Iran 's fossil-fuel subsidy was higher than any other country in 2009 at $66 billion, the International Energy Agency said Tuesday, creating strain on the country's economy and inefficiencies in its energy sector.

In its World Energy Outlook report, the IEA recognized Iran 's recent efforts to address the problems created by the subsidies, but noted many challenges remain before changes are implemented.

"The chronic under-pricing of domestic energy in Iran represents a large subsidy that burdens the economy and contributes to deep inefficiencies in the energy sector," the agency said.

In its fifth Five-Year Development plan, covering 2010-2015, Iran hopes to overhaul its energy subsidy policy with the gradual implementation of market-based energy pricing and the replacement of subsidies with targeted assistance to lower-income groups.

Iran's aim is to raise the price of gasoline, diesel, kerosene, liquefied petroleum gas and other oil derivatives to at least 90% of the Persian Gulf export free-on board price, elevate gas tariffs for households to 75% of the Persian Gulf export price--with preferential rates being applied to industrial consumers--and determine average electricity prices based on the full cost of production.

The Iranian government expects to redistribute 50% of fiscal benefits resulting from the subsidy cuts through either direct cash or non-cash compensation for low-income groups, the agency noted.

Despite Iran's ambitious reform plans, however, details such as the level and frequency of price adjustments each year, the definition of those eligible for compensation and the amount and duration of those payments, as well as ways to minimize inflation, remain unclear, making implementation of reforms challenging, the IEA said.

With energy subsidies in Iran at the rate of 89%, consumers there paid only 11% of the competitive market price for energy products, the agency said.

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