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Iran mulls cutting fuel subsidies under sanctions pressure

File - Iranians fill their vehicles in a gas station in central Tehran, Iran, Sunday, Dec. 19, 2010, after Iran's president on Saturday announced the start of a plan to slash energy and food subsidies, part of government efforts to boost the country's ailing economy. (AP Photo/Vahid Salemi)

DUBAI: Iran is preparing a politically risky increase in domestic fuel prices, trying to ease the burden of multibillion-dollar subsidies on an economy severely damaged by Western sanctions.

Oil Minister Bijan Zanganeh said this week the government was studying plans for the rise, the second in three years, which would affect the welfare of millions of poor people.

Since 2011 the sanctions have slashed Iran’s oil exports and played a role in persuading Tehran last week to accept new talks on its disputed nuclear program with six world powers.

The government first moved to reduce the subsidy burden on its finances by lifting prices for motorists in December 2010. It then suspended a second wave of price reform, planned for mid-2012, partly out of concern that it could prove too painful with living standards already falling because of the sanctions.

But by shrinking state oil revenues, the sanctions have increased financial pressure on the government to cut the subsidies. Authorities also want to rein in rampant smuggling of cheap fuel to neighboring countries.

“We are studying gasoline prices and will make a final decision after consultation with parliament,” Zanganeh was quoted as saying. “We cannot ignore fuel smuggling but the main reason behind considering the revision is the budget law that has tasked the government with paying subsidies.”

The U.S. and European sanctions have largely frozen Iran out of the international banking system, making it difficult to sell oil; the country’s oil exports are down by more than half from presanctions levels of about 2.2 million barrels per day.

This has cost Tehran tens of billions of dollars in lost revenues annually and, since oil traditionally provided about two-thirds of state income, undermined its budget.

The government has not fully disclosed the extent of the damage. A devaluation of the rial, which lost about two-thirds of its value against the U.S. dollar in the free market, pushed up inflation but also helped state finances by letting the government sell its dollars to the public at expensive rates.

There are also conflicting signals on how close the sanctions have pushed Iran to an external payments crisis. The IMF estimates Iran is still running a surplus in its trade of goods and services and that its foreign reserves will drop only moderately to $85 billion at the end of 2013, from $96 billion in 2011.

Not all of that money is readily available to Tehran, however. New U.S. sanctions introduced in February effectively bar Iran from repatriating earnings from its oil exports, requiring customers to pay funds into an escrow account at a bank in the purchasing country and limiting Tehran’s use of the proceeds to buying goods in that country.

Iranian-born economist Mehrdad Emadi, of the Betamatrix consultancy in London, said he estimated Iran had about $35 billion-$40 billion of accessible reserves, including some money in Indian and South Korean banks.

 
A version of this article appeared in the print edition of The Daily Star on October 03, 2013, on page 5.

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