Economist Breaks Ranks Over Cash Subsidies

EghtesadOnline: Governments must honor their contracts, even those made under previous administrations, says Iranian professor of economics at Virginia Tech, Djavad Salehi-Isfahani.

News ID: ۷۷۳۶۱۰

31 January 2017

He regards the cash subsidy project as a contract under which the government vowed to pay every Iranian citizen 455,000 rials (about $12) on a monthly basis in return for the elimination of food and energy subsidies, saying it is not acceptable for subsequent governments go back on their promises.

The administration of President Hassan Rouhani has kept going the controversial plan it inherited from the government of former president, Mahmoud Ahmadinejad, albeit reluctantly. The plan, according to most analysts, has brought nothing but inflation for the Iranians and an economic burden for the government.

Disagreeing with many other respected economists who have time and again opposed the plan, Salehi-Isfahani believes the system of monthly cash payments to households is a fair way of distributing oil and gas revenues among Iranian citizens, the Persian weekly Tejarat-e Farda reported.

“Governments are held accountable for the revenues earned from the sales of oil and natural gas, and are given the mandate to spend those revenues to improve people’s lives,” Financial Tribune quoted him as saying.

Three Methods

Salehi-Isfahani said they might decide to give a fraction of the revenues to their citizens in cash.

Currently, around 10-15% of the revenues are paid to people in cash under the “Subsidy Reform Plan”.

“The second method governments might opt for is to provide their people with subsidized goods,” he said.

“Investment in infrastructures, which allows people to use facilities toll-free, is another form of transferring revenues from oil and natural gas to citizens.”

The economist notes that each of the above methods has their own pluses and minuses that should be taken into account when assessing the general policies in using public wealth.

“For instance, the replacement of subsidized fuel with cash payments in 2010 was an appropriate move, given the fragile environmental condition in Iran,” he said.

“Cheap energy is a form of cash subsidy paid on condition of consumption. Investment in infrastructures might seem to be the preferred option over the other two, but there is no solid evidence to prove that.”

Salehi-Isfahani questioned the distribution system of state investment in infrastructures and said it is not clear who is a better investor: governments or households?

“Before the introduction of the Subsidy Reform Plan, Iranians were generously supplied with cheap energy and the country’s oil money was channeled into government coffers and the budget organization was tasked with spending the wealth,” he said.

“The policy worked just as well, affecting people’s lives positively but none of them would benefit people equitably. Those who had bigger houses or cars would use more energy. Cheap energy and highways are not used equitably by all socioeconomic strata.”

Equitable Distribution

Salehi-Isfahani said no one can feel confident about the equitable distribution of revenues by the government, as there is always a tinge of administrative corruption and inefficiency in the public sector. “Therefore, the option of cash handouts cannot be taken off the table easily,” he added.

Last month, Economy Minister Ali Tayyebnia once again voiced his disapproval of paying cash handouts, saying that the current level of the administration’s and public-sector companies’ debts held by contractors and other entities stand at a whopping 6-7 quadrillion rials ($152-177 billion).

However, these debts, albeit slightly lower when the cash subsidy was initiated, have always dominated the account balance of Iranian governments.

“I wonder why we keep paying cash handouts to the tune of 420 trillion rials ($10.5 billion) a year while only 200-300 trillion rials ($5-7.5 billion) are allocated to development projects,” the minister said.

Striking a contrasting note, Salehi-Isfahani says, “I’m not sure the allocation of 10-15% of national wealth to people should exert an intolerable pressure on the government.”

Asked about offering subsidies to manufacturing industries instead of households, the economist said the country’s citizens are the rightful owners of national wealth.

“Economic entities are free to raise the prices of their products once costs go up, but families don’t have such an option,” he said.

“Energy prices in Iran are currently lower than global prices, which means the government is still paying subsidies to consumers of fuel. Households should be entitled to receiving subsidies once the energy prices get real and if identifying poor households turns out to be inaccurate, citizens should all be paid the same.”

Unlike most economists and experts who insist the cash handouts scheme is “poison for the national economy” and should be scrapped sooner rather than later, Salehi-Isfahani believes cash payments helped take the sting out of sanctions and the punishing economic conditions resulting from the demise of oil prices and their impact on low-income households who were not entitled to the support of humanitarian organizations.

New Discourse

The economist said the plan also put forth another way of delivering oil revenues to the people.

“By doing this, an important precedent was established and a new discourse found its way into the country’s political-economic dialogue,” he said.

According to a report by the Ministry of Economic Affairs and Finance, Iranian households’ purchasing power declined by 25% since the plan was put into effect.

“Currently, 31% of Iranian households live below the poverty line,” the report said.

Majlis Research Center believes the wasteful monthly distribution of over 34,000 billion rials ($850 million) among citizens has done little to improve productivity or reduce energy consumption.

The Rouhani government has moved to restrict the number of cash subsidy recipients, slowly but steadily.

So far, about seven million people from a population of 80 million have been delisted, Eghtesad Online reported.

Earlier this month, Minister of Cooperatives, Labor and Social Welfare Ali Rabiei said a notice of discontinuance of cash subsidies will be sent to three million Iranians by text message. Some doubt this will be enacted anytime soon, as it will adversely affect the president’s voter base, as he is expected to seek reelection in the next presidential poll in May.