Recent Developments in Iran's Energy Subsidy Reform

By Elham Hassanzadeh on October 10, 2012

In 2009, the International Energy Agency (IEA) estimated that Iran's subsidies for fossil-fuel consumption were US$66 billion, the highest of any country.

In 2010, it took bold economic reforms to phase out energy subsidies with the aim of preventing wasteful consumption, equitably distributing national wealth, strengthening the competitiveness of key industries and increasing the country's export capacity. The reform plan has been praised by international organizations, including the International Monetary Fund, for its well-designed mitigating measures, including a substantive cash transfer scheme.

Almost two years into the reforms and within the context of harsh economic conditions mostly resulting from international sanctions, questions have arisen as to the success or failure of the reform plan. A soaring inflation rate, dramatic volatility in the foreign exchange market and rising commodity prices have significantly undermined the price reforms and the value of cash handouts which have been paid on a nationwide scale to compensate for the higher energy prices.

This policy brief outlines recent developments since the reforms were implemented and sheds some light on the impacts that the reforms—once referred to as the country's "grand economic surgery"—have had.

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IISD, 2012