Majlis rethinks subsidies but spends a further $3bn

02 December 2005
The Majlis (parliament) has voted on spending a further $3,000 million to fund foreign petrol purchases and introduced a smart-card fuel rationing system. But it has delayed plans to sell all imported petrol at the market price, asking the government to introduce legislation detailing how to do this in next year's budget law, which is expected to be passed in March (Iran, MEED Special Report, 26:8:05).

Deputies voted to divert $2,600 million from the Oil Stabilisation Fund (OSF) to support the imports and asked National Iranian Oil Company (NIOC)to provide the remaining $400 million. Iranians use about 67 million litres a day (l/d) of petrol, of which 27 million l/d are imported. Until now, petrol has been sold at the pump for only IR 800 ($0.09) a litre, but production costs inside Iran are IR 2,500 ($0.27) a litre and import costs this year are expected to average IR 4,500 ($0.50) a litre. As a result, Iran's petrol subsidy is costing the public purse up to $7,000 million a year.

Under the new smart-card system, motorists will be rationed to five l/d, while officially registered taxis and public vehicles will be granted 30 l/d. This allocation is expected to curtail some excess consumption as well as petrol smuggling through Iran's porous borders but it will not affect most motorists, who are unlikely to use more than their limit. Those who exceed the ration will have to pay the full cost of import. Petrol station forecourts are to be fitted with the new technology early next year, but the system will not come into effect for another three months.

This limited rationing falls far short of the stronger measures some economists had sought - selling all imported petrol at full cost. However, the difficulties associated with doing so and the concomitant dangers of creating a black market have persuaded the Majlis to pass the buck back to the government.

Some new proposals are now expected in the budget law for the Iranian year 1385, which starts in late March.

Both the government and the Majlis fought elections based on economic populism that all but promised to maintain or expand subsidies. However, with the Majlis voting a year ago to ignore long-term government plans to increase petrol prices by 10 per cent a year, the level of the subsidy has risen considerably. Economists say that raiding the OSF to finance new additions to the capital spending bill is a recipe for disaster.

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