Iran cutting energy subsidies to boost revenue-IMF

Tue Sep 28, 2010 11:15pm BST

* Higher domestic prices in Iran to allow for more exports

* Energy reforms to promote efficiency measures

* Iranians to see significant price hikes in first year

By Jasmin Melvin

WASHINGTON, Sept 28 (Reuters) - Iran, dependent on imported gasoline but squeezed by international sanctions, is working to eliminate subsidies on oil and natural gas, International Monetary Fund economists said on Tuesday.

Iran's energy price reform is expected to lower demand as prices rise in the country. The higher prices will prompt more efficient energy use within Iran while increasing the supply of oil and gas available for export, the economists said in an interview published on the IMF website.

Iran's energy subsidies kept domestic oil and gas prices as low at 10 cents a liter in an effort to distribute the country's wealth to its people, said senior IMF economist Roman Zytek.

But as the gap between the extraction price and prices on the international market surged in recent years, "giving away for free something that could be sold for a pile of money is not the best policy," Zytek said.

Also, the cheap price of fuel spurred energy waste and magnified pollution in the country. Zytek said the subsidy allowed Iran's wealthiest people to splurge on gas-guzzling vehicles and large energy-inefficient appliances, while the poor saw fewer benefits because they use less energy.

The energy price reform comes as Iran faces tough economic sanctions targeted at its nuclear program that have already caused prices to soar in other sectors of its economy.

Iran hopes revenue from increased energy exports will boost its economy, the world's 17th largest, the IMF said.

"The government is aiming to grow at the pace of South Korea and other vibrant emerging market countries, and they realize that the only way to do so is to restore market pricing of energy," said IMF mission chief to Iran Dominique Guillaume.

Guillaume added that the law adopted in January to cut the subsidies included a first-year revenue target of $20 billion.

Iranians can expect the first price hike to lift energy product prices between four and 20 times previous levels, Guillaume said, with prices surging even higher eventually.

To ease the transition for Iranians, half the added revenues will go to citizens in the first year. Businesses will receive 30 percent of the additional revenues to invest in energy efficient technologies. (Reporting by Jasmin Melvin; editing by Lesley Wroughton and David Gregorio)