Why Iran’s Subsidy Reform Keeps Stalling

In Iran, subsidy reform appears simple until one examines the reality of what it actually touches. While the issue seems purely economic on paper—with the state selling fuel, electricity, water, and basic goods at prices lower than their actual cost—the implications are far-reaching. Deeply discounted pricing helps households survive, especially during inflationary periods, yet simultaneously creates waste, encourages overuse, makes smuggling profitable, and drains public finances.

Once reform moves from theory to action, it stops being an economic debate and becomes a test of trust. Subsidies in Iran cover essentials, not luxuries. Gasoline is the most sensitive, though not the only one. Bread, electricity, and water fall into the same category. For families already stretched by rising prices, none of these are abstract policy items—they are necessary for daily survival.

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This reality does not erase the economic problems created by subsidies, but it explains why they are so hard to fix. Iranian officials understand the burden of the current system and also recognize that changing it can trigger immediate anger. Inside the Majles and the Plan and Budget Organization, the economic case for reform is not controversial. What officials fear is the reaction. Reform keeps stalling not because policymakers are unaware of the math, but because even small price changes can produce large reactions. Under persistent inflation, each adjustment feels like a warning that another wave of hardship is coming.

Cheap Essentials, Expensive Consequences

When fuel is cheap, people consume more—a predictable outcome. More importantly, however, cheap fuel reshapes the entire economy. It keeps transport costs lower than they would otherwise be, affecting the price of food, commuting, and daily services. Electricity and water subsidies work similarly, holding down costs across households and parts of the private sector. Since the rich consume more water, electricity, and gasoline than the poor, they benefit disproportionately from these subsidies.

Low pricing carries a structural downside: it encourages overuse and delays investment. If electricity remains underpriced for years, funding upgrades becomes harder. Networks age, maintenance is postponed, and losses increase. Eventually the state spends more simply to keep a weaker system running.

Subsidy reform returns again and again for precisely these reasons. It is not only a budget argument but also a question of whether Iran can sustain essential services under rising demand and limited capacity to modernize.

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A border reality complicates matters further, as gasoline priced significantly lower inside Iran than in neighboring countries makes cross-border transport highly profitable. Organized smuggling, small informal channels, or diversion along distribution routes facilitate this flow, underscoring a simple core point: large price gaps create incentives that enforcement alone cannot erase. While subsidies protect households, they simultaneously create distortions that others can readily monetize.

Why Price Changes Spread so Fast

Subsidy reform is politically sensitive everywhere. In Iran, it becomes uniquely explosive because the economy already experiences low growth and high inflation.

When gasoline becomes more expensive, transport costs follow. When transport costs rise, food prices often follow because moving goods across the country becomes more expensive. When utilities become more expensive, producers and small businesses face higher costs and may pass them along to consumers. Even if a fuel price increase appears limited, the ripple effect does not remain contained.

The speed of spillover matters. In stable economies, wage adjustments and expectations are more predictable. In Iran, wage growth is uneven and many households live with constant uncertainty, making the same policy change feel heavier because people have less room to absorb it.

Public reaction is shaped by experience, not speeches. If rent and groceries have already climbed sharply, families interpret any new increase in fuel or bread as the beginning of another wave, even if the government insists it will be controlled. Reform thus becomes something bigger than itself—it becomes a signal.

The Problem with “Cash Compensation”

Officials often present a familiar solution: raise prices, then compensate people with cash payments. The logic is understandable. If the state removes cheap fuel or cheap electricity, it can reduce waste while protecting families directly.

In practice, Iran’s inflation undermines such a model. Cash support may appear meaningful when introduced, but if prices continue rising, the real value of that cash shrinks. What begins as protection becomes inadequate, and people quickly feel the gap. Filling the gap is possible if budgetary revenue rises with the price of subsidized goods, allowing the government to increase cash payouts. But such an approach requires efficient and dynamic budgetary management and an effective system for determining who should receive cash payments and how much. Iran lacks both systems.

Here is where trust breaks down. The public does not only ask whether compensation exists but whether it will still matter next season. Many families assume prices will rise faster than support—an assumption that may not always reflect the government’s intention but has been the outcome often enough to shape expectations.

Even well-designed reform struggles when credibility is weak. In Iran, people judge policy by what remains in their pockets after prices adjust, not by promises about fairness.

The Memory that Shapes Every Decision

Iran’s policymakers and society carry the memory of what happens when gasoline prices shift suddenly, as the November 2019 price hike and subsequent unrest remain a permanent reference point in every debate. Citizens often view that period as proof that economic pressure can arrive overnight, while the state remembers it as a warning that pricing decisions can trigger broad instability.

Historical precedent of this magnitude shapes behavior today, causing officials to hesitate, people to expect shocks, and markets to anticipate shortages. Because everyone moves early, even gradual reform becomes difficult; when trust is low, small steps still feel like the beginning of something unstoppable.

Iran often defaults to delay, partial adjustment, or complicated rationing schemes for precisely these reasons. The state may want reform, but it fears the immediate political consequences.

The System is Not Neutral

Another reason subsidy reform stalls is discussed quietly rather than openly: subsidies create opportunities.

When the state keeps an official price low, it creates a gap between that price and the true market value of the good. Anyone who can capture the gap can profit through transport networks, storage, distribution contracts, fuel allocation, border routes, and selective enforcement. Some of the activity is formal. Much of it is informal. In practice, the two can blend.

Corruption and patronage matter here as practical obstacles. In Iran, many people believe access is not distributed equally—that connections can shape who gets contracts, who avoids scrutiny, and who continues benefiting from a distorted system. Family ties and personal networks are part of the environment. Even when they are not visible in every case, they shape perceptions of fairness, and perceptions influence compliance.

Reform requires trust, specifically the belief that sacrifice will be shared and that savings will return to society. Many assume the opposite instead, fearing that pain will be socialized while gains are captured. A conviction of this nature makes reform fragile before it even begins.

Targeting is Personal

Targeting is often presented as the clean solution. Instead of subsidizing low prices for everyone, the state supports vulnerable households directly—aiming assistance at those who need it most.

But targeting forces the government to decide who qualifies. In a country where the middle class has been shrinking, such decisions become contentious. Many families do not see themselves as poor, yet they also cannot absorb higher prices. If they are excluded from support while costs rise, they become the most politically sensitive group.

The deeper issue is that Iran’s middle class used to function as a buffer zone, able to absorb gradual adjustments, complain, then adapt. That buffer has been thinning for years. More families now live close to vulnerability, with limited savings and less room to adjust. Subsidy reform becomes sharper as a result, because the group that once stabilized transitions now experiences them as a direct fall in living standards.

Targeting also requires reliable delivery. If payments arrive late, if criteria are unclear, or if households are misclassified, reform becomes discredited. People interpret errors as favoritism or incompetence. In an environment where connections are assumed to matter, even small mistakes can destroy legitimacy.

Moreover, targeting creates boundaries inside society, labeling some families as protected and others as excluded. Even if the criteria are rational, the result can generate resentment.

Why Reform Becomes Partial Reform

Iran’s leadership is caught between two risks. Keeping subsidies intact is costly: it drains finances, worsens distortions, and encourages leakage. It delays investment and locks the economy into inefficient pricing. But removing subsidies quickly risks a cost-of-living shock that spreads through transport, food, and basic services, arriving at a moment when households already feel exhausted. It can also become political, because price changes are never interpreted in isolation.

Between these risks, the state often chooses the middle option: partial reform. Iran’s recent move toward an additional gasoline price tier reflects such instinct for ‘reform without rupture,’ expanding rationing and tiering rather than removing subsidies outright. Prices are adjusted slightly, rationing expands, promises of targeting are announced, enforcement campaigns against smuggling appear, and new exemptions and categories are introduced. Some savings are captured, but the structure remains, and many distortions survive in new forms. Reform keeps stalling for precisely such reasons. Iran tries to reduce the burden without triggering rupture, but the deeper problems keep growing underneath, and each partial reform becomes another reminder that full reform is politically dangerous.

In conclusion, Iran’s subsidy dilemma is not a story of officials who fail to understand economics. It is a story of a state trying to change essential prices in an economy where inflation has reduced resilience, trust is low, and distribution networks benefit from distortion. Subsidies protect households, but they also create waste, leakage, and rent-seeking opportunities. Removing them may be necessary, but doing so quickly risks a shock the system may not manage. Until inflation is more contained and compensation is seen as reliable, subsidy reform will likely remain postponed, diluted, and replaced by another round of partial measures.