Why Rouhani won’t Halt Costly Cash Handouts

By Bijan Khajehpour, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

Why Rouhani won’t Halt Costly Cash Handouts anytime soon

Iran kick-started a subsidy reform plan in December 2010 that was originally drafted to be implemented in three phases over five years. Given the change of government in 2013 and irregularities in the implementation of the original plan by the previous administration of President Mahmoud Ahmadinejad (2005-13), the second phase was only initiated in April 2014.

This article looks at the incumbent administration of President Hassan Rouhani’s potential options for how to wind down the current program, which was supposed to involve the removal of blanket subsidies and instead direct payment of cash handouts to vulnerable social classes.

It is evident that the Rouhani administration is faced with a dilemma: On the one hand, the law calls for the third phase of the original plan to be implemented, but on the other hand, economic realities have changed so dramatically that this implementation would damage the economy.

In the meantime, parliament is considering a provision in the 6th Five-Year Plan that would ask the government to discontinue the current cash handouts and to introduce a different approach to managing energy subsidies. This new law would once again change the dynamics of a plan that was misconceived from the beginning.

The core objectives of the original subsidy reform plan were to achieve social justice through redistribution of wealth and to reduce the inefficiencies in energy consumption through more appropriate energy pricing. Though some improvements in energy consumption have been achieved, no improvement has been registered with respect to social justice.

The reality is that the government currently pays a total of 34 trillion rials (nearly $1.1 billion) per month in direct cash handouts to about 90% of the population without a clear benefit to the economy. These funds, which amount to some $13 billion a year, could be used more efficiently both in terms of reducing the income gap as well as reducing inflationary phenomena such as budget deficits and financial bottlenecks.

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