Iranian president proposes ending energy subsidies

New York 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.

The New York Times

By NAZILA FATHI
Published: December 30, 2008

TEHRAN — 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.

The amount he proposes for the allowance is not yet clear, but monthly assistance to the poor has steadily dropped to $20 per person every month from nearly $70.

Mr. Ahmadinejad came to power in 2005 with a mandate to distribute windfall oil revenue among the poor. However, the economy has taken a downturn since his election. Unemployment has increased, and inflation already stands at nearly 30 percent.

Opponents of his plan say it would push inflation higher. A central bank official, Ramin Pashaifam, said Mr. Ahmadinejad’s plan would increase inflation by an additional 11 to 15 percent, the daily newspaper Etemad quoted him as saying on Tuesday.