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Cost repercussions of Iran's subsidy reform plan

12/21/10 Source: Mehr News Agency

Iranian President Mahmoud Ahmadinejad announced on Saturday the launch of his economic reform plan that is aimed at overhauling the country's economy by phasing out energy and food subsidies.

A bakery in Tehran

Implementation of the subsidy reform plan affected prices on the second day. Following are some of the cost repercussions.

Fruits, gasoline, diesel, cooking gas, electricity, and water are among the major items that have hiked in price, while bread prices have not changed, yet.

ILNA news agency, citing the economy ministry, said the monthly hike in household cooking gas charges has increased by more than five-fold, electricity nearly three-fold, and water more than three times.

Based on the released data the average price for water is 2,500 rials per cubic meters for household usage and 4,128 rials per cubic meters for industrial usage.

Data released on Sunday indicates that the price of subsidized gasoline for the month of Dey (Dec. 22 - Jan. 20) is fixed at 1,000 rials per liter (appx. 9.6 cents) for the first 50-liter purchase, and 4,000 rials per liter for the next 60-liter and more than that quantities gasoline can be purchased at 7,000 rials per liter.

The subsidized diesel oil price is now 1,500 rials per liter and unsubsidized diesel oil will be sold for 3,500 rials per liter. Based on the size of the vehicle between 300 and 1500 liters of diesel with the price of 165 rials (appx. 1.6 cents) will also be offered as supportive ration.

Tehran municipality said the price hikes would not lead to fare hikes of metro rail network and city-run buses in the capital, but taxis would review their tariffs.

According to the reports price inspectors are now working in three shifts per day to monitor and prevent any retail price increases.

Khabar Online claimed on Monday that every four-member family can save some one million rials ($100) in case of an optimal over-all consumption pattern.

Under the plan which went into effect on Sunday, all subsidies are to be gradually removed during a five-year period.

The subsidy cuts plan -- encompassing key consumer goods such as gasoline, natural gas, and food -- is said to be one of the most important undertakings in Iran's recent economic history.

Before the official announcement of the plan, every family member received a sum of 810,000 rials (USD 80) in cash subsidies per month for a two-month period.

People in Kouhdasht, Lorestan province in western Iran, line up to withdraw their cash subsidies from an ATM machine

Ahmadinejad has also vowed that the Iranian government would tackle economic problems such as housing, unemployment and improve the banking system through the reform plan.

According to the president, the initiative will lead to a better distribution of wealth among the public.

Officials say energy subsidies have cost the Iranian government around 100 billion dollars a year.

Ahmadinejad also said his government was paying $4 billion in bread subsidies, which will also gradually be phased out.

Some analysts have criticized the plan, saying it could trigger a hike in prices and stoke inflation in the country.

Others, however, argue that the plan is in line with recommendations from global financial organizations who advise Iran to get rid of a heavily subsidized economy if it wants to solve the country's economic problems.

Iran's Interior Minister Mostafa Mohammad-Najjar has also announced that the plan will have no economic repercussions.

Contrary to some speculations, he gave assurances the plan will increase the purchasing power of the nation.

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