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Published: Thursday February 6, 2014 MYT 10:40:01 PM
Updated: Thursday February 6, 2014 MYT 10:41:02 PM

Iran parliament backs Rouhani plan for subsidy cuts

DUBAI (Reuters) - Iran's parliament has approved politically sensitive plans to slash subsidies on fuel and food, but delayed implementation for several months while authorities try to soften the blow to consumers by handing out food packages.

A clause in the budget bill for next fiscal year, which starts in late March, calls for steep price increases to save 630 trillion rials (15.4 billion pounds) at the official exchange rate annually in subsidy payments.

The clause was passed by members of parliament on Tuesday, Iranian media reported, marking a political victory for President Hassan Rouhani, who took power last August after elections and has vowed to reform Iran's chaotic finances.

Rouhani's predecessor, Mahmoud Ahmadinejad, began a programme of cutting subsidies but was forced to suspend plans for further reductions in 2012 because of strong opposition in parliament.

Iran's finances have been under heavy pressure because of international economic sanctions imposed over its disputed nuclear programme and also, Ahmadinejad's critics say, because of his erratic management.

Last August, officials said the government faced a shortfall of one-third in the current fiscal year's budget because of lower-than-expected revenues, and it was forced to revise its spending plans.

Parliament's vote on Tuesday gave the government until the end of June to push through its subsidy reforms. About 83 percent of the money saved would come from fuel price rises.

"With implementation of this bill on June 20, fuel prices will be multiplied," member of parliament Nader Ghazipour was quoted by Iranian news agencies as saying.

To soften the blow, the government has started handing out food packages - including two frozen chickens, 36 eggs and two packs of processed cheese - to over 15 million families earning less than five million rials a month, Iranian media reported this week.

Rouhani's government has become increasingly critical of the damage which the multi-billion dollar subsidy programme does to Iran's ability to invest in projects seen as vital for future growth.

Oil industry officials complain that state-run fuel retailers, who bear the brunt of subsidy costs, cannot continue operating without changes to the system.

Iranian motorists paid an average of just $0.33 (20 pence) a litre ($1.25 per gallon) for fuel in 2012, compared with a global average of $1.41 (86 pence) per litre, according to World Bank data.

Next fiscal year's subsidy reforms are expected to bring the Iranian price closer to global levels, but not all the way.

The government's proposed budget for next fiscal year envisages about $80 billion (48 billion pounds) of spending, calculated with the official exchange rate. Parliament is currently reviewing the proposal clause by clause.

(Additional reporting by Mehrdad Balali; Editing by Andrew Torchia)

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