35% of Targeted Subsidies Resources Not Realized

EghtesadOnline: Thirty-five percent of the resources estimated for the implementation of the Targeted Subsidies Law were not realized in the eight months to Nov. 20 due to the decline in oil revenues and lower domestic gasoline consumption following the outbreak of the new coronavirus and reduction in journeys, an official with the Plan and Budget Organization of Iran said.

News ID: ۷۸۵۶۸۵

13 December 2020

“To avert the delay in cash subsidy payments, Islamic financial bonds were issued with the go-ahead of the Supreme Council of Economic Coordination,” Mojgan Khanlou was also quoted as saying by Mehr News Agency.

The Targeted Subsidies Law of 2010 authorized the reduction of food and energy subsidies and instead allowed the payment of 455,000 rials ($1.75) to each and every Iranian on a monthly basis. The plan has been retained and more than 95% of Iranians currently receive the monthly cash subsidy.

Noting that as per the budget bill of the next fiscal year (March 2021-22), Targeted Subsidies Organization is allowed to issue its own bonds to compensate the deficit in its budget, the official said, “The value of bonds permitted to be issued for the current year [March 2020-21] stands at 880 trillion rials [$3.38 billion]. The Sixth Five-Year Development Plan [2017-22] has projected 550 trillion rials [$2.11 billion] in Islamic financial bonds for the year ending March 2022. The government has also predicted to sell [oil] Salaf bonds worth 700 trillion rials [$2.69 billion]. Bonds that will be issued by the government next year won’t exceed 1,250 trillion rials [$4.8 billion] but state companies are allowed to issue bonds under their own guarantee and payment scheme.”

The government will pay 428 trillion rials ($1.64 billion) in cash and non-cash subsidies next year as per the next fiscal year’s budget bill (March 2021-22). On top of that, it will allocate 310 trillion rials ($1.19 billion) for the implementation of the so-called Livelihood Assistance Program, i.e. cash transfers as compensation for higher gasoline prices introduced in November 2019.

World’s Largest Fuel Subsidizer

Iran was the largest fossil fuel subsidizer for the third year in a row in 2019, according to the International Energy Agency.

Having spent $86.09 billion on fossil energy consumption subsidies in 2019, Iran ranked first globally, leaving behind China with $30.48 billion and Saudi Arabia with $28.72 billion.

The volume of Iranian fuel subsidies extended to its citizens in 2019, which increased by 10.9% year-on-year, equals 18.8% of Iran’s GDP.

Iran’s average subsidization rate of fossil fuels (as a proportion of the full cost of supply) was 79%. The country paid $1,038 as fossil fuel subsidies per person in 2019.

In 2019, Iran’s subsidies for natural gas consumption were at $16.32 billion, fossil-fueled electricity at $51.74 billion and oil at $18.03 billion. Transport oil subsidies stood at $13.08 billion.

Iran spent $77.62 billion on fossil fuel consumption in 2018, including $26.52 billion on natural gas, $19.33 billion on electricity and $31.76 billion on oil. Transport oil subsidies stood at $23.96 billion.

In 2017, the country spent $57.76 billion on fossil fuel consumption, including $20.04 billion on natural gas, $17.08 billion on electricity and $20.63 billion on oil. Transport oil subsidies stood at $14.82 billion.

After two years when the global aggregate rose, 2019 saw a decline in fossil fuel consumption subsidies of $120 billion, related in large part to lower average fuel prices over the course of the year.

Almost all countries had lower estimated subsidies year-on-year, the only exceptions being Iran (which remained the single largest provider of these subsidies, despite a hike of at least 50% in gasoline prices in November), Bahrain and Sri Lanka.

The weighted-average subsidy rate was some 15%, meaning that consumers receiving these subsidies paid on average around 85% of the competitive market reference prices for the energy products concerned.

Among the fuels, subsidies to oil products remained the largest single component of the total ($150 billion out of the total $320 billion). Electricity is the next-largest element of the overall subsidy estimate ($115 billion in 2019), followed by natural gas ($50 billion) and coal ($2.5 billion).

IEA has been measuring fossil-fuel subsidies in a systematic way for more than a decade. The analysis performed by the World Energy Outlook team highlights the scale of these subsidies, and the beneficial impact of fossil-fuel subsidy removal for energy markets, climate change and government budgets.

It estimates subsidies to fossil fuels that are consumed directly by end-users or consumed as inputs to electricity generation. The price-gap approach, the most commonly applied methodology for quantifying consumption subsidies, is used for this analysis.

The data required for the price-gap calculations are extensive. End-user price and consumption data are drawn from IEA data and, where necessary, from government sources and other reports.

Furthermore, the estimate is sensitive to reference prices, which are calculated for fuels on the basis of international prices. Electricity reference prices are derived from annual average-cost pricing.

For economies [like Iran] that export a given fossil-energy product but charge less for it in the domestic markets, the subsidies are implicit; they have no direct budgetary impact as long as the price covers the cost of production.

The subsidy, in this case, is the opportunity cost of pricing domestic energy below international market levels, i.e., the rent that could be recovered if consumers paid world prices, adjusting for differences in variables such as transportation costs.

For net importers, subsidies measured via the price-gap approach may be explicit, representing budget expenditures arising from the domestic sale of imported energy at subsidized prices, or may sometimes be implicit. Many economies, Indonesia for example, rely extensively on domestically produced fuels, but supplement domestic supply by importing the remainder. In such cases, subsidy estimates represent a combination of opportunity costs and direct expenditures.