Subsidies: New IMF Report

The International Monetary Fund released a report today on Iran’s subsidy reform. The final section addresses the challenges ahead. A link to the full report is at the bottom:

The successful implementation of the drastic price increases has created a unique opportunity for Iran to reform its economy and accelerate economic growth and development. The authorities are now faced with the challenging task of translating this opportunity into reality. Pre-reform preparations, for good reasons, centered on ensuring social support for the price increases. Without broad public support, the government would not have been able to increase the domestic prices of energy and other products. However, to ensure the long-term success of the reform, as measured by tangible improvements in economic efficiency and productivity, Iran’s corporate sector must adjust to the much higher energy prices and reduce its energy intensity. This will require changing the economy’s product mix and production technologies. Iranian companies will need to produce more energy efficient products and produce them more energy efficient technologies.

The main immediate challenge facing the authorities is, however, to allow a progressive pass-through of higher energy prices by eliminating administrative price controls and reducing excessive and arbitrarily set import or export tariffs, while controlling inflation by coordinated and tight credit, fiscal, and exchange rate policies. Maintaining macroeconomic stability is essential to avoid a rapid erosion of the benefits of the reform. At the same time, new product prices should reflect the adjustment in product mix from Iranian companies and changes in consumer demand away from products and services requiring a lot of energy towards more energy-efficient goods and services.

Reforming Iranian companies will not be an easy task. The experience of other countries that pursued similar reforms shows that corporate restructuring can be a very tricky process. Safeguarding the reforms often involves short-term compromises. At the same time, pragmatism in dealing with narrow, well-defined economic stress should not lead to reform drift and reversals. International evidence of economic reforms is littered with examples of seemingly small-scale compromises that hijacked the entire reforms by resulting in an accumulation of small or larger bailouts that eventually led to very high inflation.

Source: The Iran Primer