World Bank Welcomes Iran Subsidy Cuts, Foresees Sanction Woes
The World Bank�s MENA division has welcomed the relative success of the Iranian government�s drastic subsidies cuts to subsidies, which in 2008 were estimated to be the highest in the world amounting to 27% of Iran�s GDP. In its 1 September Iran Overview it notes that �preliminary reports suggest that the Government�s comprehensive cash transfer program accompanying the ongoing subsidy reform has reduced extreme poverty and income inequality significantly.� Phase 1 of the subsidy cuts, initiated in December 2010, is estimated to have increased state savings by $44bn in 2011 and $53.8bn in 2012, according to Iranian 2012-13 budget projections. The government paid out $33bn in direct cash handouts to the lowest and middle income classes last year. And according to the budget�s provision for this year it is expected to pay $40bn in cash rebates while also dedicating another $8.15bn and $4.9bn respectively to the industrial and health sectors (MEES, 21 May).
Nevertheless, the report notes that the government had not honored its obligation to direct around 30% of the expected subsidy savings to Iran�s industrial sector, stressing that �it was not until September 2011, that the government started to fulfill its commitment to producers.� The increasing effectiveness of international sanctions may further hinder the government from paying the $8.15bn earmarked for the industrial sector in this year�s budget. The report also underlines the increased vulnerability of the Iranian economy to international sanctions, which are expected to limit the economy�s growth to below to 2% for 2012, while keeping inflation at around 20% for fiscal 2012-13.
The Central Bank of Iran (CBI) acknowledged that the official inflation rate for June was 22.4% versus 21.8% in April (MEES, 23 July), but it is likely to grow due to the energy prices increases and continued devaluation of the riyal. The World Bank overview clearly identifies the loss of oil export revenues, estimated in June by the International Energy Agency at 1mn b/d, as the most serious weakness for Iran�s financial situation. It notes that �exports of crude oil are expected to decline due to embargoes by the EU, and lower demand from China and India after recent payment difficulties due to the US sanctions on the Iranian central bank.�
The report also expresses serious doubts about the ability as well as the sincerity of the government�s decision to implement its 2010-15 privatization program, which calls for the selling of up to 20% of state-owned enterprises (SOE). It says �assets of SOEs appear to have been often bought by the Iranian Revolutionary Guards Corps.� Iran�s overall financial attractiveness has declined to the 144th place in the Bank�s Doing Business ranking. Only Algeria, Iraq and Djibouti rank lower than Iran among MENA countries.
Copyright MEES 2012.
