Major protests and social unrest erupted in Iran on 16 November on the day after the government announced a sudden hike in fuel prices, which are heavily subsidised.

The price of petrol used to be IRR10,000 (US$0.09) per litre. On 15 November, the government announced two changes: a new rationing system allocating 60 litres of petrol per month to each passenger vehicle at IRR15,000/litre; and a price of IRR30,000/litre for amounts over the allocation, a 200% increase. Prices are, however, still heavily subsidised and much cheaper than global prices.

Fuel subsidies have significantly distorted the Iranian economy since they were introduced in the 1970s and then consolidated through the revolutionary policies in 1979. Essentially, subsidies have been used an inefficient tool to redistribute wealth, and they have failed to support social welfare.

According to the International Monetary Fund, fuel subsidies cost 1.6% of the Iranian GDP in the year that ended on 20 March 2018. In 2010, Iran passed a law to divert the resources used for fuel subsidies into direct cash transfers to low-income households. The recent price rises were the third and final step of that law, and they will give the current government some space for fiscal reforms. Social housing, public transportation, and health reform projects to alleviate poverty will all be facilitated.

The decision to correct prices and increase direct cash transfers to low-income families was therefore based on sound fiscal policy. Nonetheless, the core impediment to such reforms remains corruption and mismanagement. That is what angers Iranian citizens: the waste of resources that should be used to improve economic conditions.

Therefore — as long as the Iranian authorities do not address deep-rooted corruption in the state bureaucracy — even good fiscal policies will be met with public outrage, and especially if the economy is depressed.

This excerpt is taken from Iran Strategic Focus, our monthly intelligence report on Iran. Click here to receive a free sample copy.

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