## _wp11167 - References

## Source details

**Canonical URL:** [_wp11167 - References](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11167.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11167.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11167.pdf.json)

---

### I. Introduction and Key Implementation Facts
- Announcement timing:
  - President Ahmadinejad announced start of the Targeted Subsidies Reform on Saturday, December 18, 2010, at 9:00 p.m. Tehran time; new fuel prices were released after midnight on December 19, 2010.
  - New natural gas, electricity, and water tariffs were published within 24 hours; ceilings for taxi and public transport tariff increases followed.
- Coverage and transfers:
  - Close to 80 percent of Iran’s population was granted unrestricted access to compensatory payments deposited in specially-created bank accounts starting in October 2010.
  - The reform replaced massive indirect energy subsidies with across-the-board energy dividend transfers.
- Estimated impacts and transfers:
  - Price increases removed close to US$50–US$60 billion in annual product subsidies.
  - By December 2011 (first 12 months), Iranian households received at least US$30 billion in freely usable cash.
  - Another $10–$15 billion was advanced to enterprises to finance investment in restructuring aimed at reducing energy intensity.
- Scope of the paper: documents preparations, implementation, immediate post-implementation policies and risks; does not analyze broader macroeconomic policies preceding or following the reform.

### II. The Role of Oil in the Iranian Economy
- Shares and trends:
  - Share of oil in real GDP fell from an average of 40 percent in the 1960s to about 10½ percent in the last decade.
  - Oil and gas receipts accounted for about 72 percent of export revenues in the last decade.
  - Oil and gas revenues account for 65 percent of fiscal revenues.
- Pricing and effects:
  - Domestic energy prices were administratively set near production costs and changed only occasionally.
  - Rising international oil prices after 2002 and domestic inflation/exchange rate depreciation eroded domestic energy price parity with international benchmarks.
  - March 2002 unification of exchange rates and rial depreciation aggravated disparities.
- Economic consequences of subsidized energy:
  - Increased domestic energy consumption and energy intensity; Iran became one of the most energy-intensive economies in the world.
  - High domestic absorption of crude distillates, natural gas, and electricity reduced availability for export.
  - Energy companies faced underinvestment due to prices at or below cost recovery.
  - Environmental pollution and traffic congestion were additional drivers for reform.

### III. Objectives and Rationale of the Price Reform
- Primary objective: reduce waste and rationalize consumption by aligning domestic energy prices more closely with international opportunity costs.
- Compensation rationale:
  - Compensating households intended to discourage marginal gasoline consumption (substitution effect), allow consumers to purchase more other goods and services (income effect), and win broad public acceptance via cash compensation.
- Distributional and macro expectations:
  - Compensation would improve social equity; for the poor the compensation would represent a large share of income.
  - Distribution of about $30 billion in annual compensatory payments directly to the population was expected to support domestic demand and nonenergy sector growth.
  - The reform was not designed to contribute to fiscal consolidation; legislation and political debate ruled out using subsidy reductions to improve the fiscal balance.
  - Potentially large savings in domestic energy use could free crude and refined products for export; export revenues could finance investment to increase production and refining capacity.
- Contextual price facts:
  - By 2008, domestic gasoline price: US$0.10 per liter; international oil prices approached US$150 per barrel; f.o.b. gasoline around $2 per liter.

### Box 1 — Consumer Equilibrium Theory (selected quantitative details)
- Representative household and preferences:
  - Income: Rs 3 million per month.
  - Utility: U (E, O) = E^(1/10)*O^(9/10), where E = energy consumed; O = consumption of other goods & services.
- Initial prices and budget:
  - P_E^R = Rs 1,000 per unit; P_O = Rs 1,000.
  - Budget constraint: P_E * E + P_O * O <=3,000,000.
- Initial optimal bundle:
  - Energy purchased: 300 units.
  - Other goods and services: 2,700 units.
- Effect of quadrupling energy price (Rs 1,000 → Rs 4,000) without compensation:
  - Uncompensated consumption: 75 liters of energy and 2,700 units of other goods and services.
- Compensated price increase:
  - Compensation payment of about Rs 450,000 restores utility to initial level.
  - Income with compensation shown as: Rs3 .45million (as presented in source).
  - New equilibrium after compensation: about 85 liters of energy and 3,100 units of other goods and services.
- Purpose: illustrates substitution and income effects and how cash compensation can preserve or restore household welfare while reducing energy consumption.

### IV. Reform Legislation and Institutional Design
- Parliamentary timeline:
  - Debate began in late 2008; Parliament approved the Reform Act on January 5, 2010; Guardian Council approved on January 13, 2010.
  - Implementation planned over five years, coinciding with the Fifth Five Year Economic, Social and Cultural Development Plan for Iranian Years 1389–1394 (2010–2015).
- First-year fiscal projection:
  - Reform was to raise an estimated 200 trillion rials (US$20 billion) in additional revenues in the first year.
- Reform Act allocations and institutions:
  - Stipulated allocations of additional revenues:
    - At least fifty percent to households.
    - Thirty percent to assist Iranian companies to restructure and adjust to higher energy costs.
    - Twenty percent to the government to cover its own higher energy bill.
  - Article 15 authorized creation of a Subsidy Targeting Organization for centralized management.

### Box 2 — Simulating Aggregate Cash Flows from a Hypothetical Gasoline Price Increase
- Aggregate simulation headline results:
  - Quadrupling gasoline price estimated to reduce daily gasoline consumption from about 66 million liters to about 54 million liters.
  - Gasoline sales estimated to yield 81 billion rials in additional annual sales:
    - Rs 54.8 billion from the domestic market
    - Rs 26.3 billion from exports (or savings from reduced imports)
  - Government could compensate consumers by up to Rs 1.0 million per person per year without incurring losses.
  - This would amount to distributing up to US$90 per family of five for every two-month period if the government awarded the entire revenue windfall to households.
- Tabulated scenario (before → after reform):
  - Domestic price (rials per liter): 1,000 → 4,000
  - Daily use (average; millions of liters) 1/: 66 → 54
  - Annual use (billions of liters): 24.1 → 19.7
  - Total revenue (billions of rials): 24,090 → 78,840
  - Increase in revenues (billions of rials): 81,030, comprising:
    - From domestic sales: 54,750
    - From incremental increase in exports: 26,280
  - Per person (per year, in thousands of rials): 1,080
  - Per person (per two-month period, in thousands of rials): 180
  - Per family of five (per two-month period, in US dollars): 90
  - Memorandum items:
    - Export price for gasoline (in rials): 7,000 → 7,000
    - Population (in millions): 75 → 75
    - Exchange rate (rials/US$): 10,000 → 10,000
- Sources cited in box: CBI, Iranian media; and Fund staff estimates.
- Footnote: 1/ As widely reported by Iranian media in late January 2011.

### Preparation, Timing, and Advance Measures
- Key preparatory decisions: timing and speed of price adjustment; distribution—size and form—of compensatory payments; banking readiness to distribute transfers.
- Timing considerations:
  - Approval by mid-January 2010 left little time for March 21, 2010 implementation; authorities preferred November–December timing (seasonal low energy use).
  - Energy distribution companies needed software upgrades to handle multi-tier tariffs (e.g., regular gasoline at Rs1,000, Rs 4,000, and Rs 7,000 per liter during transition).
- Administrative measures to control inflation and expectations:
  - Pre-reform objective: reduce inflation (fell from close to 30 percent in mid-2008 to 7 percent in early 2010).
  - December 2010 CPI surged by 1.5 percent (not seasonally adjusted) versus November; twelve months ending December 20, 2010 end-of-period CPI was up by 12.8 percent.
  - Measures included fines for premature price increases, stockpiling consumer goods, and advertising stockpile availability to dissuade hoarding.

### Magnitude of Price Adjustment and Pricing Mechanics
- Reform Act specified net revenue gain of 200 trillion rials in the first year but not explicit price increase magnitude.
- Government argued modest increases (200–500 percent) might not significantly reduce demand and could erode in real terms via inflation or exchange rate moves; large, frontloaded increases increase nominal compensatory payments making reform easier to sell.
- Reform Act target: adjust prices to 90 percent of f.o.b. Persian Gulf levels within five years.
- Authorities simulated over 200 price scenarios to balance demand reduction and avoid inefficient substitutions.

### Energy Distribution, Multi-tier Pricing, and Rationing
- Multi-tier pricing to protect small users; example electricity schedule:
  - First 100 kWh priced at Rs 270 (about US$0.027); prices rise to Rs 2,100 for use in excess of 600 kWh.
- Tariff differentiation by region and escalating schedules for natural gas and water.
- Electronic gas rationing cards introduced in June 2007 created a de facto multi-tier gasoline pricing structure; rationed gasoline increased in price but remained below full unrestricted price.
- In areas lacking natural gas, rationed kerosene at Rs 1,000 per liter and lower electricity rates to ensure heating affordability.

### Household Transfers: Identification and Distribution Mechanics
- Reform Act stipulated households receive 50 percent of revenues but did not define beneficiary selection.
- Targeting difficulties led to final approach: everyone could apply; compensatory transfers made equal for all applicants; richest households were encouraged to refrain from applying.
- Application process: simple, no means testing or income verification; approval rate reported at 98 percent.
- Coverage and registration:
  - On eve of price increase, over 61 million individuals (80 percent of population of about 75 million) received compensatory payments.
  - By May 2011 over seventy million Iranians registered to receive compensatory payments.
- Physical distribution:
  - Deposits began October 19 and continued through November 11 for different provinces.
  - Initial credits: 800,000 rials multiplied by up to six household members for accounts in certain provinces.
  - Access to deposits frozen until the energy price increase day.
  - Public verification via a government website and telephone hotlines.

### Corporate Sector Assistance and Restructuring Measures
- Authorities analyzed more than 12,000 enterprises; 7,000 selected to receive targeted assistance.
- Corporate assistance financed by 30 percent of additional revenues and included:
  - Direct assistance packages
  - Sales of limited quantities of fuel at discounted rates (e.g., selected sectors offered diesel at Rs 1,500 per liter though free market diesel rose from Rs 165 to Rs 3,500 per liter)
  - Interest subsidies on loans for energy-saving technologies
  - Credit lines to mitigate cash-flow impacts and spread higher energy costs over three years
  - Reduced fees and taxes, special export awards, and tariff adjustments
  - Initiatives to improve enterprise efficiency (e.g., credit for hiring consultants)

### Banking Sector Role and Readiness
- Banks used to distribute targeted subsidies to households; advantages:
  - Efficiency and security versus cash distribution
  - Allowed beneficiaries to see transfers before price rises, aiding acceptability
  - Expected savings in banks to ease liquidity management
- Preparations included opening an estimated 16 million new accounts, upgrading banking infrastructure and payment systems, and expanding ATM network nationwide.
- Banks also allocated to implement enterprise subsidy schemes by receiving interest rate differentials from the government.
- Central Bank prohibited banks from using targeted subsidy funds to recover overdue loans.

### Government Sector Allocations, Public Relations, and Communication
- Government allocations:
  - Additional revenue allocated to cover higher energy bills of government sector, including provincial and local governments.
  - Uncertainty whether allocation schemes provided incentives to promote energy savings by government-funded organizations.
- Public relations strategy:
  - Extensive PR campaign to educate population on low-energy-price costs and reform benefits; coordinated spokesman and broad media engagement.
  - Emphasis that reforms switch subsidies from products to households to benefit poor households.
  - Publicizing crediting of “targeted subsidies” to accounts of 62 million beneficiaries was instrumental in building support and making reform effectively irreversible.
  - Some communication missteps caused uncertainty; President later clarified deposits were “per person and for two months” and would be made every two months, two months in advance.

### Implementation: Timing, Execution, and Immediate Aftermath
- Timing and announcement:
  - Decision on exact timing delegated to the President; public announcement planned to precede price increases by only an hour or two to limit preemptive behavior.
  - Hours before announcement, additional gasoline quotas at Rs 1,000 per liter were credited for December 21, 2010–January 20, 2011 to moderate effects.
  - President televised announcement on December 18; reform to start December 19. Bread price increase announced to follow after supplementary compensation.
- Immediate operational outcomes:
  - Banking system handled withdrawals smoothly: only 0.5 percent of funds withdrawn on first day.
  - Authorities recommended transferring benefits to time and savings accounts.
  - Pragmatic responses included additional diesel quotas and limited price increases for truckers.
  - Government pledged market interventions and price controls where needed; used stockpiles.

### Challenges Ahead and Policy Recommendations Highlighted
- Long-term requirements for success:
  - Corporate adjustment to higher energy prices, reduction in energy intensity, and changes in product mix and production technologies.
  - Allow progressive pass-through of higher energy prices by eliminating administrative price controls and reducing excessive import/export tariffs.
  - Control inflation through coordinated and tight credit, fiscal, and exchange rate policies.
- Risks highlighted:
  - Corporate restructuring is difficult; short-term compromises can lead to reform drift or reversals.
  - International experience warns that small-scale compromises and bailouts can accumulate, potentially causing high inflation and undermining reform benefits.

### Appendix I — Subsidy Reform Law: Key Provisions and Numeric Specifics
- Scope and timeframe:
  - Gradual adjustment of domestic sale prices of energy carriers until the end of the 5th FYDP 2010-15.
  - Law consisting of 16 Articles and 16 Notes; approved by the Islamic Assembly on Tuesday, 15 Day 1388 (January 5, 2010) and confirmed by the Guardian Council on 23 Day 1388 (January 13, 2010).
- Energy carrier pricing rules and targets:
  - Domestic sale prices of gasoline, diesel fuel, fuel oil, kerosene, LPG, and other oil condensates to be adjusted gradually up to a level which shall not be less than 90 percent of Persian Gulf FOB prices.
  - Sale prices of crude oil and gas liquids to domestic refineries equal to 95 percent of Persian Gulf FOB prices.
  - Average domestic sale price of natural gas to be adjusted gradually up to a level which shall not be less than 75 percent of average export price of natural gas, excluding transfer costs, taxes and legal duties.
  - Feedstock prices for industrial, refinery, and petrochemical plants for at least 10 years not to exceed 65 percent of a basket of gas export prices of Persian Gulf origin (excluding transfer costs).
  - Average domestic sale price of electricity to be adjusted gradually up to a level equal to full cost price; efficiency of power plants to improve by at least 1 percent per year to reach 45 percent within 5 years; transmission and distribution losses to be reduced to 14 percent by end of 5th FYDP.
  - Government authorized to apply preferential prices considering geographical regions, type, amount, and time of consumption.
- Revenue and initial adjustment requirements:
  - Adjustment in the first year to generate an additional aggregate amount of revenue up to RLS 200,000 billion, but not less than RLS 100,000 billion.
  - Calculation of prices after the first year based on exchange rate used in the relevant annual budget.
- Price stability mechanism:
  - Government authorized to keep prices unchanged for consumers as long as Persian Gulf FOB prices fluctuate within a range of 25 percent; if fluctuations exceed 25 percent, prices will be adjusted accordingly.
- Water, sewage, and other subsidies:
  - Average price of water to be adjusted to cost price by end of 5th FYDP.
  - Gradual targeting of subsidies payable on wheat, rice, cooking oil, milk, sugar, postal services, and air and rail (passenger) transportation until end of 5th FYDP.
  - Per capita bread subsidy payable to villages and cities with less than twenty thousand people, and vulnerable groups in other cities, at least 50 percent more than the average per capita subsidy.
- Allocation of net proceeds:
  - Government authorized to spend up to 50 percent of net proceeds on cash and non-cash subsidies to households and social security expansion.
  - Required to spend 30 percent on optimizing energy consumption, reforming production technology, compensating utility losses, public transportation development, supporting producers and non-oil export promotion, and related items.
  - Authorized to spend up to 20 percent to compensate government spending impacts and acquisition of capital assets.
  - All income sources to be deposited into a special subsidy targeting account; 100 percent of funds allocated for uses authorized under Articles (7), (8) and (11).
  - Interchangeability of credits in Articles (7), (8) and (11) authorized only for a maximum of 10 percentage point in the annual budget.
- Organizational and governance provisions:
  - Government to establish a Subsidy Targeting Organization within one month after law comes into force.
  - Organization’s General Assembly to comprise specified ministers and Head of MPO.
  - Organization required to provide semi-annual performance and receipts/payments reports to Parliament’s Planning, Budget and Audit Committee and other relevant committees; Supreme Audit Court required to provide semi-annual reports.
- Administrative and compliance rules:
  - Receipt of aids subject to providing accurate information; government required to take legal action for refunding amounts if information inaccurate.
  - Implementing regulations for identification of targeted population, database establishment and payment methods to be proposed and approved within three months after approval of the law.
  - Cash and noncash aids provided as result of implementation of this law will be exempt from income tax under the Direct Taxes Law 6 approved in Esfand 1366 (February 1988) as amended, with specified exceptions.
- Implementation timing and related fiscal measures:
  - From beginning of year 1389 (March 21, 2010), government authorized to increase tax exemption level under Article (84) of the Direct Taxes Law proportional to price adjustments under this law over a period of five years and up to a maximum of 100 percent.
  - Petty cash needed included in annual budget petty cash and settled from sources generated by implementation during the year.
  - Organization’s unutilized funds in any year could be used in the succeeding year, and it may make commitments for succeeding years under the framework of this law.

*Source: IMF staff paper as contained in the supplied content unit.*

### References .............................................................................................................

### _wp11167 - References

### I. Introduction
- On Saturday, December 18, 2010, at 9:00 p.m. Tehran time, President Ahmadinejad announced the start of the Targeted Subsidies Reform; new fuel prices were released after midnight on December 19, 2010.
- Within 24 hours, new natural gas, electricity, and water tariffs were published; allowable ceilings for taxi and public transport tariff increases followed.
- Close to 80 percent of Iran’s population was granted unrestricted access to compensatory payments deposited in specially-created bank accounts starting in October 2010.
- The reform replaced massive indirect energy subsidies with across-the-board energy dividend transfers.
- Estimated impacts and transfers:
  - Price increases removed close to US$50–US$60 billion in annual product subsidies.
  - By December 2011 (first 12 months), Iranian households received at least US$30 billion in freely usable cash.
  - Another $10–$15 billion was advanced to enterprises to finance investment in restructuring aimed at reducing energy intensity.
- Scope of the paper: documents preparations, implementation, immediate post-implementation policies and risks; does not analyze broader macroeconomic policies preceding or following the reform.

### II. The Role of Oil in the Iranian Economy
- Trends and shares:
  - Share of oil in real GDP fell from an average of 40 percent in the 1960s to about 10½ percent in the last decade.
  - Oil and gas receipts accounted for about 72 percent of export revenues in the last decade.
  - Oil and gas revenues account for 65 percent of fiscal revenues.
- Historical pricing and consequences:
  - Domestic energy prices were administratively set at levels near production costs and changed only occasionally.
  - Rising international oil prices after 2002 and domestic inflation/exchange rate depreciation eroded domestic energy price parity with international benchmarks.
  - The March 2002 unification of exchange rates and rial depreciation aggravated disparities between domestic and international energy prices.
- Economic effects of cheap energy:
  - Increased domestic energy consumption and energy intensity; Iran became one of the most energy-intensive economies in the world.
  - High domestic absorption of crude distillates, natural gas, and electricity reduced availability for export.
  - Energy companies faced underinvestment due to prices at or below cost recovery.
  - Environmental pollution and traffic congestion were additional reform drivers.

### III. Objectives of the Price Reform
- Primary stated objective: reduce waste and rationalize consumption by aligning domestic energy prices more closely with international opportunity costs.
- Design rationale:
  - Compensating households for energy price increases was intended to:
    - Discourage marginal gasoline consumption (substitution effect).
    - Allow consumers to purchase more other goods and services (income effect).
    - Win broad public acceptance of large price increases via cash compensation.
- Distributional and macroeconomic expectations:
  - Compensation would improve social equity by redistributing hydrocarbon wealth; for the poor the compensation would represent a large share of income.
  - Distribution of about $30 billion in annual compensatory payments directly to the population was expected to support domestic demand and nonenergy sector growth.
  - The reform was not designed to contribute to fiscal consolidation; the legislation and political debate ruled out using subsidy reductions to improve the fiscal balance.
  - Potentially large savings in domestic energy use could free crude and refined products for export; export revenues could finance investment to increase production and refining capacity.
- Contextual facts:
  - By 2008, domestic gasoline price: US$0.10 per liter; international gasoline and oil prices were much higher (international oil prices approached US$150 per barrel; f.o.b. gasoline around $2 per liter).
  - Iran had been importing increasing amounts of gasoline; fuel waste and smuggling were concerns.

- Boxed analytical tool: consumer optimization and compensated price increase (see Box 1, reproduced below under Box 1 subsection).

### Box 1. The Consumer Equilibrium Theory (selected quantitative details)
- Representative household income: Rs 3 million per month.
- Utility function: U (E, O) = E^(1/10)*O^(9/10), where E = energy consumed; O = consumption of other goods & services.
- Initial prices: P_E^R = Rs 1,000 per unit; P_O = Rs 1,000.
- Budget constraint: P_E * E + P_O * O <=3,000,000.
- Initial optimal bundle (under the example parameters):
  - Energy purchased: 300 units.
  - Other goods and services: 2,700 units.
  - Initial utility: U(0) (Point A in the source figure).
- Effect of a quadrupling of energy price (from Rs 1,000 to Rs 4,000 per unit) without compensation:
  - Uncompensated consumption: 75 liters of energy and 2,700 units of other goods and services.
  - Utility falls to U(1) (Point B).
- Compensated price increase:
  - A compensation payment of about Rs 450,000 restores the household to initial utility U(2) = U(0) (Point C).
  - Income with compensation shown as: Rs3 .45million (as presented in source).
  - New equilibrium after compensation: about 85 liters of energy and 3,100 units of other goods and services.
- Purpose: illustrates substitution and income effects and how cash compensation can preserve or restore household welfare while reducing energy consumption.

### IV. Reform Legislation
- Parliamentary timeline:
  - Debate on the Targeted Subsidy Reform Act started in late 2008.
  - Initial government proposal aimed for implementation on March 21, 2009 (start of Iranian year 1388), but political timing issues around the June 2009 presidential elections delayed action.
  - Work resumed in fall 2009 amid economic deterioration and sanctions.
  - Parliament approved the Reform Act on January 5, 2010.
  - Guardian Council approved the Act on January 13, 2010, with expectation of starting on March 21, 2010 (beginning of Iranian year 1389).
- Implementation horizon:
  - The reform was planned to be implemented over five years, coinciding with the Fifth Five Year Economic, Social and Cultural Development Plan for Iranian Years 1389–1394 (2010–2015).
- First-year fiscal projection:
  - In the first year of implementation the reform was to raise an estimated 200 trillion rials (US$20 billion) in additional revenues from price increases.

*Source: IMF staff paper as contained in the supplied content unit.*

### Box 2. Simulating Aggregate Cash Flows from a Hypothetical Gasoline Price Increase

### Box 2. Simulating Aggregate Cash Flows from a Hypothetical Gasoline Price Increase

### Aggregate cash-flow simulation and headline results
- Quadrupling of the price of gasoline in Iran is estimated to have reduced daily gasoline consumption from about 66 million liters to about 54 million liters.
- Gasoline sales are estimated to yield 81 billion rials in additional annual sales:
  - Rs 54.8 billion from the domestic market
  - Rs 26.3 billion from exports (or savings from reduced imports)
- Government could compensate consumers by up to Rs 1.0 million per person per year without incurring losses.
- This would amount to distributing up to US$90 per family of five for every two-month period if the government awarded the entire revenue windfall to households.
- In practice, somewhat lower compensation would be warranted and would likely gain social acceptance; the reform allocated some compensation to other gasoline consumers, the corporate sector and the government.

### Tabulated scenario (before and after reform)
- Domestic price (rials per liter): 1,000 → 4,000
- Daily use (average; millions of liters) 1/: 66 → 54
- Annual use (billions of liters): 24.1 → 19.7
- Total revenue (billions of rials): 24,090 → 78,840
- Increase in revenues (billions of rials): 81,030, comprising:
  - From domestic sales: 54,750
  - From incremental increase in exports: 26,280
- Per person (per year, in thousands of rials): 1,080
- Per person (per two-month period, in thousands of rials): 180
- Per family of five (per two-month period, in US dollars): 90
- Memorandum items:
  - Export price for gasoline (in rials): 7,000 → 7,000
  - Population (in millions): 75 → 75
  - Exchange rate (rials/US$): 10,000 → 10,000
- Sources cited in box: CBI, Iranian media; and Fund staff estimates.
- Footnote: 1/ As widely reported by Iranian media in late January 2011.

### Reform Act revenue allocation and institutional design
- Reform Act envisaged replacement of product subsidies with targeted transfers to the population, plus assistance to Iranian companies and the government.
- Stipulated allocations of additional revenues:
  - At least fifty percent to households.
  - Thirty percent to assist Iranian companies to restructure and adjust to higher energy costs.
  - Twenty percent to the government to cover its own higher energy bill.
- Article 15 authorized creation of a Subsidy Targeting Organization for centralized management.

### Preparation, timing, and advance measures
- Key preparatory decisions: timing and speed of price adjustment; distribution—size and form—of compensatory payments; banking readiness to distribute transfers.
- Timing considerations:
  - Approval of the Reform Act by mid-January 2010 left little time for March 21, 2010 implementation; some implementation details were unresolved.
  - Authorities preferred timing reforms during November–December (seasonal low energy use).
  - Energy distribution companies needed software upgrades to handle multiple tariff structure (e.g., regular gasoline at Rs1,000, Rs 4,000, and Rs 7,000 per liter during transition).

### Controlling inflation and exchange rate considerations
- Pre-reform macro policy objective: reduce inflation. Inflation fell from close to 30 percent in mid-2008 to 7 percent in early 2010.
- Authorities committed to stabilizing the exchange rate to limit inflationary trends and expectations.
- Administrative measures to stabilize prices included fines for premature price increases, stockpiling consumer goods, and advertising stockpile availability to dissuade hoarding.
- Despite efforts, CPI began to rise in summer 2010; December 2010 CPI surged by 1.5 percent (not seasonally adjusted) versus November; twelve months ending December 20, 2010 end-of-period CPI was up by 12.8 percent.

### Magnitude of price adjustment: rationale and choices
- Reform Act specified net revenue gain (200 trillion rials) in the first year but not price increase magnitude.
- Government argued modest increases (200–500 percent) might not significantly reduce demand and could erode in real terms via inflation or exchange rate moves.
- Large, frontloaded increases increase nominal compensatory payments making reform easier to sell to the poorest households.
- Government used flexibility in timing to achieve larger price adjustments while meeting revenue targets.

### Energy distribution, multi-tier pricing, and rationing
- Reform Act target: adjust prices to 90 percent of f.o.b. Persian Gulf levels within five years.
- Authorities simulated over 200 price scenarios to balance demand reduction, avoid inefficient fuel substitution, and account for regional fuel availability.
- Multi-tier pricing implemented to protect small users:
  - Electricity example: first 100 kWh priced at Rs 270 (about US$0.027); prices rise to Rs 2,100 for use in excess of 600 kWh.
  - Tariff differentiation by region and escalating schedules for natural gas and water.
  - In areas lacking natural gas, lower priced rationed kerosene at Rs 1,000 per liter and lower electricity rates were to ensure heating affordability.
- Electronic gas rationing cards introduced in June 2007 created a de facto multi-tier gasoline pricing structure; rationed gasoline increased in price but remained below full unrestricted price.

### Household transfers: identification and distribution mechanics
- Reform Act stipulated households receive 50 percent of revenues but did not define beneficiary selection.
- Initial plan to target poorer percentiles (bottom 30–50; possibly lower 70 percentiles) proved administratively difficult.
- Final approach: everyone could apply; compensatory transfers made equal for all applicants; richest households were encouraged to refrain from applying.
- Application process: simple, no means testing or income verification; approval rate reported at 98 percent.
- Coverage and registration:
  - On eve of price increase, over 61 million individuals (80 percent of population of about 75 million) received compensatory payments.
  - By May 2011 over seventy million Iranians registered to receive compensatory payments.
- Physical distribution:
  - Deposits began October 19 and continued through November 11 for different provinces.
  - Initial credits: 800,000 rials multiplied by up to six household members for accounts in certain provinces.
  - Access to deposits frozen until the energy price increase day.
  - Public verification via a government website and telephone hotlines.

### Corporate sector assistance and restructuring measures
- Authorities analyzed more than 12,000 enterprises; 7,000 selected to receive targeted assistance.
- Corporate assistance financed by 30 percent of additional revenues and included:
  - Direct assistance packages
  - Sales of limited quantities of fuel at discounted rates (e.g., selected sectors offered diesel at Rs 1,500 per liter though free market diesel rose from Rs 165 to Rs 3,500 per liter)
  - Interest subsidies on loans for energy-saving technologies
  - Credit lines to mitigate cash-flow impacts and spread higher energy costs over three years
  - Reduced fees and taxes, special export awards, and tariff adjustments to protect domestic industries
  - Initiatives to improve enterprise efficiency (e.g., credit for hiring consultants)

### Banking sector role and readiness
- Banks used to distribute targeted subsidies to households; advantages:
  - Efficiency and security versus cash distribution
  - Allowed beneficiaries to see transfers before price rises, aiding acceptability
  - Expected savings in banks to ease liquidity management
- Preparations included opening an estimated 16 million new accounts, upgrading banking infrastructure and payment systems, and expanding ATM network nationwide.
- Banks also allocated to implement enterprise subsidy schemes by receiving interest rate differentials from the government.

### Government sector allocations and incentives
- Additional revenue allocated to cover higher energy bills of government sector, including provincial and local governments.
- Uncertainty noted on whether allocation schemes provided incentives to promote energy savings by government-funded organizations.

### Public relations strategy and communication outcomes
- Extensive PR campaign to educate population on low-energy-price costs and reform benefits; coordinated spokesman and broad media engagement.
- Emphasis that reforms switch subsidies from products to households to benefit poor households.
- Households exposed to new prices via electricity bills showing true unit costs and availability of “free market” gasoline since June 2007.
- Publicizing the crediting of “targeted subsidies” to accounts of 62 million beneficiaries was instrumental in building support and making reform effectively irreversible.
- Some communication missteps caused uncertainty (e.g., unclear reports on deposit purpose and periodicity); President later clarified deposits were “per person and for two months” and would be made every two months, two months in advance.

### Implementation: timing, execution, and immediate aftermath
- Decision on exact timing delegated to the President; public announcement planned to precede price increases by only an hour or two to limit preemptive behavior.
- Hours before the announcement, additional gasoline quotas at Rs 1,000 per liter were credited for December 21, 2010–January 20, 2011 to moderate effects.
- December 18 President televised announcement; reform to start December 19. Bread price increase announced to follow after supplementary compensation.
- Post-reform days:
  - Government pledged market interventions and price controls where needed; built or used stockpiles; temporarily adjusted some energy prices and quotas for vulnerable groups.
  - Banking system handled withdrawals smoothly: only 0.5 percent of funds withdrawn on first day.
  - Authorities recommended transferring benefits to time and savings accounts; central bank prohibited banks from using targeted subsidy funds to recover overdue loans.
  - Pragmatic responses included additional diesel quotas and limited price increases for truckers.

### Challenges ahead: macroeconomic stability and corporate restructuring
- Successful immediate implementation opens opportunity to reform the economy and accelerate growth.
- Long-term success requires corporate adjustment to higher energy prices, reduction in energy intensity, and changes in product mix and production technologies.
- Immediate policy challenge: allow progressive pass-through of higher energy prices by eliminating administrative price controls and reducing excessive import/export tariffs while controlling inflation through coordinated and tight credit, fiscal, and exchange rate policies.
- Risks highlighted:
  - Corporate restructuring is difficult; short-term compromises to safeguard reforms can lead to reform drift or reversals.
  - International experience warns that small-scale compromises and bailouts can accumulate, potentially causing high inflation and undermining reform benefits.

*Source: IMF staff box text titled "Box 2. Simulating Aggregate Cash Flows from a Hypothetical Gasoline Price Increase."*

### References

### _wp11167 - References

### Statistical data sources
- Annual Review, Central Bank of the Islamic Republic of Iran, http://www.cbi.ir/default_en.aspx
- Economic Trends, No. 60 (and other issues), Central Bank of the Islamic Republic of Iran, http://www.cbi.ir/showitem/7620.aspx
- Daily exchange rate data (since 1992), http://www.cbi.ir/exratesadv/exratesadv_en.aspx

### News media with intensive coverage of economic developments in Iran
- Farsi language outlets:
  - http://www.abrarnews.com/ — Links to two business and economic policy-focused news platforms; provides extensive coverage of developments in the banking, insurance, other financial, energy, automotive, industries and mines, and macroeconomic policy making.
  - http://www.donya-e-eqtesad.com/ — One of the main daily newspapers in Iran focused on economic developments.
  - http://www.mesghal.info/ — Main source of current information on free market exchange rates and gold prices in Iran.
  - http://www.iribnews.ir/ — Islamic Republic of Iran Broadcasting News Network; provides comprehensive coverage of economic and political developments in Iran.
  - http://www.irinn.ir/ — Islamic Republic of Iran News Network; reports key economic events and surveys of gold and foreign exchange prices in Tehran markets.
  - http://www.isna.ir/ISNA/ — Iranian Student News Agency; very active covering interviews with senior government economic ministers and central bank officials.
  - http://www.mehrnews.com/fa/ — Mehr News Agency; provides in-depth economic coverage and frequent commentary and editorials.
  - http://www.irna.ir/ — Islamic Republic News Agency; provides comprehensive coverage of news in Iran, including economic news.
  - http://www.cbi.ir/ — Central Bank of Iran Farsi page; carries statistical updates and press releases with delay or not available on the CBI’s English-language website.
- English language outlets:
  - http://www.iran-daily.com/
  - http://www.tehrantimes.com/
  - http://www.irannewsdaily.com/home.asp?home=true
  - http://www.payvand.com/news/ — US based Iranian news website
  - http://www.irantracker.org/ — US based, managed by the American Enterprise Institute (AEI) website. Carries daily review of Iranian press, mostly political developments with only marginal interest in economic policy; provides links to full Farsi text of the headline news.

### Appendix I. Subsidy Reform Law — key provisions and numeric specifics
- Scope and timeframe:
  - Gradual adjustment of domestic sale prices of energy carriers until the end of the 5th Five-Year Development Plan (FYDP) 2010-15.
  - Law consisting of 16 Articles and 16 Notes; approved by the Islamic Assembly on Tuesday, 15 Day 1388 (January 5, 2010) and confirmed by the Guardian Council on 23 Day 1388 (January 13, 2010).

- Energy carrier price targets and rules:
  - Domestic sale prices of gasoline, diesel fuel, fuel oil, kerosene, liquefied petroleum gas (LPG), and other oil condensates will be adjusted gradually until the end of the 5th FYDP, up to a level which shall not be less than 90 percent of Persian Gulf FOB prices.
  - Sale prices of crude oil and gas liquids to domestic refineries will be equal to 95 percent of Persian Gulf FOB prices; purchase prices of products from the refineries will be set in line with the said prices.
  - Average domestic sale price of natural gas will be adjusted gradually until the end of the 5th FYDP up to a level which shall not be less than 75 percent of average export price of natural gas, excluding transfer costs, taxes and legal duties.
  - For a period of at least 10 years from the date of approval of this law, prices of feedstock for industrial, refinery, and petrochemical plants per cubic meter will not exceed a level which is equal to 65 percent of a basket of gas export prices of Persian Gulf origin (excluding transfer costs).
  - Average domestic sale price of electricity will be adjusted gradually until the end of the 5th FYDP up to a level which shall be equal to full cost price.
  - Calculation of electricity cost price will be based on total costs of energy conversion, transmission and distribution, and fuel costs, with an efficiency of at least 38 percent of power plants and observance of standards; the efficiency of the country’s power plants shall be improved by at least 1 percent per year, so that it reach a level of 45 percent within 5 years from the date of implementation of this law, and also 2 the transmission and distribution power grid losses to be reduced to 14 percent by the end of the 5th FYDP.
  - Government authorized to apply preferential prices for electricity and natural gas considering geographical regions, type, amount, and time of consumption.

- Revenue and initial adjustment requirements:
  - The adjustment of relevant prices in the first year of implementation of this law will be made in a manner that generate an additional aggregate amount of revenue up to RLS 200,000 billion, but not less than RLS 100,000 billion.
  - Calculation of prices of energy carriers after the first year will be based on the exchange rate used in the relevant annual budget.

- Price stability mechanism:
  - Government authorized to keep prices unchanged for consumers as long as Persian Gulf FOB prices fluctuate within a range of 25 percent, by paying subsidy or collecting differentials and include such amounts in the account established for regulating energy carriers market. If fluctuations exceed 25 percent range, prices will be adjusted accordingly.

- Water, sewage, and other subsidy targeting:
  - Average price of water for different uses will be adjusted gradually until the end of the 5th FYDP up to a level which shall be equal to the cost price, considering the quality and the manner of purification.
  - Calculation of chargeable fee for sewage collection and disposal services will be based on total costs of maintenance and operation of the sewage system, after deduction of the intrinsic value of delivered wastewater and government aids under the annual budget.
  - Government required to make arrangements for gradual targeting of subsidies payable on wheat, rice, cooking oil, milk, sugar, postal services, and air and rail (passenger) transportation services until the end of the 5th FYDP.
  - Government required to make available the flour and bread subsidies to consumers who have applied, to the extent payable in accordance with the annual budget bill, through appropriate methods.
  - Per capita bread subsidy payable to population of villages and the cities with less than twenty thousand people, and vulnerable groups in other cities, will be at least 50 percent more than the average per capita subsidy, at the discretion of the government.
  - Subsidies paid to producers in agriculture sector in each year should not be less than the same for the preceding year.
  - Government to adopt incentive and supportive policies to establish and expand industrial bread production units; implementing regulations to be prepared by the Ministry of Commerce and approved by the Cabinet within three months after approval of this law.

- Allocation of net proceeds from reform:
  - Government authorized to spend up to 50 percent of net proceeds resulting from the implementation of this law under items including:
    - Cash and non-cash subsidies payable to all households countrywide, considering the level of household income.
    - Implementing a comprehensive social security system for the targeted population (including expansion of social insurances, health care services, financing housing costs, and social support programs).
  - Government required to spend 30 percent of the net proceeds resulting from the implementation of this law to pay for grants, or subsidies on bank facility charges, or specially-managed funds for implementation of items such as:
    - Optimizing energy consumption in production, services, and residential units and encouraging energy savings.
    - Reforming technological structures of production plants to increase energy and water efficiency and developing electricity generation from renewable resources.
    - Compensating part of losses to utility companies and municipalities incurred as a result of implementing this law.
    - Developing and improving public transportation and paying an amount up to the credit ceiling determined under Article (9) of the Public Transportation Development and Fuel Consumption Management Law.
    - Supporting producers in agriculture and manufacturing sectors, supporting production of industrial bread, supporting non-oil export promotion, and developing interactive electronic services to reduce unnecessary traffic.
  - Government authorized to spend up to 20 percent of the net proceeds resulting from the implementation of this law to compensate its impact on spending and the acquisition of capital assets.
  - Government required to deposit all income sources resulting from implementation of this law into a special account titled subsidy targeting account with the General Treasury; 100 percent of funds so deposited will be allocated for uses authorized under Articles (7), (8) and (11) and under the framework of annual budget laws.
  - Interchangeability of credits discussed in Articles (7), (8) and (11) will be authorized only for a maximum of 10 percentage point in the annual budget.

- Organizational and governance provisions:
  - Government authorized to establish, within one month after coming into force of this law, a new organization of public company nature named Subsidy Targeting Organization (the Organization) for implementation of this law.
  - Organization’s General Assembly will comprise Ministers of Welfare and Social Security, Economic Affairs and Finance, Commerce, Roads and Transportation, Agricultural Jihad, Industries and Mines, Petroleum, Energy, and Head of MPO.
  - The Organization is required to provide reports on performance, receipts and payments related to resources from subsidy targeting, for each of Articles (7) and (8) separately, at the end of each six-month period, to Parliament’s Planning, Budget and Audit Committee and other relevant committees.
  - Supreme Audit Court required to provide semi-annual reports to Parliament on the Organization’s operations.
  - Credits governed by this law are subject to the Regulations Governing Spending Credits Exempted from Observance of the Public Audit Law and Other General Government Regulations Law approved on 06/11/1364 (January 26, 1986).

- Administrative and compliance rules:
  - Receipt of aids and subsidies discussed under Articles (7) and (8) will be subject to providing accurate information; government required to take legal action for refunding amounts if information inaccurate and prevent future payments.
  - Implementing regulations for identification of targeted population, database establishment, method of payment, and other operational details will be proposed by specified ministers and Head of MPO, and approved by the Cabinet within three months after approval or notification of this law.
  - Government required to present credit amounts of sources and uses in four separate items in the relevant annual budget bill.
  - Cash and noncash aids provided to natural and legal persons as a result of implementation of this law will be exempt from income tax under the Direct Taxes Law 6 approved in Esfand 1366 (February 1988) as amended, with specified exceptions.
  - Government required to provide the Supreme Audit Court and Parliament with detailed report of operations every six month.
  - Government authorized to open the subsidy targeting account in the name of the head of each eligible family or another eligible person; authorized to exercise control over manner of fund use.

### Implementation timing and related fiscal measures
- Starting from the beginning of the year 1389 (March 21, 2010), the government is authorized to increase the tax exemption level provided under Article (84) of the Direct Taxes Law, proportional to price adjustments under this law and in addition to its annual increase, over a period of five years and up to a maximum of 100 percent.
- Petty cash needed to implement this law will be included in the petty cash of the annual budget and will be settled from sources generated by implementation of this law during the year.
- The Organization’s unutilized funds in any year could be used in the succeeding year, and it may make commitments for succeeding years under the framework of this law.

*Source: _wp11167 - References*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11167.pdf_