A General Equilibrium Analysis of Alternative Scenarios for Food and Energy Subsidy Reforms in Iran

In 1996 the government of Iran submitted its application to join the World Trade Organization (WTO). To meet WTO obligations, the government has launched several marketoriented reforms to deal with existing distortions such as heavily subsidized food and petroleum products. From the beginning of 2002, the Iranian government committed itself to implementing subsidy policy reform intended to adjust distortions and structural imbalances. However, the impact of the reform on needy and vulnerable households was a source of concern. In this paper we use the GTAP7inGAMS static CGE model with 20 household types in rural and urban areas, grouped according to income, to simulate the welfare impacts of subsidy policy reform in Iran. The static GTAP7inGAMS model is calibrated using the GTAP 7 database representing the world economy for 2004. Subsidy rates were adjusted by incorporating protection data prepared by Iranian statistical centers, and the Petroleum and Coal Products (p-c) sector in the GTAP7 database was disaggregated into four energy commodities: gasoline, diesel, kerosene and fuel oil, since the initial level of subsidies on these energy commodities reported by Iranian statistical centers are quite different from each other. Results indicate that removing food and energy subsidies and introducing compensating direct income payments to all income groups would significantly increase the welfare levels of lower income households in rural areas and all income households in urban areas reflecting the high level of distortions. However, the reform would make the highest income rural households worse off.