Iran’s challenges
Subsidies have been in place in Iran for four decades.
However, the uniqueness of Iran’s policy bail-out hinges on the discretionary role the government played amidst crippling challenges such as energy overconsumption, fiscal strain, international sanctions, and inefficiency in fuel usage, smuggling, air pollution, traffic congestion and human health problems.
The large gap between domestic and international fuel prices in Iran gave rise to a buoyant black market economy for smuggled products. In 2013 alone, 7 to 10 million litres of gasoline and diesel, sold ten times the official price, found its way out of Iran through the back door daily.
Low domestic energy prices, increased population, and smuggling made local energy consumption spike. Iran soon became the energy consumption capital of the world with a mean energy intensity tripling global average and 2.5 times the Middle Eastern average.
How Iran managed the situation
Iran’s Subsidy Reform Plan has been applauded to be the “biggest surgery” on the nation’s economy in half a century.
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The reform focus was on subsidy replacement in the food and energy sectors of the country, as well as a 5-year Economic Development Plan targeted at massive social assistance to the poor and most vulnerable.
Iran’s government agreed that subsidising energy was hurting the economy deeper than they attempted to heal it; approximately $100 billion per year was spent on subsidising energy prices. Of the $100 billion yearly subsidy payment, $45 billion went into fuel subsidies alone, and the remainder was dedicated to subsidising other consumables like bread, sugar, rice, cooking oil and medicine.
The reform would replace subsidy payments with cash handouts to identified low-income families, while price increase in the food and energy sectors were to be introduced systematically. This redistributive policy was also set to help equilibrate Iran’s energy pricing to its bordering neighbour’s rate to discourage smuggling and over consumption.
Careful implementation of the reform policy was set to improve Iran’s productivity, efficiency, competitiveness, economic growth, oil export and per capita income.
Accordingly, 50 per cent of the amount saved by the policy was set to go into direct transfers to the most impoverished strata of the economy. 20 per cent was dedicated to serving as safety nets or as compensation for increased costs owing to the new scheme, while 30 per cent was dedicated to the improvement of utility fuel and energy production infrastructure, public transportation development, industry and farming.
The Subsidy Reform Plan commenced with effective communication and messaging strategy. Online platforms and dedicated phone lines were made available to disseminate policy-related information and receive feedback from Iran’s massive citizens.
Iran’s government also partnered with the private sector to harvest firm-level reports and to address business concerns about rising costs. 7,000 enterprises benefited from government financial assistance and fuel discounts as compensation for financial hardship due to price increases.
Interestingly, the government ensured that all cash transfers were made to all targeted recipients before the phased price increases commenced. Reports reveal that about $45 per household was transferred to mitigate the economic shocks due to the policy rollout.
Banks were also helpful in the cash transfer process as they upgraded their payment platforms to accommodate the financial flows. Automated Teller Machine (ATM) networks were expanded to reach rural areas, facilitating about 16 million new accounts to eligible households.
The results
By March 2011, revenue saved by the reform was distributed to 80 per cent of the country’s citizens. Consequently, about 8 per cent of the rural population and 3.2 per cent of the urban residents were pulled out of poverty.
As a result of the high prices, a significant decline in the consumption rate of most energy products was recorded: fuel consumption decreased by 36.4 per cent; petrol, 5.6 per cent; diesel, 9.8 per cent; kerosene, 2.9 per cent; LPG, 10.6 per cent; electricity, 1.7 per cent; water, 6 per cent; and natural gas, 1.5 per cent.
The subsidy reform policy achieved massive public saving, and an estimated $20 billion was raised in the first year of implementation of the policy. Petroleum imports also declined from $5 billion to $30 million within the first year of implementation.
Furthermore, the gap between domestic and international oil prices in Iran significantly reduced, leaving very little room for smuggling activities in a once buoyant backdoor economy.
The second phase of the reform took effect in 2014 after some brief delays, and energy prices further rose to between 20 and 25 per cent. Poverty rate also recorded a decline by five percentage points in the first three months of the reform, and Gini coefficient decreased from 0.41 in 2009/2010 to 0.37 in 2011/2012.
What Nigeria can learn from Iran’s experience
Public trust plays a crucial role in supporting relatively easy deployment of services by the government. Suffice to say, good governance relies not only on transparency and accountability of leaders, coupled with the willingness to serve beyond any other objective, the governed must also be assured that they can bank on their leader’s words.
Public protest in disfavour of subsidy removal may portray real economic concerns, especially in the face of current socio-economic turbulence. However, more troubling could be the people’s distrust for the government’s real interest in the decision.
While Iran’s initial move to phase out the subsidy regime was met with some protests, the citizens soon understood that their government had genuine interest in bettering the economy. This was made clear from the effective communication and liaising strategy coupled with the decision to effect transfers before sequential price increases. Nigeria’s central authorities can borrow a leaf from this.
Although, the right timing to commence a development plan such as this may never come in handy, it is important that the government realises that subsidy removal requires a long-term play of open communication and policy direction which must focus on increasing GDP per capita of citizens to cater for the shocks that come with the price increases.
