The Arabist

The Arabist

By Issandr El Amrani and friends.

Iran, a model for Egypt?

Don't get me wrong: Iran is absolutely not a model for Egypt in terms of its bizarre, unelected Ayatollah-led Islamic republic, or in terms of its nasty and repressive security apparatus. But it might be in terms of economic policy, if the IMF is anything to go by. Here's a statement from the latest IMF Article IV consultation for Iran, the annual "inspection" of economic policy and performance review it does in every country:

“The mission reviewed recent economic developments and revised its macroeconomic estimates and projections in light of new data and discussions with the authorities. Real GDP growth recovered to an estimated 3.5 percent in 2009/10 despite the drop in oil prices, reflecting strong non-oil growth and an exceptional agriculture crop. The positive growth momentum continued in 2010/11. The authorities’ monetary policy successfully brought down annual average inflation from 25.4 percent in 2008/09 to 12.4 percent in 2010/11. Gross external reserves also remain comfortable with improved prospects for the external sector on the back of higher oil prices.

The mission commended the authorities for the early success in the implementation of their ambitious subsidy reform program. The increases in prices of energy products, public transport, wheat, and bread adopted on December 19, 2010, are estimated to have removed close to US$60 billion (about 15 percent of GDP) in annual implicit subsidies to products. At the same time, the redistribution of the revenues arising from the price increases to households as cash transfers has been effective in reducing inequalities, improving living standards, and supporting domestic demand in the economy. The energy price increases are already leading to a decline in excessive domestic energy consumption and related energy waste. While the subsidy reform is expected to result in a transitory slowdown in economic growth and temporary increase in the inflation rate, it should considerably improve Iran’s medium term outlook by rationalizing domestic energy use, increasing export revenues, strengthening overall competitiveness, and bringing economic activity in Iran closer to its full potential.

Cutting energy subsidies and rationalizing other subsidies so that they target the poor better is exactly what Egypt needs to be doing. Mohamed ElBaradei is the first Egyptian politician who had the courage to bring it up, to my knowledge, in last night's appearance on the Amr Khaled "Boukra Ahla" show. Rather than borrowing money from financial institutions to finance increases in its budget, Egypt should cut the subsidies. It will be politically unpopular but it's necessary.

The previous government knew it and the next one better know it. An economic policy that delivers better social justice and poverty reduction doesn't just have to create jobs, improve infrastructure and deliver better social welfare — it also has to finance itself without systematically resorting to debt and to be efficient and fair in the way it delivers subsidies. The businessman who lives in a villa in Maadi and drives a gas-guzzling Range Rover should not be getting subsidized fuel — better to spend that money on the poor villagers who need affordable cooking gas. So perhaps there is something to learn from Iran after all.