Iran Plan to Cut Subsidies May Raise Fuel Prices 20%, Cut Waste, IMF Says

Iran’s planned reduction in fuel and utility subsidies will increase government revenue and reduce waste in one of the world’s most inefficient energy markets, International Monetary Fund economists said.

Until recently a four-member Iranian household received an average of $4,000 a year in subsidies for oil and natural gas, compared with a typical annual income of about $3,600 a year, according to an interview with IMF economist Roman Zytek and Iran mission chief Dominique Guillaume published late yesterday on the Washington-based organization’s website.

The removal of subsidies may initially raise prices as much as 20 percent, reducing domestic demand and leaving “more energy available for profitable exports,” Zytek said. “Giving away for free something that could be sold for a pile of money is not the best policy.”

In the 1980s, when Iran was at war with neighboring Iraq, it “was one of the most energy-efficient countries,” and now it’s “one of the most wasteful,” Guillaume said. “If they don’t restore the balance, the country will never achieve its high-growth potential.”

Iran says it aims to achieve $20 billion in savings in the first year of the subsidy cuts. It plans to spend 80 percent of that money on cash grants to the poorest Iranians and targeted subsidies for energy-intensive industries.

The plan, which has been fraught with delays, was due to start by the end of this month. Government officials haven’t specified what fuel prices will be under the new system.

Sanctions Pressure

The decision to remove subsidies comes as pressure mounts on Iran, with a fourth round of United Nations sanctions over its nuclear program imposed in June. The U.S., which along with its allies says Iran may be seeking to develop nuclear weapons, on July 1 tightened its own sanctions, targeting Iranian fuel importers and banks. European Union governments followed by banning investment and sales of equipment to Iran’s oil and natural-gas industries.

Iran’s economy probably grew by 1 to 2 percent this year, slowed by weak domestic demand, the IMF said. The country’s foreign debt is less than 7 percent of gross domestic product, and inflation has declined to less than 10 percent from almost 30 percent two years ago as the Central Bank withdrew liquidity, it said.

The lower level of inflation is a “good foundation” for the new energy pricing, Guillaume said. “Eliminating energy subsidies means that the Iranian people will see an increase in prices, so it’s important to have low inflation to start with.”

To contact the reporter on this story: Ladane Nasseri in Tehran at lnasseri@bloomberg.net.

To contact the editor responsible for this story: Maher Chmaytelli at mchmaytelli@bloomberg.net

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