightened considerably caused oil exports to fall by half and disrupted industrial production. Iran’s currency, the rial, collapsed and prices spiraled out of control. The resulting economic crisis eroded public support for the program and put further energy price increases on the back burner. In 2014, the new Rouhani government has resumes price reform, though this time in much smaller scale and in calmer international and domestic environments, but distrust in energy price reform and cash transfers is deep and the fight to bring energy prices to international levels will remain tough. The main lessons from Iran’s experience with energy price reform are that cash transfers are an important part of the reform package—they can reduce poverty and inequality while increasing the reform’s general acceptance—and that they must be self financing and not depend on the general budget.